- 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 