Click here to close now.


Wearables Authors: Tim Fujita-Yuhas, Elizabeth White, SmartBear Blog, Yakov Fain, Pat Romanski

Related Topics: Wearables, Java IoT, Industrial IoT, Mobile IoT, Microservices Expo, ColdFusion, IBM Cloud, PowerBuilder, Weblogic, Microsoft Cloud, Linux Containers, Adobe Flex, Symbian, Open Source Cloud, SYS-CON MEDIA, Eclipse, API Journal, IoT User Interface, PHP, Agile Computing

Wearables: Article

New Column: A Geek's Bookshelf

Book Review: A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Invocation

Geeks like to read – and not only programming books. Most of us read incessantly. Whether it’s popular science, sci-fi or fantasy, a good thriller or an occasional popular history book or biography, it’s a rare geek who isn’t in love with books. And I am no exception, although I have to confess I am rather an extreme case since my love of books and eclectic tastes borders on the “gentle madness” aka “bibliomania.” 

What I am going to do in this regular column is feed my habit by highlighting some of the books I am reading, and (mostly) enjoying. (I will only rarely write negative reviews; it’s a rare book that I “do not put down gently but throw across the room with great force” after all.)

Finally, since I remain involved with Apress (, the publishing company for IT professionals I helped found, is there any potential for a conflict of interest? I don’t think so nor do the kind people at SYS-CON; the kind of books I will be reviewing are the books I read “non-professionally” –for fun – in my spare time. It is only these books, rather than professional books, that I will review.

Title: A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Invocation
Author: by Richard Bookstaber
Publisher: John Wiley 2007, ISBN 978-0-471-22727-4.
Price: $27.95

Talk about prescience, this amazingly relevant book, 10 years in the making, was actually published in April of 2007 – four months before the market meltdown that was caused by subprime mortgage-backed instruments going very, very south. Yet, in this extremely interesting, extraordinarily well-written book, Bookstaber essentially predicted this, and also (alas) he predicts more crises to come. The first paragraph of the book sets the stage:

“While it is not strictly true that I caused the two great financial crisis of the late 20th century – the 1987 stock market crash and the Long-Term Capital Management (hedge fund debacle)…”

Who is Bookstaber? He was one of the early “quants” on Wall Street. These are the physicists, mathematicians, statisticians, and mathematical who revolutionized trading on Wall Street by trying to search out hidden patterns and values. The foremost among them, the great mathematician James Simon, made a mere $1.7 billion last year by apparently doing exactly this.

The idea, roughly speaking, of most of these strategies is: can you find two (seemingly) equivalent securities that should trade in parallel but are currently not? Buy one and sell short the other, wait (hope) for a regression to the mean and make a bundle. Only you won’t make a bundle unless you use a lot of leverage because the anomalies are small at best. And leverage, as the old Wall Street adage has it, cuts both ways. If something really strange happens (a “black swan event,” in the words of best-selling author Nicolas Taleb whose very interesting book I’ll review soon) that makes the divergence greater than historical norms, your billions upon billions of leveraged investments often leads to catastrophic losses. And they did. What’s worse, there is a Heisenberg quality to this kind of historical/statistical arbitrage. As Bookstaber puts it: “Predicated on their conviction that the relationship had long-term stability, they would take positions based on the assumption that it would return, or converge, back to its historical value. What they did not appreciate was that they had changed history. There had never been someone trading hundreds of billions of dollars in the middle of this relationship before.”

Of course, it isn’t only about statistical arbitrage affected by the size of the investments made by people playing the game. As Bookstaber often points out, there is a certain amount of stupidity, cupidity, and outright deceit at work here. For example, the Enron-related transactions of Citigroup were described by the then head of risk management at CitiBank as: “[our] accounting is aggressive and a franchise risk to us if there is publicity,” which Bookstaber translates beautifully as: “we’re making this up and if anyone finds out, we’re in trouble.” Of course, Enron was found out and billions upon billions were lost and some of the people who went beyond merely aggressive accounting actually went to jail. (He has a wonderful suggestion about how to handle financial reporting by the way – one that will appeal to programmers: replace a lot of the hocus pocus in financial reports by requiring that the raw data be made available in basically XML form, and thus let smart data miners make sense of it without it being filtered through high-priced accounting firms with potential stakes in the matter.)

