When Genius Failed

When Genius Failed tells the story of Long-Term Capital Management, the hedge fund staffed by Nobel Prize winners and PhD mathematicians that nearly destroyed the global financial system in 1998. LTCM's partners — including Myron Scholes and Robert Merton, who won the Nobel for their options pricing formula — built models that said the fund's positions were essentially risk-free. They were leveraged 25-to-1 when Russia defaulted and the models broke.

Roger Lowenstein's account is the most important book ever written about the dangers of overconfidence in quantitative models. LTCM's partners were objectively brilliant — they understood probability theory better than almost anyone alive. But they confused mathematical elegance with real-world truth. The models worked until they did not, and when they failed, they failed catastrophically. The Federal Reserve had to organize a $3.6 billion bailout to prevent systemic collapse.