A Mathematician Plays The Stock Market

by John Allen Paulos

Overview

Can a renowned mathematician successfully outwit the stock market? Not when his biggest investment is WorldCom. In A Mathematician Plays the Stock Market, best-selling author John Allen Paulos employs his trademark stories, vignettes, paradoxes, and puzzles to address every thinking reader's curiosity about the market -- Is it efficient? Is it random? Is there anything to technical analysis, fundamental analysis, and other supposedly time-tested methods of picking stocks? How can one quantify risk? What are the most common scams? Are there any approaches to investing that truly outperform the major indexes? But Paulos's tour through the irrational exuberance of market mathematics doesn't end there. An unrequited (and financially disastrous) love affair with WorldCom leads Paulos to question some cherished ideas of personal finance. He explains why "data mining" is a self-fulfilling belief, why "momentum investing" is nothing more than herd behavior with a lot of mathematical jargon added, why the ever-popular Elliot Wave Theory cannot be correct, and why you should take Warren Buffet's "fundamental analysis" with a grain of salt. Like Burton Malkiel's A Random Walk Down Wall Street, this clever and illuminating book is for anyone, investor or not, who follows the markets -- or knows someone who does.

Product Details

ISBN-13:	9780465054817
Publisher:	Basic Books
Publication date:	05/05/2004
Edition description:	Reprint
Pages:	224
Sales rank:	899,998
Product dimensions:	5.38(w) x 8.00(h) x (d)

About the Author

John Allen Paulos is a professor of mathematics at Temple University. His books include the bestseller Innumeracy, A Mathematician Plays the Stock Market, and Irreligion. He lives in Philadelphia.

Table of Contents

1	Anticipating Others' Anticipations	1
	Falling in Love with WorldCom
	Being Right Versus Being Right About the Market
	My Pedagogical Cruelty
	Common Knowledge, Jealousy, and Market Sell-Offs
2	Fear, Greed, and Cognitive Illusions	13
	Averaging Down or Catching a Falling Knife?
	Emotional Overreactions and Homo Economicus
	Behavioral Finance
	Psychological Foibles, A List
	Self-Fulfilling Beliefs and Data Mining
	Rumors and Online Chatrooms
	Pump and Dump, Short and Distort
3	Trends, Crowds, and Waves	37
	Technical Analysis: Following the Followers
	The Euro and the Golden Ratio
	Moving Averages, Big Picture
	Resistance and Support and All That
	Predictability and Trends
	Technical Strategies and Blackjack
	Winning Through Losing?
4	Chance and Efficient Markets	57
	Geniuses, Idiots, or Neither
	Efficiency and Random Walks
	Pennies and the Perception of Pattern
	A Stock-Newsletter Scam
	Decimals and Other Changes
	Benford's Law and Looking Out for Number One
	The Numbers Man-A Screen Treatment
5	Value Investing and Fundamental Analysis	85
	e is the Root of All Money
	The Fundamentalists' Creed: You Get What You Pay For
	Ponzi and the Irrational Discounting of the Future
	Average Riches, Likely Poverty
	Fat Stocks, Fat People, and P/E
	Contrarian Investing and the Sports Illustrated Cover Jinx
	Accounting Practices, WorldCom's Problems
6	Options, Risk, and Volatility	117
	Options and the Calls of the Wild
	The Lure of Illegal Leverage
	Short-Selling, Margin Buying, and Familial Finances
	Are Insider Trading and Stock Manipulation So Bad?
	Expected Value, Not Value Expected
	What's Normal? Not Six Sigma
7	Diversifying Stock Portfolios	141
	A Reminiscence and a Parable
	Are Stocks Less Risky Than Bonds?
	The St. Petersburg Paradox and Utility
	Portfolios: Benefiting from the Hatfields and McCoys
	Diversification and Politically Incorrect Funds
	Beta-Is It Better?
8	Connectedness and Chaotic Price Movements	163
	Insider Trading and Subterranean Information Processing
	Trading Strategies, Whim, and Ant Behavior
	Chaos and Unpredictability
	Extreme Price Movements, Power Laws, and the Web
	Economic Disparities and Media Disproportions
9	From Paradox to Complexity	187
	The Paradoxical Efficient Market Hypothesis
	The Prisoner's Dilemma and the Market
	Pushing the Complexity Horizon
	Game Theory and Supernatural Investor/Psychologists
	Absurd Emails and the WorldCom Denouement
	Bibliography	203
	Index	205

Editorial Reviews

"With accustomed humor and apt examples, Paulos tackles complex computations that are vaguely understood and frequently misapplied by Wall Street pros."

From the Publisher

Paulos is the real McCoy, and his newest offering, A Mathematician Plays the Stock Market, is a double-chocolate nougat of a book -- a rich, densely packed delight. It is also rueful, funny and disarmingly personal. — Kai Maristed

The Los Angeles Times

… Paulos engages his subject. Are stock markets truly efficient? The scandals that enriched insiders and euchred ordinary investors like the author, he writes, make it difficult to believe that ''available information about a stock always quickly becomes common knowledge'' as the efficient-market hypothesis contends. He has some useful, if brief, discussions of portfolio theory and the importance of diversification. And he draws on the best of the writers on anomalies in financial markets, like Richard Thaler, Robert Shiller, Daniel Kahneman and the late Amos Tversky, to explore the psychology of why economic actors, and hence markets, often behave irrationally and fail to work in textbook fashion. — Robert Kuttner

The New York Times

Throughout this wide-ranging survey, the writing is spirited, funny and clear. Mr. Paulos is continually imaginative in finding apt metaphors and anecdotes for the mechanics he dissects.

