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My Life as a Quant: Reflections on Physics and Finance Hardcover – September 16, 2004


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Product Details

  • Hardcover: 304 pages
  • Publisher: Wiley; 1 edition (September 16, 2004)
  • Language: English
  • ISBN-10: 0471394203
  • ISBN-13: 978-0471394204
  • Product Dimensions: 6.3 x 1 x 9.3 inches
  • Shipping Weight: 1.2 pounds (View shipping rates and policies)
  • Average Customer Review: 4.0 out of 5 stars  See all reviews (113 customer reviews)
  • Amazon Best Sellers Rank: #539,157 in Books (See Top 100 in Books)

Editorial Reviews

Review

“engaging” (CFO Europe, October 2005)

"...tells wonderful stories of trying to bring highermathematics to the Goldman Sachs equity-derivatives trading desk."(Grant's Interest Rate Observer, Dec. 17, 2004)

Not many Wall Street veterans could write: "Visiting clients inMadrid, I dropped into the Thyssen museum, where I stumbled acrossseveral [Arthur] Dove paintings . . . in The Hague, too, after aEuronext options conference, I saw early Mondrian paintings oflilies that were influenced by [Rudolf] Steiner".
There are few "gentlemen bankers" left these days. Nor is theremuch room in the great financial houses for anything that smacks ofthe amateur spirit. That is why Emanuel Derman's memoirs are socompelling. As a physicist with a PhD from Columbia University, NewYork, he was not exactly a natural born trader when he joinedGoldman Sachs in 1985. He had spent most of the preceding 20 yearsin education and research.
But Derman got in at the ground floor of financial engineering, orquantitative finance, and spent two decades exploring the almostinfinite potential (and complexity) of derivative products andsophisticated risk management. Now back in academia, Derman hasreflected on his experiences of the past 40 years.
He begins his story in 1966, when he arrived in New York city fromSouth Africa as a bewildered, rather lonely 20 year old. Derman'sfirst degree in physics was from Cape Town university, but he hadcome to Columbia determined to make his name. "I dreamed of beinganother Einstein," he confesses. "I wanted to spend my lifefocusing on the discovery of truths that would live forever."
It took several years for Derman to accept that this ambition wouldnot be realised. Pure physics had room at the top for only ahandful of people. He struggled for years in a series of insecurepost-doctoral positions. "In much the same way, by a process [that]option theorists call time decay," he writes, "financial stockoptions lose their potential as they approach their ownexpiration."
Derman's wry humour and sense of irony are apparent throughout thebook. "If you didn't mind wasting the best years of your youth," hesays, "graduate student life at Columbia was paradise." Thesequalities, allied to his many and varied literary and culturalreferences, reveal him as a multi-layered personality. In spite ofhis later eminence on The Street in the 1980s and 1990s, this is nocrude Big Swinging Dick.
And he is not lying about wasting his youth. In 1969, when so manyyoung people of his generation were heading off to hang out atWoodstock, Derman admits: "I spent the summer of 1969 at a particlephysics summer school at Brookhaven National Laboratories in Upton,Long Island."
Eventually Derman abandoned pure physics for the - to him - lessnoble pursuit of applied physics, spending five years at AT&T'sBell Laboratories in New Jersey. This chapter, entitled "In thePenal Colony" - a reference to a Kafka short story of the same name- is a tale of corporate woe. The business world, while better paidthan academia, seemed to offer even less satisfaction andexcitement.
Derman says he learnt almost nothing about business or finance atAT&T, but he did learn to program and generally master the newgeneration of computers that were beginning to appear in the early1980s. When the headhunter's call finally took him to GoldmanSachs's financial strategies group in December 1985, it came as animmense relief.
Derman was charged with developing the famous Black-Scholes optionpricing model so it could be applied to bonds, an urgent task inthe more volatile markets of the post oil shock world. FischerBlack, one of the original model's authors, worked at Goldman andbecame a mentor and inspiration to Derman. Black, he writes, "wasgenuinely in love with the idea of equilibrium." Derman waseventually to become co-author of the Black-Derman-Toy model, whichpriced bond options.
In total, Derman spent 16 years at Goldman, with one unhappy yearat Salomon Brothers sandwiched in between. The former academic wasnot immune to the usual Wall Street temptation of leveraging abetter deal at another firm. Nine months after September 11 2001,Derman left Goldman to return to Columbia, where he now leads theprogramme in financial engineering.
Derman was one of the heroes of risk management in the 1990s,constantly pushing at the boundaries of what was possible, comingup with ever more sophisticated and ingenious structures. And yet asober scepticism, learned the hard way all those years ago inuniversity libraries, underpins his world view.
He is sardonic about his work: "The capacity to wreak destructionwith your models provides the ultimate respectability," he says."Many of the Long Term Capital Management protagonists are back inbusiness."
Now teaching again full time, Derman has grown even more sceptical."A decade of speaking with traders and theorists has made me wonderwhat 'correct' means," he writes. "The more I look at the conflictbetween markets and theories, the more that limitations of modelsin the financial and human world become apparent to me."(Financial Times, November 18, 2004)

