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James Cameron would be the perfect person to make the movie "Quants." They'd be great in 3D, with really big brains and really fast computers.

With their really big brains and really fast computers they would beat the market and lord it over lesser life forms. And it would all work until the market took revenge in a giant act of economic hara kiri that brought down the Quants and, very nearly, civilization as we know it.

But, since Cameron isn't available, you'll have to make do with Scott Patterson's book, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. I chose it to review, as opposed to other excellent books on the economic crisis, because this is the book with the most lessons to teach, but the lessons aren't about investing strategies.

The lessons I was looking for are human lessons. If you want to understand the investment strategies or the mathematics of quantitative investing, this is not the book for you. If you want to dig into the causes of the recent recession, you should buy a different book. But if you want a well-paced story of human folly, set in the world of investing, this book is worth reading.

The Quants begins and ends with Ed Thorp. He was a math professor who was fascinated with using mathematics to figure out game strategies. That led him to gambling games, especially blackjack.

Thorp's first book was Beat the Dealer (1962). In it he showed how you could overcome a casino's house advantage at blackjack by using a card counting strategy.

The book was a success, but it wasn't long till Thorp was looking for a bigger casino. He applied his math skills to developing a strategy for investing in the stock market. In 1967, he wrote Beat the Market: A Scientific Stock Market System with Sheen Kassouf.

The strategies worked and soon the math professor was also a fund manager. Between the book and his own success Ed Thorp became the role model for what a bright young mathematician could do in the world of finance.

Graduate students of mathematics suddenly had something to strive for besides published papers and a tenured faculty position. All you needed to do, they thought, was use your super-power mathematical brain and find a giant computer to crunch your numbers.

Soon the quants and computer-driven investing were appearing on the business radar. In 1974, the Wall Street Journal published a front page article headlined "Trading by Formula." It outlined how some investors were using sophisticated mathematics and powerful computers to beat the market.

Help came from the academic world. The Black-Scholes Pricing Model gained a Nobel Prize for its developers. It also gave traders a recipe for investing in options that didn't depend on whether you thought the stock was going up or going down.

This is about the point in history where Patterson begins devoting his narrative to the people who ran the quant funds. You'll get good profiles of Ken Griffin, Boaz Weinstein, Peter Muller and Cliff Asness. There are briefer portraits of others.

For a while, things looked great. But, as we now know, that didn't last forever. When things began to unravel, the models simply didn't work that way all the theory and careful planning said they would.

The models were rational. The problem is that investors aren't rational and when they started acting irrationally, engaging in a "flight to liquidity" for example, the models broke down.

The models were based the idea that the market was efficient and that really smart investors with really fast computers could exploit temporary inefficiencies. That exposed them to real losses when the market didn't bounce back quickly enough for the model. As Keynes said, "In a crisis, markets can remain irrational longer than you can remain solvent."

And the models were based on historical records. That created two problems.

First, the models only used a limited amount of historical data. As Niall Ferguson said of the Long Term Capital Management's model, "They had plenty of mathematics, but not enough history."

And the models could only look backward. They simply couldn't predict things that hadn't happened before.

But, in the end, the real problem wasn't with the models at all. It was with the people who made the models and put their faith in the models and in themselves.

That brings us back to Ed Thorp. He got out of the market in 2002 (though he's back now). He just saw too many people and funds showing up and acting like things would never go bad.

A quick reading of history will tell you that things always go bad at some point. And the quants did something no gambler or investor should ever do. They bet more than they could afford to lose. They bet that way because they were sure they would never lose.

In the end this is a book where the narrative is about investing and hedge funds and the troubles we've made for ourselves. But the story is as old as the Greeks, and probably older.

It's the story of what the Greeks called "hubris," extreme arrogance and overestimating your capabilities. For the Greeks, and for the quants, hubris was followed by Nemesis.

That's the important lesson. It's also one we have to learn again and again.

Scott Patterson's book, The Quants, is worth reading for lessons about how human beings have been proving their fallibility from Ancient Times down to the present.

That's the important lesson and it's worth the price of the book. But, if you're looking for insight into investment strategies or deep understanding of market dynamics, there are problems.

Fact checking is a problem. Harry Reid, for example, is identified as a Senator from Arizona. He's from Nevada.

Things like that, combined, with some fast and loose uses of financial terms of art, make me wonder about Patterson's understanding of the investment vehicles and strategies he describes. He does not seem to have the comfortable understanding that other authors, like Andrew Ross Sorkin have brought to similar topics.

Bottom Line: The Quants is a good book for the human story of the quants themselves. It's a poor choice if you want to understand their methods or instruments or the mathematical and investment theories they used.

Other Resources

Here are two articles that will help you understand the underlying economics.

"How did the Economists get it so Wrong?" By Paul Krugman

"Can Science Help Solve the Economic Crisis" by Mike Brown in discussion with others

And here are some books that you may find helpful and interesting.

Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System and Themselves by Andrew Ross Sorkin – My pick for the best book about the crisis.

The Big Short: Inside the Doomsday Machine by Michael Lewis

The Ascent of Money: A Financial History of the World by Niall Ferguson

Wally's Working Supervisor's Support Kit is a collection of information and tools to help working supervisors do a better job. It's based on what Wally's learned in over twenty years of supervisory skills training. Click here to check it out.