Posted by: Patrick Allen Foster | August 11, 2013

Sunday Book Reviews

1. Noah Smith reviews Quants:

If you want a fun, non-technical history of quantitative finance, this is your book. It traces the development of quant models, from Ed Thorp and Black-Scholes-Merton all the way through David X. Li. It explains trading strategies like statistical arbitrage in layman’s terms, and offers insight into what it’s like to run a trading operation, day to day. And it narrates the three-decade-long run-up to the epic finance-industry meltdown of 2007-8, including “warm-ups” like Black Monday and the fall of Long Term Capital Management. The author, Scott Patterson, writes in an accessible, engaging style, making it difficult to put the book down at times. It also does a good job of profiling some of the colorful personalities of the quant world – Peter Muller and Cliff Asness being the most colorful of the bunch.

Smith main criticism of the book is that it does not contain much material that would connect the development of quant models to the way in which the big banks broke Wall Street and the country back in 2008:

Personally, I would have liked to have seen The Quants tell the stories of the “pricing quants” and “risk quants” within the big banks, whose models were instrumental in convincing regulators, ratings agencies, and bank executives themselves that mortgage-backed products were safe. Patterson does briefly tell the story of two such quants, Fischer Black David X. Li, but I’d like to have seen a lot more about these guys, and about academics like Myron Scholes and Robert Merton.

Did the quants within big banks know that their models were wrong? Did they try to warn the executives not to apply the models? Did they simply shut up and take a paycheck as greedy, reckless executives misused and over-applied their models? Or did they actively promote blanket and widespread use of the flawed models, encouraging the heavy use of leverage and the holding of huge amounts of mortgage-backed products? I wish The Quants had answered this question, but it did not.

That said, the book is recommended — a “really good book,” in Smith’s words.

2. At Reason, Christopher Preble reviews Wrong Turn: America’s Deadly Embrace of Counterinsurgency, by Colonel Gian Gentile. An excerpt:

The point about legitimacy cannot be overstated. Insurgencies arise because of weak, and usually corrupt, governments. When the United States, or any other foreign power, intervenes on behalf of that government, it can only help to the extent that that foreign partner is in a position to eventually command respect—and recover its authority—from a substantial portion of the population. U.S. strategy could not force the South Vietnamese government to implement crucial reforms in order to win over the Vietnamese people. Contrary to the claims of the “better war” school, the communists had a deep core of support, not least because of the pervasive corruption within all levels of the South Vietnamese government.

The United States’ nation-building failures, in short, cannot be reduced to military personnel employing the wrong tactics or weak-kneed American politicians unwilling to pursue victory at all costs. They reflect the deep political dysfunction in places that are nation-states in name only. Not all countries will be as deeply divided as Iraq; not all will be as poor as Afghanistan. But most nation-building missions fail, and the few successes take extraordinary expenditures of time, blood and treasure.

Gentile does admit that there were some changes under Abrams, Petraeus, and McChrystal, respectively, but he contends that they were more of degree than of kind. “Tactical and organizational improvements do not save wars fought under failed strategy,” he explains, in what is arguably the most important passage in the entire work. The obsession with COIN diverts people attention away from motives (why we fight) to means (how we fight). It turns the entire enterprise of warfare on its head, elevating properly conducted military operations as ends in themselves. But wars are supposed to serve a political purpose.

As such, and contrary to General Douglas MacArthur’s famous statement in 1949 that in war “there is no substitute for victory,” Gentile points out that “sometimes, in a war that involves limited policy aims, there may well be alternatives to victory. Moreover, as was the case with MacArthur, it is not ultimately a general’s call to decide that in war there is no substitute for victory. That decision rests with political leaders.”

3. Thoreau reviews a book by Tom Bennett, Teacher Proof: Why research in education doesn’t always mean what it claims, and what you can do about it. He describes the book as “more awesome than I can put into words.” He also discusses how he would teach physics if someone “removed all the shackles.”

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Responses

  1. Must incline to agree with Gentile. Not only can’t C/I create popular legitimacy, it typically works against it. In Vietnam, Iraq, Afghanistan, all that’s happened is that our troops die in packets while corrupt politicians collect their millions from the U.S., stored against the day when they know they’ll have to flee the mess they were supposedly ruling.

  2. A related problem involves our demonstrated fondness for urbane government-in-exile types who speak flawless English and can easily work any room in New York or Washington but haven’t lived in the country in question for years or decades. For whatever reason, the people on the ground tend not to embrace these exiles who sweep into power behind our tanks.


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