Welcome!

Wearables Authors: Elizabeth White, Carmen Gonzalez, Liz McMillan, Yeshim Deniz, Christopher Harrold

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, Cognitive Computing , Machine Learning , 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 (www.apress.com), 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 (www.apress.com), 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
In order to meet the rapidly changing demands of today’s customers, companies are continually forced to redefine their business strategies in order to meet these needs, stay relevant and continue to see profitable growth. IoT deployment and development is integral in this transformation, and today businesses are increasingly seeing the value of investing their resources into IoT deployments. These technologies are able increase ROI through projects such as connecting supply chains or enabling sm...
SYS-CON Events announced today that SoftLayer, an IBM Company, has been named “Gold Sponsor” of SYS-CON's 18th Cloud Expo, which will take place on June 7-9, 2016, at the Javits Center in New York, New York. SoftLayer, an IBM Company, provides cloud infrastructure as a service from a growing number of data centers and network points of presence around the world. SoftLayer’s customers range from Web startups to global enterprises.
Multiple data types are pouring into IoT deployments. Data is coming in small packages as well as enormous files and data streams of many sizes. Widespread use of mobile devices adds to the total. In this power panel at @ThingsExpo, moderated by Conference Chair Roger Strukhoff, panelists will look at the tools and environments that are being put to use in IoT deployments, as well as the team skills a modern enterprise IT shop needs to keep things running, get a handle on all this data, and deli...
With major technology companies and startups seriously embracing Cloud strategies, now is the perfect time to attend @CloudExpo | @ThingsExpo, June 6-8, 2017, at the Javits Center in New York City, NY and October 31 - November 2, 2017, Santa Clara Convention Center, CA. Learn what is going on, contribute to the discussions, and ensure that your enterprise is on the right path to Digital Transformation.
Five years ago development was seen as a dead-end career, now it’s anything but – with an explosion in mobile and IoT initiatives increasing the demand for skilled engineers. But apart from having a ready supply of great coders, what constitutes true ‘DevOps Royalty’? It’ll be the ability to craft resilient architectures, supportability, security everywhere across the software lifecycle. In his keynote at @DevOpsSummit at 20th Cloud Expo, Jeffrey Scheaffer, GM and SVP, Continuous Delivery Busine...
SYS-CON Events announced today that delaPlex will exhibit at SYS-CON's @CloudExpo, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. delaPlex pioneered Software Development as a Service (SDaaS), which provides scalable resources to build, test, and deploy software. It’s a fast and more reliable way to develop a new product or expand your in-house team.
SYS-CON Events announced today that Carbonite will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Carbonite protects your entire IT footprint with the right level of protection for each workload, ensuring lower costs and dependable solutions with DoubleTake and Evault.
SYS-CON Events announced today that EARP Integration will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. EARP Integration is a passionate software house. Since its inception in 2009 the company successfully delivers smart solutions for cities and factories that start their digital transformation. EARP provides bespoke solutions like, for example, advanced enterprise portals, business intelligence systems an...
SYS-CON Events announced today that delaPlex will exhibit at SYS-CON's @ThingsExpo, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. delaPlex pioneered Software Development as a Service (SDaaS), which provides scalable resources to build, test, and deploy software. It’s a fast and more reliable way to develop a new product or expand your in-house team.
Amazon started as an online bookseller 20 years ago. Since then, it has evolved into a technology juggernaut that has disrupted multiple markets and industries and touches many aspects of our lives. It is a relentless technology and business model innovator driving disruption throughout numerous ecosystems. Amazon’s AWS revenues alone are approaching $16B a year making it one of the largest IT companies in the world. With dominant offerings in Cloud, IoT, eCommerce, Big Data, AI, Digital Assis...
Detecting internal user threats in the Big Data eco-system is challenging and cumbersome. Many organizations monitor internal usage of the Big Data eco-system using a set of alerts. This is not a scalable process given the increase in the number of alerts with the accelerating growth in data volume and user base. Organizations are increasingly leveraging machine learning to monitor only those data elements that are sensitive and critical, autonomously establish monitoring policies, and to detect...
We build IoT infrastructure products - when you have to integrate different devices, different systems and cloud you have to build an application to do that but we eliminate the need to build an application. Our products can integrate any device, any system, any cloud regardless of protocol," explained Peter Jung, Chief Product Officer at Pulzze Systems, in this SYS-CON.tv interview at @ThingsExpo, held November 1-3, 2016, at the Santa Clara Convention Center in Santa Clara, CA
SYS-CON Events announced today that Outscale will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Outscale's technology makes an automated and adaptable Cloud available to businesses, supporting them in the most complex IT projects while controlling their operational aspects. You boost your IT infrastructure's reactivity, with request responses that only take a few seconds.
SYS-CON Events announced today that Progress, a global leader in application development, has been named “Bronze Sponsor” of SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Enterprises today are rapidly adopting the cloud, while continuing to retain business-critical/sensitive data inside the firewall. This is creating two separate data silos – one inside the firewall and the other outside the firewall. Cloud ISVs oft...
DevOps at Cloud Expo – being held October 31 - November 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA – announces that its Call for Papers is open. Born out of proven success in agile development, cloud computing, and process automation, DevOps is a macro trend you cannot afford to miss. From showcase success stories from early adopters and web-scale businesses, DevOps is expanding to organizations of all sizes, including the world's largest enterprises – and delivering real r...
SYS-CON Events announced today that Cloud Academy will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Cloud Academy is the industry’s most innovative, vendor-neutral cloud technology training platform. Cloud Academy provides continuous learning solutions for individuals and enterprise teams for Amazon Web Services, Microsoft Azure, Google Cloud Platform, and the most popular cloud computing technologies. Ge...
The 21st International Cloud Expo has announced that its Call for Papers is open. Cloud Expo, to be held October 31 - November 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA, brings together Cloud Computing, Big Data, Internet of Things, DevOps, Digital Transformation, Machine Learning and WebRTC to one location. With cloud computing driving a higher percentage of enterprise IT budgets every year, it becomes increasingly important to plant your flag in this fast-expanding busin...
In his opening keynote at 20th Cloud Expo, Michael Maximilien, Research Scientist, Architect, and Engineer at IBM, will motivate why realizing the full potential of the cloud and social data requires artificial intelligence. By mixing Cloud Foundry and the rich set of Watson services, IBM's Bluemix is the best cloud operating system for enterprises today, providing rapid development and deployment of applications that can take advantage of the rich catalog of Watson services to help drive insigh...
As cloud adoption continues to transform business, today's global enterprises are challenged with managing a growing amount of information living outside of the data center. The rapid adoption of IoT and increasingly mobile workforce are exacerbating the problem. Ensuring secure data sharing and efficient backup poses capacity and bandwidth considerations as well as policy and regulatory compliance issues.
With major technology companies and startups seriously embracing Cloud strategies, now is the perfect time to attend @CloudExpo | @ThingsExpo, June 6-8, 2017, at the Javits Center in New York City, NY and October 31 - November 2, 2017, Santa Clara Convention Center, CA. Learn what is going on, contribute to the discussions, and ensure that your enterprise is on the right path to Digital Transformation.