Indecisive, introspective, awkward, and sometimes morose,memoirist Emanuel Derman comes across like a character in a SaulBellow novel. He wallows in loneliness after leaving his home inSouth Africa to earn a PhD in theoretical physics at ColumbiaUniversity. Later, he obsesses over leaving pure physics to doapplied research at Bell Laboratories. Then he punishes himselfwith guilt when he abandons physics entirely to work on WallStreet. Although he succeeds as a math-savvy "quant" at Goldman,Sachs & Co. (GS), he continues to ponder whether markets canreally be understood. "We are still on a darkling plain," he writestoward the end of his new book. "If you are a theorist you mustnever forget that you are traveling through lawless roads where thelocal inhabitants don't respect your principles."
That sense of being an intruder in outlaw territory lends anintriguing mood to Derman's My Life As a Quant, a literateand entertaining memoir of his two-stage career -- in physics andthen financial engineering. Wall Street looks quite different froma nerd's-eye view: "Geeks were fair game," Derman reflects. Once, achief trader who passed between him and a fellow quant "winced,clutched his head with both hands as though in excruciating pain,and exclaimed, 'Aaarrggh-hhh! The force field! It's too intense!Let me out of the way!"'
As one of Wall Street's leading quants, Derman did throw off someintense gamma radiation. He worked at Goldman from 1985 until 2003except for one year at Salomon Brothers. At Goldman, he moved fromfixed income to equity derivatives to risk management, becoming amanaging director in 1997. He co-invented a tool for pricingoptions on Treasury bonds, working with Goldman colleagues Bill Toyand the late Fischer Black, who co-invented the Black-Scholesformula for valuing options on stocks. Derman received theindustry's "Financial Engineer of the Year" award in 2000. Now hedirects the financial-engineering program at ColumbiaUniversity.
Derman failed at what he really wanted, which was to become animportant physicist. He was merely very smart in a field dominatedby geniuses, so he kicked around from one low-paying research jobto another. "At age 16 or 17, I had wanted to be another Einstein,"he writes. "By 1976...I had reached the point where I merely enviedthe postdoc in the office next door because he had been invited togive a seminar in France." His move to Wall Street -- anacknowledgment of failure -- brought him financial rewards beyondthe dreams of academic physicists and a fair measure ofsatisfaction as well.
In the tradition of the idiosyncratic memoir, My Life As aQuant is a grab bag of the author's interests. It quotesSchopenhauer and Goethe while supplying not one but three diagramsof a muon neutrino colliding with a proton. There is a long sectionon the brilliant and punctilious Fischer Black; a glimpse ofphysicist Richard Feynman; and an embarrassing encounter withfinance giant Robert Merton, who sat next to the author on a longflight (Derman treated him rudely before realizing who hewas).
Derman's mood seems to vary from bemused on good days to sour onbad ones. The chapter on his postdoc travels is titled "A Sort ofLife"; his brief career at Bell Labs, "In the Penal Colony"; histenure at Salomon Brothers, "A Severed Head." Pre-IPO Goldman Sachscomes off as relatively gentle yet stimulating. He writes: "It wasthe only place I never secretly hoped would crash and burn."
At times, his awkwardness is so extreme that it's funny. Here's howhe failed to work up his nerve to ask a Columbia professor to behis adviser: "Every time I saw him I smiled; every time I smiled hebared his lips back at me with greater awkwardness." It got sopainful that he began to flee whenever he saw the profcoming.
The most challenging part of the book -- and for techies, probablythe best -- is Derman's detailed explanation of trading tools hedeveloped. The Black-Derman-Toy model, from 1986, allowed tradingdesks to come up with prices for Treasury bond options based onmath rather than guesswork. In 1993 he and Goldman colleague IrajKani invented an options-pricing method that improved on an aspectof Black-Scholes -- its incorrect assumption that the volatility ofoptions is unvarying. They deduced the "local" volatility of aconventional option at each possible stock price and at each momentup to expiration. That information could then be used to priceexotic options more accurately.
As it turned out, both inventions had limitations in practice, butDerman accepts that. The theoretical purist finds a measure ofcontentment in contributing to the imprecise world of finance --"intuiting, inventing, or concocting approximate laws andpatterns." It ain't E=mc2, but as he recognizes, it maybe the best anyone can hope for. By Peter Coy (BusinessWeek, November 15, 2004)

