A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation Book

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'.