As this book is just filled with interesting information and great anecdotes, I could go on for a long time describing its virtues. For example, there’s a wonderful discussion of what portfolio insurance is and how it (inevitably with hindsight) led to the crash of 1987, for example. In the end, however, the whole point of this book can be summed up by the following passage:

“The danger to the system is the system…despite all the risks we can control, the greatest ones remain beyond our control. Those are the risks we do not see, things beyond the veil…”

Combine this inescapable fact with the amazing leverage that modern hedge funds can use, throw in the usual amounts of human stupidty and cupidity, the speed with which things happen in our modern era, the interconnections of everything with everything and Bookstaber has convinced me at least that more and more disasters await the financial system.

Before I leave this review though I do want to point out some parts of the book that will be especially interesting to programmers. Here is an amusingly scary one that occurred in the past and perhaps is not so relevant anymore; however, it remains of vital importance to everything we do. He describes how one early crisis (1995) was caused by the use of a now exotic programming language called APL (“A Programming Language”) created by Turing award-winner Ken Iverson. APL was an amazingly fun language for math types. You could invert a matrix with a single key stroke and write the most amazing one-liners. But let’s forget about the maintenance problems of a language that makes PERL seem like COBOL in it lucidity; the real problem was that APL was interpreted in an era when JITs were still a decade away and computers were hundreds of times slower. But many financial calculations require zillions of iterative calculations to compute prospective values, and APL, since it was not compiled in those days, simply couldn’t do them. So oddball situations weren’t well modeled in the financial models built with APL, and, once upon a time, this failure to use a compiled language led to a loss of between 100 and 250 million dollars to UBS – and this was back when a quarter of a billion dollars was real money.  

But more important is his stressing that the worst nightmare of financial machinations is our worse nightmare as well: the effects of tight coupling on systems. OOP was designed to solve this problem but it hasn’t proven the panacea its early proponents had hoped for. And, as anyone who was on the Vista team can testify (for example), tight coupling remains the biggest problem we face for large software projects.

In sum, get this book. Read it and learn. It’s beautifully written and full of insights that apply not only to financial management but to “life, the universe, and everything.”

More Stories By Gary Cornell

Gary Cornell has a PHD in mathematics from Brown University. At various times and among other things he has been a professor, a program director at the National Science Foundation, and a visiting scientist at IBM's Watson Labs. He has written or co-written numerous best-selling and award-winning computer books. Most recently he co-founded Apress (, which under his leadership became one of the largest publishers of books for IT professionals in the world. And he did all this while simultaneously having a truly serious case of the 'gentle madness,' AKA bibliomania.

Comments (4) View Comments

Share your thoughts on this story.

Add your comment
You must be signed in to add a comment. Sign-in | Register

In accordance with our Comment Policy, we encourage comments that are on topic, relevant and to-the-point. We will remove comments that include profanity, personal attacks, racial slurs, threats of violence, or other inappropriate material that violates our Terms and Conditions, and will block users who make repeated violations. We ask all readers to expect diversity of opinion and to treat one another with dignity and respect.

Most Recent Comments
Debbie Moynihan 10/15/07 01:52:26 PM EDT

Interesting review, I love the idea of a geek book review column. The suggestion to make raw financial data available in XML would be interesting. It would be cool to be able to grab data from various companies and do interesting things with it, but that might be a bit scary to some people...

Jane 10/11/07 04:39:13 PM EDT

Nice start to your new column, Gary. Great review of an interesting sounding book.

Paul E. Hanson 10/11/07 04:48:04 AM EDT

I did get a laugh (on a morbid level) that the blame for LTCM debacle does not lay where popularly thought. I will not give away the source for future readers.

Rajat Bhatia 10/11/07 04:28:17 AM EDT

Derivatives, trading and hedge funds are here to stay. They perform a valuable service to the financial markets, though Warren Buffet will disagree with me.

Nevertheless, it is the mis-use of derivatives and the excessive use of leverage that leads to financial disasters. This book provides an excellent insight into why we witness financial turmoil in some of the most liquid markets.

