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|  | Author: Richard Bookstaber
Publisher: Wiley
List Price: $16.95
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Rating:  64 reviews
Sales Rank: 63658
Languages: English (Original Language), English (Unknown), English (Published)
Media: Paperback
Pages: 304
Number Of Items: 1
Shipping Weight (lbs): 0.8
Dimensions (in): 8.9 x 5.9 x 0.9
ISBN: 0470393750
Dewey Decimal Number: 332
EAN: 9780470393758
ASIN: 0470393750
Publication Date: December 10, 2008
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Showing reviews 61-64 of 64
 A view from the inside May 10, 2007
Roger G. Clarke
5 out of 11 found this review helpful
The book articulates an important perspective from someone who has worked through the major market crises during the last 20 years. The experiences are insightful and the book is tightly written containing both interesting examples and concepts.
 Some interesting insights within April 30, 2007
Dr. Lee D. Carlson (Baltimore, Maryland USA)
16 out of 35 found this review helpful
It is always interesting to observe and study how humans cope with calamities or uncertainty, whether it is in the context of the financial markets, a tornado, hurricane, or tsunami, or armed conflict. The reaction to disasters, it might be fair to say, is usually limited, in the sense that the tools that it deploys are not usually extensive in their conceptual scope. When facing situations that cause great anxiety, simple solutions are to be preferred over complex ones, for the latter usually take too much time to conceptualize or to implement. Constructing complex systems, situations and scenarios is an activity that is best done in periods of calm, when long-range planning is necessary, and there are no fires to be put out.
The contemplation and explanation of financial disasters, such as stock market crashes or hyperinflation have resulted in a large amount of literature in the last decade, due in part to the participation of a large section of the populace in financial deal making, stock trading, and real estate speculation. The rise of the Internet and the resulting ease of information flow have democratized the financial markets to a scale that is unprecedented in economic history. Embedded in this literature are extensive discussions on the financial debacles that have subjected market participants to strong perturbations, emptying their pocket books and bank accounts, implanting in their brains a large amount of aversion to risk, and instigating them to find excuses or blame for their economic decimation.
But the financial markets, like all other systems in the twenty-first century, are enormously complex, and finding the culprits behind these fiascos is difficult, despite the confidence of many who profess to their understanding. This book is one of many that make claims to this understanding and to a fair degree and despite the purely qualitative nature of its contents it offers some interesting insights. For those who work in the financial and banking industry, some of the claims made by the author are difficult to accept, particularly those where his personal involvement is thought to be responsible for financial meltdowns or debacles. It is easy to fall into this trap, since expertise and over-confidence can result in an intellectual myopia or confabulation that reinforces beliefs that one's actions are having direct effect on scenarios or events that are in reality very entangled and very difficult to decipher. As an example of this, the author claims early on in the book that he participated in "knocking the legs out" of the October 1987 market, and "started things rolling" in the 1998 crisis for Long Term Capital Management.
The author points to the `complexity' of the financial markets as being the root cause of the crises that have occurred without warning in the last two decades. But defining complexity quantitatively is somewhat difficult, at least from the standpoint of arriving at a definition that is practical. The author does not do this in the book, but instead gives the reader a notion of complexity that he feels can be readily understood by the targeted readership, who are assumed not to have a background in advanced statistics or mathematics.
Very interesting along these lines is the notion of `interactive complexity' that the author discusses in the book. This concept is proposed as a measure of the manner in which the components of a system are interrelated and connected. The components of a system that is interactively complex can interact in such a way as to cause surprises to observers or at least violate their expectations, in that they can fail in ways that are "unfathomably improbable". Even though this definition is not on the surface sharp enough to distinguish an "ordinary" system from one that is "interactively complex", the author gives enough elaboration to encourage the reader to investigate the concept in more detail. This reviewer first encountered this notion in the study of networks, these having their share of `normal accidents' but also considered to be "high-risk" technologies. Some failures in networks can indeed be explained by an appeal to the systems that is constructed from as being `tightly coupled', and thus interactively complex in the manner in which the author discusses. He gives other examples of such systems, and ones that are not.