New York Observer

John Allen Paulos is a genius at translating the arcane and complex for the rest of us in ways that go down as easily, and enjoyably, as vanilla ice cream. ... This book should be required reading for anyone opening a brokerage account.

The Washington Post

Yes, there are many percentage signs in this book, and even the odd Greek letter. But Paulos' humor and clarity will see you through.

USA Today

We like to think not only that mathematicians are smarter than the rest of us but that by dint of their mastery of numbers, they hold the key to understanding the baffling mysteries of the universe. Alas, Paulos (Innumeracy) says that's not always the case. As the author relates in this funny, insightful little volume about attempts to bring order and science to the free-for-all that is the stock market, he himself was once a big investor (in WorldCom). Despite strong evidence to sell, he desperately hung on to his stock as the price plummeted, proving that a head for numbers doesn't always translate to Wall Street know-how. Through most of this book, Paulos discusses various methods for predicting markets and offers thoughts on why people keep trying to perfect them. Shocking in their obtuseness are the so-called Elliot Wave followers, who believe stocks operate according to an impossibly arcane series of numerical waves and cycles. The efficient-market theorists-many of whom believe the stock market is so inherently efficient that everything one needs to know about a company is reflected in its stock price-get the most thorough joshing from Paulos: never able to resist a joke, he tells one about how many efficient market theorists it takes to change a light bulb. "Answer: None. If the light bulb needed changing the market would have already done it." Playful and informative, Paulos's book will be appreciated by investors with a sense of humor. (June) Copyright 2003 Reed Business Information.

Publishers Weekly

What at first appears to be a sour grapes account of investing in ill-fated WorldCom stock during 2000-02 is actually a tour of investing with a mathematical twist. As he recounts the decline of his WorldCom investment, Paulos (mathematics, Temple Univ.; Innumeracy) explains the simple mathematical concepts of investing, such as P/E ratios, the present and future value of money, and compound interest. He also looks at market psychology and such popular techniques of investing as technical and fundamental analysis. Paulos concludes that no technique works in the long run, which implies that he should have stuck to the index funds he mentions at the book's start. The math he introduces is easily understood, however, and Paulos gives copious examples; his book would be interesting to those who enjoy popular works on mathematics. Still, authors like John Bogle and Burton Malkiel have covered the fundamentals of investing better. An optional purchase for public and academic libraries.-Lawrence R. Maxted, Gannon Univ., Erie, PA Copyright 2003 Reed Business Information.

Library Journal

In this witty tale of a smart man making dumb investment decisions (a disastrous love affair with WorldCom stock was not his brightest endeavor), mathematics professor John Allen Paulos describes his ill-fated journey into the stock market. As he attempts to use his analytical skills to predict the Dow's peaks and dips, Paulos presents down-to-earth explanations of risk, volatility, stock portfolio diversity, and game theory. He also shows how many investment strategies are mathematically flawed. Copyright © 2004 Soundview Executive Book Summaries

Soundview Executive Book Summaries

A severe investment miscalculation leads to valuable lessons about the tricky psychology and thorny arithmetic of the market. Bestselling mathematician Paulos (Innumeracy, 1988, etc.; Mathematics/Temple Univ.) invested in WorldCom, he averaged down and bought more WorldCom, he bought WorldCom calls, and he bought WorldCom on margin. He lost a lot on WorldCom, but since that loss gave rise to this account, it’s a gain for investing readers. His uncommonly cogent text does not promote a secret investment method for attaining riches. Rather, it lucidly clarifies many of the mathematical and statistical influences on the stock market. With accustomed humor and apt examples, Paulos tackles complex computations that are vaguely understood and frequently misapplied by Wall Street pros. He explores the deficiencies of both technical and fundamental analyses. Diversification, covariance, beta factors, and various portfolio selection models utilized by brokerage theoreticians all have mathematical perils unseen by the most sophisticated players, the author argues. He introduces the wave theory of market movements, based on Fibonacci numbers, to the golden ratio. He warns that scams like pump and dump, short and distort, e-mail chat-room diversions, or plain old book-cooking will surely affect an investment; so may arcana like moving averages, regression to the mean, standard deviation, availability error, Benford’s Law, and the Nash equilibrium, not to mention psychological, logical, and belief-system influences. In his generally accessible explanations, Paulos walks the reader through basic formulae and eschews tables and charts—even where they might help. Investors would do well to heed hisentertaining, frequently counterintuitive, always useful bean-counting methodology. A first-rate exploration into the math of the market: heuristic numeracy at its best. Author tour. Agent: Rafe Sagalyn/Sagalyn Agency

Kirkus Reviews