@ThingsExpo Stories
SYS-CON Events announced today that Sandy Carter, IBM General Manager Cloud Ecosystem and Developers, and a Social Business Evangelist, will keynote at the 17th International Cloud Expo®, which will take place on November 3–5, 2015, at the Santa Clara Convention Center in Santa Clara, CA.
Developing software for the Internet of Things (IoT) comes with its own set of challenges. Security, privacy, and unified standards are a few key issues. In addition, each IoT product is comprised of at least three separate application components: the software embedded in the device, the backend big-data service, and the mobile application for the end user's controls. Each component is developed by a different team, using different technologies and practices, and deployed to a different stack/target - this makes the integration of these separate pipelines and the coordination of software upd...
The IoT market is on track to hit $7.1 trillion in 2020. The reality is that only a handful of companies are ready for this massive demand. There are a lot of barriers, paint points, traps, and hidden roadblocks. How can we deal with these issues and challenges? The paradigm has changed. Old-style ad-hoc trial-and-error ways will certainly lead you to the dead end. What is mandatory is an overarching and adaptive approach to effectively handle the rapid changes and exponential growth.
Mobile messaging has been a popular communication channel for more than 20 years. Finnish engineer Matti Makkonen invented the idea for SMS (Short Message Service) in 1984, making his vision a reality on December 3, 1992 by sending the first message ("Happy Christmas") from a PC to a cell phone. Since then, the technology has evolved immensely, from both a technology standpoint, and in our everyday uses for it. Originally used for person-to-person (P2P) communication, i.e., Sally sends a text message to Betty – mobile messaging now offers tremendous value to businesses for customer and empl...
Too often with compelling new technologies market participants become overly enamored with that attractiveness of the technology and neglect underlying business drivers. This tendency, what some call the “newest shiny object syndrome,” is understandable given that virtually all of us are heavily engaged in technology. But it is also mistaken. Without concrete business cases driving its deployment, IoT, like many other technologies before it, will fade into obscurity.
The buzz continues for cloud, data analytics and the Internet of Things (IoT) and their collective impact across all industries. But a new conversation is emerging - how do companies use industry disruption and technology enablers to lead in markets undergoing change, uncertainty and ambiguity? Organizations of all sizes need to evolve and transform, often under massive pressure, as industry lines blur and merge and traditional business models are assaulted and turned upside down. In this new data-driven world, marketplaces reign supreme while interoperability, APIs and applications deliver un...
Today air travel is a minefield of delays, hassles and customer disappointment. Airlines struggle to revitalize the experience. GE and M2Mi will demonstrate practical examples of how IoT solutions are helping airlines bring back personalization, reduce trip time and improve reliability. In their session at @ThingsExpo, Shyam Varan Nath, Principal Architect with GE, and Dr. Sarah Cooper, M2Mi's VP Business Development and Engineering, will explore the IoT cloud-based platform technologies driving this change including privacy controls, data transparency and integration of real time context w...
"Matrix is an ambitious open standard and implementation that's set up to break down the fragmentation problems that exist in IP messaging and VoIP communication," explained John Woolf, Technical Evangelist at Matrix, in this interview at @ThingsExpo, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
WebRTC converts the entire network into a ubiquitous communications cloud thereby connecting anytime, anywhere through any point. In his session at WebRTC Summit,, Mark Castleman, EIR at Bell Labs and Head of Future X Labs, will discuss how the transformational nature of communications is achieved through the democratizing force of WebRTC. WebRTC is doing for voice what HTML did for web content.
The IoT is upon us, but today’s databases, built on 30-year-old math, require multiple platforms to create a single solution. Data demands of the IoT require Big Data systems that can handle ingest, transactions and analytics concurrently adapting to varied situations as they occur, with speed at scale. In his session at @ThingsExpo, Chad Jones, chief strategy officer at Deep Information Sciences, will look differently at IoT data so enterprises can fully leverage their IoT potential. He’ll share tips on how to speed up business initiatives, harness Big Data and remain one step ahead by apply...
Nowadays, a large number of sensors and devices are connected to the network. Leading-edge IoT technologies integrate various types of sensor data to create a new value for several business decision scenarios. The transparent cloud is a model of a new IoT emergence service platform. Many service providers store and access various types of sensor data in order to create and find out new business values by integrating such data.