"Sadly, there's not much to buy in the stock or bond market thisholiday season, but John Wiley & Sons has published the perfectgift. "My Life as a Quant," by Emanuel Derman (292 pages, $29.95)is, indeed, a perfect memoir, as Derman, a South African-bornphysicist turned financial engineer, is a perfectmemoirist."--Grant's Interest Rate Observer

From the Inside Flap

Wall Street is no longer the old-fashioned business it once was. Inrecent years, investment banks and hedge funds have increasinglyturned to quantitative trading strategies and derivative securitiesfor their profits, and have raided academia for PhDs to model thesevolatile products and manage their risk. Nowadays, the fortunes offirms and the stability of markets often rest on mathematicalmodels. "Quants"–the scientifically trained practitioners ofquantitative finance who build these models–have become keyplayers on the Wall Street stage.

And no Wall Street quant is better known than Emanuel Derman.One of the first high-energy particle physicists to migrate to WallStreet, he spent seventeen years in the business, eventuallybecoming managing director and head of the renowned QuantitativeStrategies group at Goldman, Sachs & Co. There he coauthoredsome of today’s most widely used and influential financialmodels.

Physics and quantitative finance look deceptively similar. But,writes Derman, "When you do physics you’re playing againstGod; in finance, you’re playing against God’s creatures."How can one justify using the precise methods of physics in thefrenzied world of financial markets? Is it reasonable to treat theeconomy and its markets as a complex machine? Or is quantitativefinance merely flawed thinking masquerading as science, a bravewhistling in the dark?

My Life as a Quant is Derman’s entertaining and candidaccount of his search for answers as he undergoes histransformation from ambitious young scientist to managing director.His book is simultaneously wide-ranging and personal. He tells thestory of his passage between two worlds; he recounts his adventureswith physicists, quants, options traders, and other highfliers onWall Street; he analyzes the incompatible personas of traders andquants; and he meditates on the dissimilar natures of knowledge inphysics and finance. Throughout his tale, he reflects on theappropriate way to apply the refined methods of physics to thehurly-burly world of markets.

My Life as a Quant is a unique first-person story and aperceptive and revealing exploration of the quantitative side ofWall Street.

Customer Reviews

I thoroughly enjoyed the book, it was well written, informative, and fascinating.
Bryan Bader
If you're interested in finance, physics, academia, or you'd just like to read an autobiography the way it ought to be written, this book is for you.
Don M. Chance
To everyone, Derman is that physicist who made the transition from particle physics to doing something great at Goldman Sachs.
Dario Villani

Most Helpful Customer Reviews

105 of 116 people found the following review helpful By Rico Blaser on September 27, 2004
Format: Hardcover
The book commences with a history of physics that is reminiscent of "The Elegant Universe" by Brian Greene. From Newton to Maxwell to Einstein and beyond, Derman discovers the great theories of yesterday and finds himself in the middle of a seven year marathon to a PhD and the launch of his academic career.

The struggle for intellectual purity and the distain for applied work abound in Derman's academic environment and the pressures of achieving greatness are pronounced in a place where genius is a commodity.

In a leap of faith, Derman decides to return to New York to spend more time with his family and to surrender to what he considered a less dignified job.

Lost in the Dilbert-esque hierarchies of the Bell Labs, Derman discovers the joy of programming, while submerged in office politics. After numerous attempts of beating the currents, Derman finally reaches the shores of Wall Street and is relieved to find an avant-garde environment, where meritocracy is no longer a foreign word.

The initial period of awakening takes place at Goldman Sachs, where he is mentored by Fischer Black, one of the great financial practitioners of our time. Derman is immediately impressed by Black's pragmatic style and intuitive quest for simplicity.