Given the time and resources, it is somewhat straightforward to administer and control interactively complex systems like networks due to the locations of their components, which without too many exceptions are fixed. This allows a study of networks to proceed without too much trouble, in that some, if not all, of the information that flows into the components can be measured and studied. But the financial markets consist of computers, trading desks, networks, and most importantly people. One can study the information flowing into computers and trading desks quite easily, but technology is not yet advanced enough to peer into a trader's brain in non-laboratory conditions and study real time how it is processing information. So a financial system is without doubt interactively complex in the sense that the author defines it, but it must be remembered that this is because of the lack of technology (to study brain processing and predict subsequent trading behavior), not because of something intrinsic to the system itself (there is a branch of cognitive neuroscience called `neuroeconomics' that has as its goal this type of understanding however). This lack of knowledge about how human's process financial knowledge is the primary reason for the interactive complexity of the financial markets. Failures do seem "to come out of nowhere" as the author writes, and if viewed from a statistical framework have an extremely small probability of occurrence.
The author does believe however that systems that are tightly coupled and interactively complex can be managed if there is enough time available. If there is not, then such a system cannot be managed either by a centralized authority or by some sort of adaptive approach that learns on the fly. This is a crucial point, since it seems all bets are off when it comes to the risk management of these kinds of systems. This of course will trouble those individuals who are responsible for managing risk, for there seems to be no reasonable approach to softening the pain produced by such systems. The author's solution to this is expected but still somewhat puzzling: he wants to reduce the complexity of these systems in order to make them manageable. This is an odd proposal since it diminishes or trivializes the ability of the human brain to understand the complexities of these systems using the tools of science and technology. Advanced technology, particularly the use of artificial intelligence, will be able to handle the small time scales involved in the financial markets and take appropriate action if necessary. There is every reason to be confident in this kind of technology, and this reviewer believes that it will evolve into a kind of surrogate risk management, performing functions that humans are not able to handle effectively due to their biological limitations.
Accurate, relevant and complete. April 26, 2007
Gerald Giauque (The Carolinas, USA)
33 out of 39 found this review helpful
A wonderful book! I especially appreciated Richard Bookstaber's labor of love because I have been studying developments in trading and risk since about '93 and really benefited from the way he chronicled so many developments. Bookstaber probably says `demons' tongue in cheek, because for people who have followed the growing sophistication of financial instruments, the real demons are within us. And Bookstaber does a pretty good job of explaining how that has played out in the recent past. All-in-all, I felt like I got to spend a number of most enjoyable evenings with a long-lost friend, catching up on developments in the market in areas where I wasn't as fully involved. Since I have probably spent a couple thousand overtime hours with tick-by-tick data, I can verify he has also done his homework and paid his dues.
While not dwelling on dishonesty and greed, he shows the many ways those factors have played out disastrously, and how, with the increasing sophistication of structured finance in combination with poorly managed large corporations, there are ever more places for rascals to hide. He has experienced a lot more disasters than I had considered, and he fills in the details. For example, he outlines how the reckless abuse of leverage at LTCM subjected the markets to their most serious test to date. These details add weight to the theme of his book.
By the time you reach the end of this book, you will have heard about most of the major investment strategies that have been tried, and how they worked out (or are working out). The author thoughtfully does not hype the results. You feel pretty much everything is there, if you are careful to pause and reflect at the right places, or occasionally read between the lines. Refreshing also is the author's frank treatment of his own learning process.
I found Bookstaber's book consistently well written right to the end. Never did I feel that he rushed through a section, or wrapped up the book quickly because he was tired of the effort. It answered all my questions about hedge funds (you'll have to read it for yourself; maybe the answers will have different meaning for you). Just as importantly for me, he talked about what it would take to make the financial system more stable; including what an appropriate level of regulation might be. You'll have to read carefully to pick up his thoughts there, but they are accurate and to the point.
His book was also well written in the sense that, although a number of stories and points could have mean made with fewer words, anything `extra' in the mathematical sense could certainly be appreciated in the sense of good music, since it added luster and clarity to the theme.
The right book for the times April 5, 2007
Rational Bear (New York, NY)
12 out of 27 found this review helpful
This is a great and important book about financial crises (past and future) by a guy who has been there. A must read for (at the least) financial professionals of all stripes.
Showing reviews 61-64 of 64
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