Bookstabber draws on his years of experience working in risk management and in hedge funds to describe the increasing complexity that the financial markets are experiencing. Furthermore, he puts forth ideas such as tight coupling and over regulation that could lead to natural events such as Chernobyl and financial market events such as the one we are currently experiencing. His advice is to refrain from the tendency to increase regulation when these instances happen and try to keep financia... (show more)

Bookstabber draws on his years of experience working in risk management and in hedge funds to describe the increasing complexity that the financial markets are experiencing. Furthermore, he puts forth ideas such as tight coupling and over regulation that could lead to natural events such as Chernobyl and financial market events such as the one we are currently experiencing. His advice is to refrain from the tendency to increase regulation when these instances happen and try to keep financial products relatively simple. It is after all the complexity and therefore lack of understanding by consumers of how these products work that cause the financial markets to collapse. (show less)

This is not an easy book to understand if you are not a trader or involved with financial engineering on an everyday basis. Upon first read however, I sensed that Bookstaber's overall argument is spot-on for the historic financial crisis of 2008. For example, he explained how a liquidity crisis could be precipitated, ironically, by a demand for liquidity itself.

Once we move away from many of the technical nomenclatures in Bookstaber's book, the underlying backbone of this book argues that ... (show more)

This is not an easy book to understand if you are not a trader or involved with financial engineering on an everyday basis. Upon first read however, I sensed that Bookstaber's overall argument is spot-on for the historic financial crisis of 2008. For example, he explained how a liquidity crisis could be precipitated, ironically, by a demand for liquidity itself.

Once we move away from many of the technical nomenclatures in Bookstaber's book, the underlying backbone of this book argues that the financial markets, derivatives, liquidity options and other tightly-coupled financial mechanism--literally and all the products of human design--are extremely risky because they are too complex and their interdependent dynamic interactions are beyond what we can ordinarily perceive and react to.

To make this argument, Bookstaber must have relied on Chuck Perrow's seminal "Normal Accidents" (1984) and Dietrich Dorner's "The Logic of Failure" (1989; Deutsch), neither of which he explicitly gave credit to. While Perrow argued that complex technologies inevitably fail, Dorner argued that human cognition tends to short-change our decision making process especially when faced with non-linear interactions.

In short, this is a valuable book with great insights (even though I do not understand much of it) despite Bookstaber's implicit denial that he must have stood on the shoulders of Giants to construct his thesis. Particularly relevant for the Financial Crisis, this book at least does a better job in explaining the demise of LTCM technically than N.Taleb's terrible "went bust" in the 'Black Swan'. (show less)

Very esoteric story related to the 1987 stock market crash, the demise of Long Term Capital Management and hedge funds in general. He then goes into very complex examples unrelated to financial markets to demonstrate his point. It was a tough read.

Bottom Line: with regards to investment busts, the combination of tight couplnig (having many investment closely related & dependent on one another) and complexity is a formula for normal accidents -accidents that are all but inevitable as ... (show more)

Very esoteric story related to the 1987 stock market crash, the demise of Long Term Capital Management and hedge funds in general. He then goes into very complex examples unrelated to financial markets to demonstrate his point. It was a tough read.

Bottom Line: with regards to investment busts, the combination of tight couplnig (having many investment closely related & dependent on one another) and complexity is a formula for normal accidents -accidents that are all but inevitable as a result of the structure of the system. Disaster is triggered by simple and apparantly innocent actions that initiate a chain of compounding problems because of the complex nature of the system. Attempts to add layers of safeguards or regulation to prevent these disasters may actually do the opposite by addiing complexity. (show less)