Quants

1) Is Wall Street moral?

No. Are there moral people working on Wall St? Yes, I'd imagine. Do they allow their morality to affect their strategies? I imagine they wouldn't succeed if they allowed morality to influence them significantly. I guess that's the crux; Wall St. measures success in monetary gains. Money is an inherently amoral metric of success. So in that sense I would say Wall St. lacks morality.

That said, I think it would be a mistake to compel Wall St. to be "moral." I think a better question (although probably still not a very good one) is "Is Wall St. fair?" Fair is about as difficult to define in a rigorous way as moral, but I think it's plausible that society would be better off as a whole if Wall St. were more fair.

2) Does the solution have something to do with leverage?

Echoing Jesse, the solution to what exactly? Drastic rises and falls in aggregate stocks? I imagine bubbles will happen whether the government more strictly regulates leverage or not. To the question of whether hedge funds were at all regulated in their use of leverage, I don't know an absolute answer. But Patterson certainly gives the impression that they were internally regulated, either through overarching strategies (when they resided in investment banks) or through external pressues (as in the "run on the bank" deleveraging that Patterson describes in the last third of the book).

The issue of a hedge fund's (or an investment bank's) failure causing a hole in the economy that hurts lots of people "who didn't necessarily have it coming to them" I suppose that's sort of what I meant by "fair." You'd like the costs to be borne more heavily by the main actors rather than peripheral actors (presumably the staid retirment 401k investors, or the small business owners who can't make payroll because there's a credit crunch). But what you're perceiving as a lack of fairness (again, I'm not sure I'd define it that way) cuts both ways; during the boom years, small investors and small businesses benefitted from the cheap credit that was being generated primarily for the big players.

3) Did the quants really play as big of a role in the crash as Patterson makes out?

It seems unlikely to me that the Quants really played as significant a role as Patterson makes out. If I were assigning blame, it'd be 1) to the Fed for keeping interest rates too low for too long, 2) to the ratings agencies who weren't sufficiently reactive to the creation of new products and 3) to the government agencies who should have been more capably overseeing at least the foreign markets for US products.

4) Should the quants have seen it coming?

Do you mean "should they have been able to see it coming" or "were they wrong not to see it coming?" I would certainly say no to the second case, but a qualified yes to the first. At least from the analysis Patterson provides (which I recognize is not only incomplete, but likely biased) it seems like several of the strategies failed to learn adequately from the fall of LTCM. At least in Patterson's telling, it was viewed as an aberration that was statistically unlikely ever to occur again (lightning doesn't strike in the same place twice). If that's truly the case, then I would say anyone generating a market model that fails to explain what happened in the lead-up to the failure of LTCM was being myopic.

As an additional point, I know Patterson heaps contempt on the VAR and the Gaussian cupola, and probably rightly so. But it seems like there are regimes where the approximations work quite well. Perhaps some of those Phyics PhDs could come up with some sort of near field-far field approach to the markets, and particularly discover if there's a phase transition between the two.

5) Adaptive Market Hypothesis.

I thought the AMH (and the related "ecological" approach out of Sante Fe) were a little bit silly. Not that evolutionary algorithms or models can't perform well, but I didn't see (at least from Patterson's brief descriptions) any sort of rigorous analysis of why they should work.

Another note on modeling; where are the game theoretic models? If there's a shortcoming of the EMH, I would say it's in its failure to adequately model the impact of homogeneous strategies. Again, in the simultaneous deleveraging that occurred in Oct. 2007 (and throughout 2008) it seems like having an adversarial model (something akin to a multi-stage Prisoner's Dilemma) would have improved performance. But who knows; maybe that's exactly what triggered the deleveraging. Some company that decided they would deleverage first and stick everyone else with the sucker's payoff.

6) The last lines of the book are:

"Just look: exotic leveraged vehicles marketed to the masses worldwide, hedge fun ds gaming their returns, lightning-fast computerized trading robots, predatory ninja algorithms hunting liquidity in dark pools...Here come the quants."

This encapuslates much of what I don't like about the book. Patterson's moral (if there is one) is a cautionary tale about the harm in being overly certain. But then he lauds "non-Quant" investors like Warren Buffett and Bill Gross because they do things "the right way" in a certain sense. But the idea that theirs is "the right way" betrays (to me at least) the same sense of hubris and certainty in his own "rightness." After spending all book knocking the quants for believing in "the Truth," here's Patterson himself, in the final pages, looking to prophets like Taleb and Gross as conduits of the Truth. And he seems oblivious to the fact that he's doing, which is sort of disheartening.

7) What is the moral to Patterson's narrative?

See my answer to (6).

I did really enjoy the book. I didn't think I would after the first chapter, guessing it would suffer from the "Tracy Kidder" disease of overly flowery lauding of the protagonists. But once it got down to business, so to speak, I really felt it picked up and pulled me in.

Thanks for a great read!