A Demon of Our Own Design
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|Cover artist||The Fall of Icarus by Jacob Peter Gowy|
|Subject||Risk management, investments|
|Publisher||John Wiley & Sons|
|Media type||Print, e-book|
|LC Class||HG4530 .B66 2007|
The theme of the book is that the world financial system is vulnerable to singularities—disasters arising out of apparently trivial details, as implied by chaos theory and its Butterfly effect. He discusses the critical and often underappreciated role of liquidity in the markets and presents a theory of 'normal accidents' arising from the combination of tight coupling and complexity. Bookstaber reviews accidents such as Three Mile Island, ValueJet, and Columbia as examples of 'normal accidents' that have corollaries in the financial markets.
The efficient market hypothesis comes under attack in this book using biological and evolutionary analogies. He suggests that overspecialization to an environment leads one vulnerable to change. Therefore, the best adaptive approach is often to have a 'coarse' approach that may ignore fine grained stimuli.
Risk management, however sophisticated it is or can become, will not end this vulnerability. To the contrary, "the more intricate risk-management structures may actually make the system worse."
Bookstaber had a front-side seat for such crises as the stock market crash of 1987 and the demise of Long-Term Capital Management, and his book is built around themes drawn from those experiences.
Table of Contents
- About the Author.
- CHAPTER 1: Introduction: The Paradox of Market Risk.
- CHAPTER 2: The Demons of ’87.
- CHAPTER 3: A New Sheriff in Town.
- CHAPTER 4: How Salomon Rolled the Dice and Lost.
- CHAPTER 5: They Bought Salomon, Then They Killed It.
- CHAPTER 6: Long-Term Capital Management Rides the Leverage Cycle to Hell.
- CHAPTER 7: Colossus.
- CHAPTER 8: Complexity, Tight Coupling, and Normal Accidents.
- CHAPTER 9: The Brave New World of Hedge Funds.
- CHAPTER 10: Cockroaches and Hedge Funds.
- CHAPTER 11: Hedge Fund Existential.
- Conclusion: Built to Crash?
He also worked at Ziff Brothers Investments doing both risk management and running a quantitative equity portfolio. He was the managing director in charge of firm-wide risk management at Salomon Brothers and a member of Salomon's powerful Risk Management Committee. He also designed and marketed derivative instruments, and worked as a proprietary trader, at Morgan Stanley, where he was the firm's first market risk manager.
In addition to A Demon of Our Own Design, he is the author of three other books and scores of articles on finance topics ranging from option theory to risk management. He received a Ph.D. in economics from MIT. His blog http://rick.bookstaber.com/ is an up-to-date commentary on risk management and related investment issues.
- 2007, USA, John Wiley & Sons, ISBN 978-0-471-22727-4, hardcover
- 2008, USA, John Wiley & Sons, ISBN 978-0-470-39375-8, paperback
- Fridson, Martin S. "A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation (A review)". CFA Institute. cfainstitute.org. Retrieved 10 May 2017.
- Wiley (2009-04-22). "Author Information". Wiley. Retrieved 2009-04-22.