Paul Wilmott

This book explains how a group of people called 'quants' took over the financial markets and nearly destroyed the world of finance. You take a probability distribution and find that it works on the diffusion of gases, so you think to yourself, "Gee whiz, this model sure works for a nonlinear situation like smoke filling a room from a single source, but why can't I use this model to show how people buy and sell things?"

Well, Paul Wilmott and David Orrell explain that this is a dumb idea and show more why it is dumb. Human beings don't act like rational agents, motivated by their own self-interest, they are greedy and conniving idiots. Just because they have an advanced degree in mathematics doesn't mean they can tell the economy how to run itself. So the book talks about the main issues inherent in our financial system and goes over the histories of giant financial crashes and how the bankers and investors went home to their families and drank the wine of celebration for losing that much money. It's really rather frightening that such a naive group of people are responsible for this sort of thing, but well, it is hard to model something that accurately reflects a nonlinear system.

Take the weather for instance. Anyone could tell you a situation where the weather person got their info wrong, and you forgot your scarf or umbrella as a consequence. The weather is an extremely complex system with dozens of variables. I'm impressed that they can predict tomorrow's weather, to be honest. Now the same goes for finance. Anyone and their grandma will tell you that the stock market is about people buying and selling things. Since people don't behave rationally, we had to introduce some mathematics borrowed from a lot of different places. Most of it tries to model random behavior as I mentioned before.

Anyway, this book is really good. It even includes jokes and things. So if you want to know about that sort of thing, it isn't really heavy on the mathematics and the stories are interesting. Also, the book is not called Quantitative Seizing, it is called The Money Formula, as seen in the picture. show less

“Bespoke Tranche Opportunity” - If these words don’t make sense to you ; as Jared Vennett (Ryan Gosling’s character in The Big Short) would say “…Then no one’s paying attention” .

Paul Willmot and David Orrell – quants ex hedge fund Wall Street credentials ; expose the dark murky world of quant finance ; how the field metastasized into a cancerous tumor that now poses a threat to global finance and banking , wiping out savings of millions of Americans ,record bankruptcies show more and foreclosures ,shocks waves that bring down central banks of nations with reverberations felt for decades – Collateral Debt Obligation i.e. re-packaging of debt and Credit Default Swaps to short the American housing market ; that happened in 2007 and nothing has changed .

In 1970’s fundamentally changed portfolio risk management ; by Black Scholes Merton to value options and dynamic hedging – subsequent decades saw quants further creating complex derivative instruments for traders , which kept drifting further away from the underlying asset and reality .; Traders being incentivized to take even greater risks while quants developing math models out of thin air to justify their disillusions that market risk was totally mitigated – Only it is nowhere close to the truth .

Paul lays out how quants intentionally use complexity to create mystical aura all the while deliberately knowing their models are no longer is inline reality ; Lack regulation of the field since the bar of entry is intentionally kept beyond the reach of most people ; a vicious circle where self-aggrandizing individuals live in a bubble without having to deal with the ramifications of their creations ; No criminal indictments unlike in Iceland , but since when did we care about Iceland and Wall Street about ethics for that matter ! show less

Excellent anti-dote to conventional, dull finance text-books. Vibrant content, with interesting asides about crashes and investment collapses, careful graphics that elegantly show data and formulae in spreadsheets, pertinent cartoons enliven the text, and a DVD. Shorter version of "Paul Wilmott on quantitative finance 2nd edition", both books being frequently described by their initials, e.g. PWOQF2.

Wilmott is an institution, and this book (or the three volume version) is one that any aspiring quant will do very well to read.