Non fiction Finance Books Review

[ShaktiRathore]

Ascent of money is the best book on history of finance i read so far. How bond markets developed centuries before as an aid to raise money for warfare. The legend of Rotschild who was a lord in bond markets. The development of stock markets dates back to raise of money for formation of corporation as east india company. Author Nial Furguson discusses the causes and effects of housing bubble and its precursors like Real estate conspiracies and gambles. Finally author closes with a chapter on chimerica that discusses rise of china as major economic power besides america.
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[ShaktiRathore]

My life as a Quant by Emanual Derman. The book starts with Derman's early career ,after graduation in south africa he moves to US and enroll in phd theoretical physics program of Columbia university. His post doc positions at oxford to analyse the particles formed in high energy collisions and return to US. He became analyst at Bell labs and moved to AT&T where he got intetested in computer programming. He was then appointed at Goldman Sachs for his dextrity in building financial models using computer programs. He got in touch with fisher black with whom he developed the BDT model which models yield curves,he changed the assumption of bond prices to move from 0 to infinity to yield moving from 0 to infinity. Short term interest rates define long term interest rates. He lays his ideas on similarity b/w physics and finance wherin both models are used to describe phenomenon while one has human element the other has godly element.
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[ShaktiRathore]

The Black Swan by Nasim Nicholas Taleb. Black swan is an financial event categorised by rarity,uncertainty and great impact like the recent credit crisis or dot com buuble if 2000. Black swans indicates our iver reliance on platonic models but theory platonified is far from reality which leds to failure of models. Ltcm is best e.g which shows models themselves are not good enough we should take into consideration unknown we dont know ,models fail because we dont have knowledge enough of these black swans thats why they occur otherwise we would be ready for them and use models as Var to tame them. Extremistan consider it possible to have black swans but mediocristan do not work for extreme black swans. There can be positive as well as negative black swans,taleb argues that one should profit from poditive black swans but at same time avoid negative black swans. For eg invest 100% portfolio ,20% in speculative ventures(highly risky) and other 80% in safe instruments.if there is positive swan i gain immensely at same time if there is negative one than also safe because atmost i can lose 20%. In end taleb critisizes bell curve and models build on them and how we shoould not overrely on them and at same time be prepared for black swans.

 

[ShaktiRathore]

Models Behaving Badly by Emanuel Derman. Models are a representation of reality not the reality itself. While models needs both explaination and verification theories like of Maxwells,Newtons or Einsteins dont need any explaination but only verification. Theories of physics are well explained as well as well verified while finance utilises models to predict mkt behaviour and future. While physics laws determines future while in finance we use future to determine present. Physics seems more of a deterministic science while Finance is prone to uncertainty i.e its impossible to forecast future.
By analogy to Einsteins theory of relativity the security should earn the same excess return per unit of risk regardless of the nature of security,similarly observers should derive the same physical laws regardless of their frame of reference. The speed of light is constant and nothing flows faster than speed of light similarly the risk free rate is constant with no other security earning less than risk free rate.
While there is a theory of unification possible in physics the models are good for nothing in finance,its possible to consider quantifiable risk but impossible to quantify uncertain risk as in recent financial crisis of 2007.
Finance is not mathematics while there is fundemantal theorem of arithmetic and algebra there is no such fundamenatal theorem in finance.
Physics defines laws created by God whereas in finance models are defined based on behavior of humans.
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[ShaktiRathore]

Fooled by Randomness by Nassim Nicholas Taleb. Randomness or pure chance can cause stock price to rise by some one or two percent,such fluctuations can be due to pure randomness rather than major economic factors. Two managers A and B ,A outperformed B by a percent does not mean A is better than B but it could have happened purely out of chance.
Out of a group of managers a few can come out as outperforming but this can be due to randomness or pure chance and cannot be attributed to skill alone,larger the sample of mgrs out of which mgr performance is ranked more likely performance is out of randomness and less out of skill.
Taleb also talks about behavioral biases that makes people emotional and comes in the way of making rational decisions.
Taleb criticises how past history can be used to forecast future,there can be various explainations past event occured how only one explaination can be used to forecast future as causes of randomness could be altogether different than past.
Regression leaves out outliers does not capture entire picture of randomness also rules out black swans.
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[ShaktiRathore]

The Cartoon Guide to Calculus by Larry Gonick. Its the best book for someone wants to learn basics and improve calculus. Larry being a great cartoonist is able to explain basic concepts of calculus using cartoons. How a simple idea of zeno of no motion at any instant of time transfers to idea of constant velocity at any instant of time leds to development of calculus. Larry begins by explaining basic functions as logarithms,power,trignometric etc and their composites. Then explains the concept of limits,inverse functions,and associated theorems as sandwich theorem,extreme value theorem and L hospitals rule. The idea of limit gives rise to differentiation,the slope of function at any point tangent to it is differentiation of function at that point.He illustrates various rules of differentiation as product rule,quotient rule and chain rule.
The inverse of differentiation is the concept of Integration. Integration is nothin but Area under the function betwen any two points. To integrate a function look for a function hose differentiation shall give the function which is to be integrated. Techniques of integration as substitution,product rule is nothing but product rule in modified form. Finally Larry ends with Applications of calculus in practice.
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[ShaktiRathore]

The Cartoon Guide to Statistics by Woolcott smith and Larry Gonick. Author explains data collection,data description and data analysis. Data is collected through various sampling techniques as random sampling,stratified sampling and cluster sampling etc. Once collected the data is described using techniques as stem and leaf method,histogram method and chart plotting. Finally the data is analysed using various statistical techniques. The mean,median and mode are used to locate central tedency of data. Standard deviation measures the dispersion of data.
Series of Bernolliss gives rise to Binomial distribution which in turn give rise to Normal distribution. These are discussed. Probability theory is discussed the addition,subbtraction,product rules,the cincepts of mutually exclusives, independence of events are well explained. The Bayes theorem and conditional probability are explained using real life examples. Application in real world with inferential statistics i.e. Taking sample and inferring about population unknown based on sample egs election poll forecast,aspirin efficiency etc.
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[ShaktiRathore]

Currency Wars by James Rickards. Cinas huge Trade surpluses with US with competitive exports is haunting the US economy so in turn Fed devalues the dollar and exports inflation to China so that Chinas exports to US becomes more pricy and hence less competitive. Its one of major currency War between US and China both manipulating their currency vqlues wrt each other to gain competitive advantage. The whole currency War is based on the fact that devaluation of domestic currency makes the foreign goids more expensive as compared to domestic goods. This saves the domestic industry and employment.
Author describes three major currency Wars. A good book describing how nations devalue their currencies to gain a competitive advantage and fuel economic growth,a treat for students of international finance/economics.
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[ShaktiRathore]

The Quants by Scott Patterson is a must for any aspiring quant. The story starts with how four big quants of wall street using math models and hedge fund strategies would conquer the street and make billions if dolllars. They made big fortunes but the subprime crisis ruin their party . The convertible arbitrage of griffin,the equilubrium models of muller,the momentum and value strategy of aseness and credit derivatives of weinstein would earn them fortunes.
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