A Mathematician Plays the Stock Market

Rating:
Summary: It Doesn't Add Up
Review: Anyone familiar with mathematician John Allen Paulos wonderful Innumeracy book from the 1980s will be sorely disappointed with his latest effort.

Innumeracy set a standard for clear and relevant explanations related to math literacy. Even the title Mr. Paulos selected became part of the country's every day lexicon, a simple way to refer to the challenge of understanding the way the world is influenced by probabilities, variables, and equations.

A Mathematician Plays the Stock Market, to use a metaphor Mr. Paulos might use, falls short of that level by a degree of magnitude.

Part of the problem, I will admit, is the high standards set by Innumeracy. If it weren't for that effort, the author's humorous and candid accounts of his own investment failures here (no, math geniuses aren't any better at it than the rest of us) and his clear and easy-to-understand explanations of what the stock market numbers actually reflect would result in a better reception for A Mathematician Plays the Stock Market.

Then again, it may have been Innumeracy's success and critical acclaim that allowed A Mathematician Plays the Stock Market to even be published.

The actual text checks in at just over 200 pages, and yet the book spends a great deal of time beating around the bush, promising to come back to certain points in the future in several instances, making the slim volume feel more unwieldy than it should. And it is repetitive, using the same story about a stock scam based on mass mailings on three separate occasions. It even shows poor editing: the author can't seem to settle on a single spelling for the bankrupt consulting firm Arthur Andersen, or is it Arthur Anderson?

Yes, there are lessons to be learned in A Mathematician Plays the Stock Market: investing is complicated, for example, and a strategy of diversification and investment in simple index funds can yield strong results. But a reader doesn't have to delve into A Mathematician Plays the Stock Market to glean these nuggets of wisdom -- they are just as available in the Sunday newspaper's investment columns and from any number more complete investment guides.

In this book, Mr. Paulos warns again and again that he made an error by not judging the financial results of WorldCom, the company whose failure forms the centerpiece of this book, objectively enough. It's an important point; he wanted the company to succeed and so he failed to recognize evidence to the contrary. And it's a lesson that people who buy this book because of the esteem they have for Mr. Paulos after reading Innumeracy and other efforts will wish they applied to their decisions on book buying as well as stock buying.

Rating:
Summary: account of "bubble" thinking with surprising nuggets
Review: Having read and liked "Innumeracy" and "A Mathematician Reads the Newspaper" (although "Beyond Innumeracy" was boring), I came to expect an interesting and entertaining read. There's some complaints on this website about the cheap puns and large amount of asides, but I found these to be relatively minor defects. What Paulos does so well and so often is relate contemporary ideas in mathematics in a simple and understandable fashion. The stock market, of course, is the ultimate foil of quantitative predictive techniques; but Paulos' WorldCom mistake is due to psychological deficits - not trusting the wrong algorithm.

The most interesting point in the story of Paulos' misadventure with WorldCom stock is his deceiving his wife about his financial activity. A useful rule of mine in personal investing is Don't Lie to Your Wife. Obeying this rule - if he had a rule like this - would have certainly cut his losses to a moderate level. There's a pretty good chapter in this book about how immoral manipulation of equity prices probably doesn't pay off as reliably as one would imagine. The missing chapter is how moral and honest behavior can indeed benefit in the long run (as the O'Neill book states, cutting one's losses short is as important as picking and riding the winning stocks).

Paulos does the mature thing and accepts personal responsibility for his WorldCom mistakes. This is in variance with Jim Cramer's $20 pamplet "You Got Screwed!" and the many shareholder class action lawsuits.

I would recommend this book to any investor today, especially as a companion (one may say antidote) to Lynch's rightfully optimistic "One Up On Wall Street."

Rating:
Summary: The World according to Mathematics!
Review: I bought this book for a very simple reason: Among all the books in the rows of shelves in the bookshop, this was the only one which admitted that it COULD NOT tell me how to make a million bucks overnight. And after reading it, I feel that I really got my money's worth! (Or, more accurately MORE than my money's worth if you consider all the money I would have saved by NOT investing in bad companies!)

Paulos uses his training in mathematics and statistics to undo most of the damage done by incorrect use of mathematical models in modern economics. One by one he brings down pillars of stock price prediction, bringing down the houses of both technical and fundamental analysts! (You may wonder in the end if there's anything left to shelter you!)

And to be truthful, he leaves very little to work on. Only the new science of Chaos and Fractals seems to have survived unscathed! But there's little real "predictive" power from that branch of research, as he correctly points out!

I daresay however, that if you DON'T pay attention to this Mathematical Oracle... you'll doom yourself to repeating his mistakes!

If you don't have much training in Mathematics - especially Statistics, this book might be a bit of a chore. It requires at least a highschool level understanding of those subjects. But if you don't mind a little mental concentration,and a slightly wrinkled fore head, you can still get a pretty good idea of what he is trying to convey. Paulos makes his arguements as clear and as unmathematical as logic allows. (He uses WORDS instead of the usual SYMBOLS - that's what I mean by "unmathematical"!)

