The Money Formula: Dodgy Finance, Pseudo Science And How Mathematicians Took Over The Markets by Paul Wilmott and David Orrell

The Blurb On The Back:

There is no blurb on the back, but there are the following quotes:

“This book has humour, attitude, clarity, science and common sense; it pulls no punches and takes no prisoners.” 

Nassim Nicholas Taleb, Scholar and former trader

”There are lots of people who’d prefer you didn’t read this book: financial advisors, pension fund managers, regulators and more than a few politicians.  That’s because it makes plain their complicity in a trillion dollar scam that nearly destroyed the global financial system.  Insiders Wilmott and Orrell explain how it was done, how to stop it happening again – and why those with the power to act are so reluctant to wield it.” 

Robert Matthews, Author of Chancing It: The Laws Of Chance And How They Can Work For You

”Few contemporary developments are more important – and more terrifying – than the increasing power of the financial system in the global economy.  This book makes it clear that this system is operated either by people who don’t know what they are doing or who are so greed-stricken that they don’t care.  Risk is at dangerous levels.  Can this be fixed?  It can and this book – full of healthy scepticism and high expertise – shows how.” 

Bryan Appleyard, Author and Sunday Times writer

”In a financial world that relies more and more on models that fewer and fewer people understand, this is an essential, deeply insightful as well as entertaining read.”

Joris Luyendijk, Author of Swimming With Sharks: My Journey Into The World Of The Bankers

”A fresh and lively explanation of modern quantitative finance, its perils and what we might do to protect against a repeat of disasters like 2008-09.  This insightful, important and original critique of the financial system is also fun to read.” 

Edward O. Thorp, Author of A Man For All Markets and New York Times bestseller Beat The Dealer

You can order THE MONEY FORMULA: DODGY FINANCE, PSEUDO SCIENCE AND HOW MATHEMATICIANS TOOK OVER THE MARKETS by Paul Wilmott and David Orrell and David Orrell from Amazon USA, Amazon UK, Waterstone’s or UK.  I earn commission on any purchases made through these links.

The Review (Cut For Spoilers):

Paul Wilmott is a researcher and quantitative finance consultant who’s worked as a fund manager and academic while David Orrell is an applied mathematician and founder of a scientific consultancy.  In this book, they look at the theories and formulae that underpin the quantitative finance models used by hedge funds and other financial institutions and explain why they’re so flawed in a challenging but interesting read told in a breezy style.

There’s a lot of maths and statistics in the early chapters of the book, which anyone with a maths/economics/engineering/econometrics background will probably find quite basic but if – like me – you worked really hard for that GCSE grade C, it’s quite challenging to follow and I found myself having to go over the explanations several times in order to follow the basic precepts behind modelling and the history of quantitative finance and the development of financial derivatives.  However, once I got it I was able to follow the main thrust of their arguments about fundamental mistakes in the assumptions underlying the area and how there’s effectively a mathematical sleight of hand and jiggery pokery to make it seem as though the models are effective.

The latter chapters, which look at how financial modelling puts the financial markets at risk.  The chapters on the financial crash are particularly interesting and as someone with a regulatory background, the refusal of regulatory authorities to get to grips with this (in particular the failure of a governmental panel that one of the authors was invited to participate in) is absolutely chilling and a portent of bad things to come.

All in all, if you have any interest in finance then I think you should check out this book because it’s a great summary of the subject and the extensive bibliography gives you suggestions for further reading on the subject.

Thanks to the Amazon Vine Programme for the review copy of this book.

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