The broad selection of hardware, the rapid evolution of operating systems and the time-to-market for mobile apps has been so rapid that new challenges for developers and engineers arise every day. Security, testing, hosting, and other metrics have to be considered through the process. In his session at Big Data Expo, Walter Maguire, Chief Field Technologist, HP Big Data Group, at Hewlett-Packard, will discuss the challenges faced by developers and a composite Big Data applications builder, focusing on how to help solve the problems that developers are continuously battling.
There are so many tools and techniques for data analytics that even for a data scientist the choices, possible systems, and even the types of data can be daunting. In his session at @ThingsExpo, Chris Harrold, Global CTO for Big Data Solutions for EMC Corporation, will show how to perform a simple, but meaningful analysis of social sentiment data using freely available tools that take only minutes to download and install. Participants will get the download information, scripts, and complete end-to-end walkthrough of the analysis from start to finish. Participants will also be given the pract...
WebRTC services have already permeated corporate communications in the form of videoconferencing solutions. However, WebRTC has the potential of going beyond and catalyzing a new class of services providing more than calls with capabilities such as mass-scale real-time media broadcasting, enriched and augmented video, person-to-machine and machine-to-machine communications. In his session at @ThingsExpo, Luis Lopez, CEO of Kurento, will introduce the technologies required for implementing these ideas and some early experiments performed in the Kurento open source software community in areas ...
Internet of Things (IoT) will be a hybrid ecosystem of diverse devices and sensors collaborating with operational and enterprise systems to create the next big application. In their session at @ThingsExpo, Bramh Gupta, founder and CEO of, and Fred Yatzeck, principal architect leading product development at, discussed how choosing the right middleware and integration strategy from the get-go will enable IoT solution developers to adapt and grow with the industry, while at the same time reduce Time to Market (TTM) by using plug and play capabilities offered by a robust IoT ...
Today’s connected world is moving from devices towards things, what this means is that by using increasingly low cost sensors embedded in devices we can create many new use cases. These span across use cases in cities, vehicles, home, offices, factories, retail environments, worksites, health, logistics, and health. These use cases rely on ubiquitous connectivity and generate massive amounts of data at scale. These technologies enable new business opportunities, ways to optimize and automate, along with new ways to engage with users.
The Internet of Things (IoT) is growing rapidly by extending current technologies, products and networks. By 2020, Cisco estimates there will be 50 billion connected devices. Gartner has forecast revenues of over $300 billion, just to IoT suppliers. Now is the time to figure out how you’ll make money – not just create innovative products. With hundreds of new products and companies jumping into the IoT fray every month, there’s no shortage of innovation. Despite this, McKinsey/VisionMobile data shows "less than 10 percent of IoT developers are making enough to support a reasonably sized team....
“In the past year we've seen a lot of stabilization of WebRTC. You can now use it in production with a far greater degree of certainty. A lot of the real developments in the past year have been in things like the data channel, which will enable a whole new type of application," explained Peter Dunkley, Technical Director at Acision, in this interview at @ThingsExpo, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
Through WebRTC, audio and video communications are being embedded more easily than ever into applications, helping carriers, enterprises and independent software vendors deliver greater functionality to their end users. With today’s business world increasingly focused on outcomes, users’ growing calls for ease of use, and businesses craving smarter, tighter integration, what’s the next step in delivering a richer, more immersive experience? That richer, more fully integrated experience comes about through a Communications Platform as a Service which allows for messaging, screen sharing, video...
SYS-CON Events announced today that Dyn, the worldwide leader in Internet Performance, will exhibit at SYS-CON's 17th International Cloud Expo®, which will take place on November 3-5, 2015, at the Santa Clara Convention Center in Santa Clara, CA. Dyn is a cloud-based Internet Performance company. Dyn helps companies monitor, control, and optimize online infrastructure for an exceptional end-user experience. Through a world-class network and unrivaled, objective intelligence into Internet conditions, Dyn ensures traffic gets delivered faster, safer, and more reliably than ever.