Chaos kings How Wall Street traders make billions in the new age of crisis

Wall Street Journal reporter Patterson (Dark Pools) delivers an illuminating investigation into those who profit from anticipating crises. Patterson outlines the two prevailing camps of catastrophe forecasters: there are those who follow trader Nassim Nicholas Taleb's "Black Swan" theory, which posits that world-changing events are often entirely unpredictable, and then there are those who follow French physicist Didier Sornette's "Dragon King" theory, which holds that events can be predicted if one has the right inputs. The author explains how Taleb positions himself to profit from sudden market crashes by purchasing put options (an agreement that obligates the option seller to buy back assets at a predetermined price should the option buyer decide to sell), which usually result in minor losses but have huge payoffs during market plunges. Sharp profiles of Taleb, Sornette, and other traders leaven the complicated financial discussions; for example, Patterson describes Sornette as a strong-willed risk-taker whose idiosyncratic thinking led him to predict the housing bubble of the mid-aughts. Additionally, the author has a knack for translating complicated financial maneuvers into easily comprehensible terms (he likens put options to "fire insurance that pays off triple the value of your mortgage... if your home burns"). Detailed yet accessible, this will appeal to fans of Michael Lewis's The Big Short. (June)

Wall Street Journal stalwart Patterson continues his explorations of high finance with a clutch of contrarian risk takers. Playing the market is part art, part science, and part leap of faith. Investor and statistician Nassim Nicholas Taleb, who stands at the center of Patterson's latest, following The Quants and Dark Pools, takes an alternate view. He assumes that the world is a series of rare black swan events ("extreme events no one could have predicted…like a sudden market crash"), and he further urges clients to think that the conventional wisdom of investing--diversified portfolio, trying to time the market--is a fool's game. Come the pandemic, and the contrary wisdom of Taleb and company, codified as "Panic now--panic early," proved its use. While a single "black swan" event might be survivable, a cluster of them, including disease, financial closures, supply-chain issues, inflation, and more, can break the bank. Taleb and like-minded investors bet on things going wrong and planning for worst-case scenarios. Although Taleb's black-swan protection protocols were widely if incompletely imitated, they were not universally accepted. Patterson highlights the thought of "complexity theorist" Didier Sornette, who argues that Taleb's notion that the future is hard, if not impossible, to predict is unnecessarily dark and who developed an alternate theory exemplified by "dragon kings" rather than black swans. No matter which image you follow, the facts are incontrovertible: Set a multipartite catastrophe such as the pandemic in motion, and huge amounts of wealth will disappear, as with one popular fund that lost 97% practically overnight, "a stark real-world example of gambler's ruin." If anything, Taleb, by Patterson's account, is more pessimistic than ever, warning that climate change is going to yield a world that will make us long for the present. Throughout, the author provides deft, accessible analysis and guidance. Complex economic and scientific theories lucidly rendered, even if the resulting picture is unremittingly gloomy. Copyright (c) Kirkus Reviews, used with permission.