Even if you do decide to skip the Math - you're still left with a delightful little book filled with self-effacing humour that's entirely capable of making you laugh out loud! It's always funny to see how someone so clever, can be so stupid - when money is involved!

Buy it! It's worth it's weight in gold!

Rating:
Summary: A Sucker Plays the Stock Market
Review: 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.

Rating:
Summary: A Mathematician Becomes Emotional
Review: I had hoped this book would show how mathematics can be applied to the stock market, but this it does not! Instead, the reader comes away with the insight that also mathematicians can become emotional and therefore commit the usual mistakes in investing activities. Big deal! The chapter on technical analysis was a disaster. I am far from convinced that any technical analysis can make profits consistenly, but I know enough about different methods to realize that the author has little knowledge about the subject.

I rate it two stars because of the humour and self-critique it entails. Here, the author shares his shortcomings with the reader, and we can all smile in recognition of our own follies.

After all, the author does confess that he wrote the book to make some money to cover his losses in the stock market.

Rating:
Summary: (half of this book is written in parenthesis)
Review: I was misled into purchasing this book by my appreciation Paulos' previous publications and the enticing title. Being very ignorant of the workings of the market, and I was overly optimistic that this little booklet would give me some insights into Wall Street based on solid mathematical foundations. This was not the case. This book does give some insight into methods used by traders, but these are scattered throughout a horribly disjointed and purposeless text, making for a cumbersome read.

An alarming amount of the text is comprised of poor humour (if it wasn't for the fact that I was trapped mid-Atlantic with nothing else to read, I would have discarded this book after the hideous "screenplay" nonsense), numerical examples ripped straight from his previous work and vast swathes of text in parenthesis (c'mon, if it's worth including the text, script together a paragraph worth inclusion, rather than just pasting it into parethesis). A growing unease came over me as it became apparent that this book was merely bundled together (he actually admits this in the text) by a lazy Paulos in an attempt to recover money lost on the market. I can't help but feel that Paulos put very little effort into composing this text and feel quite cheated out of my money.

Rating:
Summary: Of Numbers, Odds, Emotions and Crooks!
Review: If you would like an objective view of the stock market, are comfortable with math and enjoy a little irreverence in your investment reading, you will love this book. The material is easily accessible for anyone who finds algebra not too taxing. Professor Paulos minimizes the formulas for you by using anecdotes, simple brain teasers and practical examples instead.

What makes the book delightful is his self-effacing sense of humor. I cannot remember reading another book in which a writer is as candid and funny about his own failings as an investor. Only Andy Tobias comes anywhere close. The book's running joke is the professor's disastrous obsession with buying WorldCom stock using borrowed money before it became apparent that the company's reported earnings had more to do with wishful thinking than reality. It is this example that makes the book also insightful for the reader because it shows how easily our emotions and instincts can lead us astray, even when we understand as much about the stock market as Professor Paulos does.

I have read dozens of stock market books that have attempted to explain the "numbers" aspect of stock-market investing. None of them covered as much ground or did so as succinctly as this book does. I was very impressed by the depth of reading that this book reflects. Although it is not an academic book, the rigor is impressive.

The basic point is that the stock market is a lot more complicated than anyone can hope to understand, and likely to be more volatile than almost anyone will be comfortable with. Professor Paulos provides potential remedies for both (index investing, diversifying active portfolios, and using derivatives as insurance against large risks).

One of the many brilliant math examples shows how some games cannot be won with "success" strategies, but if you can combine a certain two "failure" strategies you will be a guaranteed success. With that wonderful point, the idea of being a contrarian was better expressed than in anything else I have read on the subject.

By inserting himself in the book through the WorldCom example, Professor Paulos powerfully introduces the element of individual and market psychology. Although he is neither a psychiatrist nor a psychologist, the book abounds with material about the psychology of how the market works and why investors make mistakes. To me, the ultimate lesson here was that one's stock market approach has to be one that fits emotionally well . . . or you will never execute it successfully.

Ultimately, successful active investing requires you to correctly pick what everyone else will find irresistible not too long before that compulsion hits them. I came away, once again, delighted that index fund investing is available as a sure-fired way to outperform more than 90 percent of all professional portfolio managers while sleeping soundly at night.

After you finish enjoying the book, I suggest that you also think about where else you commit your financial resources in large measure more due to your emotions than to your sense of how to calculate an advantage. How could you change your approach in that other area to be more emotionally and financially rewarding?

Donald Mitchell
Co-author of The 2,000 Percent Solution, The Irresistible Growth Enterprise and The Ultimate Competitive Advantage

Rating:
Summary: Good Reflective Piece
Review: 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.

Rating:
Summary: Let's think about the market...
Review: 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.

Rating:
Summary: Mathematical fun & humble pie
Review: Paulos uses a nasty loss in the stock market (undoubtedly embarassing to a professor of mathematics) to provide another smorgasboard of mathematical insights. He throws in some of the typical scams and lots of mathematical perspective on probability and group psychology. As the brokers say "Strong Buy."