[.ca] A Mathematician Plays The Stock Market (ISBN 0465054811)

A Sucker Plays the Stock Market:
I do not plan on going gentle on this book, so if you are fond of the book or the author, you needn't read any farther. My first complaint about this book is it implies that mathematicians, by virtue of their chosen profession, are all world class fools when it comes to investing. Surely Mr. Paulos is outstanding in that regard, and he has no business blaming mathematics or anything other than his own lack of character for his stock market fiasco. Time was, if you did something shameful or grossly stupid, you suffered sociatal approbation. Mr. Paulos, in keeping with current ethos, chose to write a book about it. Mr. Paulos regals his readers with how he managed his investments, which is a chronocol of almost every mistake a person could make: $he bought at the top $he did'nt put in a stop-loss order $he used margins to increase his investment $he willfully ignored all signals that something was wrong $he threw good money after bad $he was unlucky to have chosen Worldcom in the first place Interspersed with this confessional is a lot of mathematically oriented stories which illustrate the counter-intuitive nature of probability. If you are interested in the psychology of investing, I highly recommend "Why Smart People Make Big Money Mistakes" by Blesky. Perhaps the silliest thing about this book is that Paulos does not even entertain the possibility that it is theoreticlly possible to beat the market. It seems obvisous that if some people (such as Mr. Paulos) have above average losses, somebody somewhere has to have above average gains. Mr. Paulos, who is obviously highly intellegent, seems unable to make this observation. This book is a two hundred page affirmation of what anybody who ever went to high school already knows: the smartest kids in the class often lack common sense.

Let's think about the market...:
Paulos has written a very interesting and fun to read book on the workings of the stock market and the inner-workings of the investors. He manages to synthesize a significant amount of related academic literature and non-academic practise focusing on the main ideas and the core insights. For example, what is the relationship between a market and a "beauty contest", when it might be smart to believe in rumors, what biases and psychological processes make us less rational investors, what are the main approaches to investing. And if you don't make more money after reading this book, at least you will be able to have much more thoughtful conversations about the markets.

Informative, but pretty random and basic:
Pallos explains the concepts of mathematics and how it relates to the stock market. Is there financial analysis that can lead to increasing market gains? Is it all random? If it is random, why is everyone trying to beat the system and get better returns? If there are inefficiencies, why haven't they haven't been exploited yet? He goes into such topics as the psychology of losses, the analysis of risk, the diversification of portfolios, and how it all relates to strategies, probabilities, and many mathematical topics. He often interjects how he went against common mathematical theories by personally sticking with his WorldCom stock during it's huge crash. It's hard to explain or give a synopsis of this book because it really doesn't have a concrete point, nor does it really have anything that really stands out. It's a bunch of somewhat interesting mathematical concepts that either loosely or strongly correlate to the stock market. All in all, it's a decent easy read, but nothing eye-opening or memorable.

I was rather disappointed:
The beginning of the book is somewhat interesting; all those psychological experiments that the book talks about are both entertaining and educational. It could be considered as a good introduction to behavioral finance and game theory, if it was compressed into magazine article. But then, less then half into the book, even this disappears; endless recounts of WorldCom become annoying, entertaining element vanishes, mathematical correctness (or at least completeness) of some examples becomes questionable. Lets take, for example, an IPO trading strategy (page 96). The author argues that if you have 50% probability that stock will gain 80% in a week and 50% probability that it will lose 60% in the same week, you would still lose money despite that the arithmetic average of return is 70%/week. The author explains it by geometric average of such set up being minus 15%/week. That is all right, but the problem is: the book stops right there! However, this is not the end of the story, because a good trader can still take an advantage of such volatility and earn nice profits. All she needs to do is to reduce the leverage! If she establishes rule that she always uses lets say 10% of her account for such trades and keeps the rest in cash she would reduce both percentage gains and percentage loses. Now she would have 50% probability that stock will gain 8% in a week and 50% probability that it will lose 6%. The geometric mean now much closer to an arithmetic; it is +0.75%/week or +82% annually on a compounding basis, still not bad!!! The morale of this example would be: a good trader knows how to control the leverage, or more generally, how to manage the risk; unfortunately the very concept of risk management is almost totally missing from the book (with the exception of security guard story, perhaps). Overall the book is very discouraging and very shallow - do not even open it if you are a novice trader or investor who is looking for inspiration and some insights.

Good Reflective Piece:
This book is a good reflective piece on markets and luck and the odds. Clearly it is a business book. Business buyers are looking for a way to get rich and get stock tips. Such reflective pieces may not be welcome. Read it and reflect.