Book Review: The Quants By Scott Patterson (Crown Bus 2010).(Financial Well Being)(Book review)

By John M. Mason

Let me just start out by saying that, in my mind, this is a terrific book! It has people and places, it has history, it has theory, and it is very readable. I could not stop reading it once I got started. I highly recommend it to anyone.

Most recent books on the financial crisis focus on the events of September 2008, Fannie Mae, Freddie Mac, Lehman Brothers, and AIG. This book focuses on August 2007 and the meltdown of hedge funds run by Quants. The terrain is not as familiar as that pertaining to the former date.

I will come back to this part of the book later. First I want to highlight some of the points made in the book that can get lost in the excitement of the story Patterson tells.

The initial point I would like to make is this: Finance is just about information; and Information is just 0s and 1s. Continuing, you can say that 0s and 1s are just about computers. This is the essence of the story that resides in this book.

It is interesting to me that the beginning of the story Patterson tells is how a Math/Physics whiz, the Godfather of the Quants, Ed Thorp started out on the path to "Quant-dom." Thorp, as a new member of the MIT staff, took some of his early work on how to predict outcomes of roulette wheels to a well-known member of the MIT faculty named Claude Shannon.

Shannon is known as one of the founding fathers of Information Theory, a theory that has to do with the transmittal of information and the ability to receive and discern the message conveyed in the information transmitted. Information, however, is a technical matter, completely devoid of meaning and content: it is purely statistical and encodable. Information can be put into 0s and …