Paulos, John Allen. A Mathematician Plays The Stock Market. New York: Basic Books, 2003. ISBN 0-465-05481-1.
Paulos, a mathematics professor and author of several popular books including Innumeracy and A Mathematician Reads the Newspaper, managed to lose a painfully large pile of money (he never says how much) in Worldcom (WCOM) stock in 2000–2002. Other than broadly-based index funds, this was Paulos's first flier in the stock market, and he committed just about every clueless market-newbie blunder in the encyclopedia of Wall Street woe: he bought near the top, on margin, met every margin call and “averaged down” all the way from $47 to below $5 per share, bought out-of-the-money call options on a stock in a multi-year downtrend, never placed stop loss orders or hedged with put options or shorting against the box, based his decisions selectively on positive comments in Internet chat rooms, and utterly failed to diversify (liquidating index funds to further concentrate in a single declining stock). This book came highly recommended, but I found it unsatisfying. Paulos uses his experience in the market as a leitmotif in a wide ranging but rather shallow survey of the mathematics and psychology of markets and investors. Along the way we encounter technical and fundamental analysis, the efficient market hypothesis, compound interest and exponential growth, algorithmic complexity, nonlinear functions and fractals, modern portfolio theory, game theory and the prisoner's dilemma, power laws, financial derivatives, and a variety of card tricks, psychological games, puzzles, and social and economic commentary. Now all of this adds up to only 202 pages, so nothing is treated in much detail—while the explanation of compound interest is almost tedious, many of the deeper mathematical concepts may not be explained sufficiently for readers who don't already understand them. The “leitmotif” becomes pretty heavy after the fiftieth time or so the author whacks himself over the head for his foolishness, and wastes a lot of space which would have been better used discussing the market in greater depth. He dismisses technical analysis purely on the basis of Elliott wave theory, without ever discussing the psychological foundation of many chart patterns as explained in Edwards and Magee; the chapter on fundamental analysis mentions Graham and Dodd only in passing. The author's incessant rambling and short attention span leaves you feeling like you do after a long conversation with Ted Nelson. There is interesting material here, and few if any serious errors, but the result is kind of like English cooking—there's nothing wrong with the ingredients; it's what's done with them that's ultimately bland and distasteful.

September 2004 Permalink