Black's influence becomes evident in the lucid and accessible description of the famous Black-Derman-Toy interest rate model and the subsequent elaborations on local volatility models that are at the foundation of more exotic instruments (which cannot be accurately priced using the overly simplistic implied volatility provided by the Black-Scholes-Merton model).
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27 of 27 people found the following review helpful By A Reader on December 10, 2006
Format: Hardcover Verified Purchase
This book is not for those interested in learning quantitative finance. Rather, it is a memoir written by a physicist who came to finance relatively late in life.

There is some poignancy in Derman's transformation from theoretical physicist bent on a life in academia (where he hoped to make groundbreaking discoveries about elementary particles) to mid-level employee of one of the world's great financial institutions (Goldman Sachs). Although he was undoubtedly well paid for the skills he brought to the financial markets, Derman's story is tinged with sadness about the loss of an ideal.

The book is particularly valuable for the insights it provides about the inner workings of a major investment bank, and in particular about the role played by the "quants" in the development of new products and trading strategies. It also provides some perspective on the development of quantitative finance as a practical discipline; and it makes clear that quantitative skills, while important to a successful career in a major financial institution, generally take a back seat to salesmanship, practical trading skills, and internal politicking.

Those with a liking for pure mathematics will have to grin and bear Derman's critical comments about mathematical rigor and economic theory.
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49 of 54 people found the following review helpful By gilstrac on October 12, 2005
Format: Hardcover
It was an interesting read but not what I expected.

It is my own fault. I bought it because the title (Physics and Finance) caught my eye and the average rating and number of reviews was high. I would guess it is not a heavily embellished memoir. Emanuel appears to be an honest, practical and educated individual. I found myself in the beginning wondering when I would start to read something about his life as a Quant. I don't know the exact page but I was probably half way through the book before I got my first taste.

In the end I found it like most things I have not personally experienced, it is more romantic to dream than live. This is not to say he didn't do good things. It just means for every minute of success and enjoyment there are hundreds if not thousands of minutes of grind and perseverance. The grind is not always so well documented.

Due to my age, I did find myself identifying with Emanuel as he changed from a wide eyed youth ready to change the world to a more pragmatic successful adult. I still envy the enthusiasm lack of experience provides younger people.

I wouldn't recommend it to someone looking for insights in to physics or finance. I would recommend it to someone is in the field or aspires to be in the field.
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29 of 32 people found the following review helpful By Vincent Poirier on November 13, 2005
Format: Hardcover Verified Purchase
Quants, formerly called rocket scientists in the days when traders thought rocketry was the deepest and hardest science, are the new engineers of the financial world. I suppose the trader is the architect and thus a quant's job is to evaluate the trader's design for reliability, plausibility, and safety.

In many ways "My Life as a Quant" is a deceptively ho-hum book. Derman does whine a little and his life is somewhat ordinary, at least not that much more special than yours or mine. But this can endear him to readers as Derman is also humble and self-critical to a fault. Further, the book stands out of the crowd on two points: first, it is a timely account of the beginnings of financial engineering; second, Derman writes surprisingly graceful and elegant prose, worth reading even if you're not interested in finance.

While Derman trained and practiced as a professional physicist for many years before entering finance, he reminds his readers that financial analysis is not a precise science the way physics is. It is more of an art. Physicists, writes Derman, are reductionists, meaning they simplify the world to astonishingly successful models describing its behaviour. Quants on the other hand must never forget that all financial models are wrong and naive. The questions for them, writes Derman, are how wrong and how naive. The problems of finance are the problems of modeling human behaviour and so should not be reduced too far. In this light he his especially critical of VaR (Value-at-Risk) a single figure measure of the riskiness of a portfolio.

On personal matters, Derman shies away from invading his family's privacy. He mentions his relatives, his wife and children without describing them much.
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More About the Author

EMANUEL DERMAN is Head of Risk at Prisma Capital Partners and a professor at Columbia University, where he directs their program in financial engineering. He is the author of My Life As A Quant, one of Business Week's top ten books of the year, in which he introduced the quant world to a wide audience. His latest book is Models.Behaving.Badly: Why Confusing Illusion with Reality Can Lead to Disasters,On Wall Street and in Life.

He was born in South Africa but has lived most of his professional life in Manhattan in New York City, where he has made contributions to several fields. He started out as a theoretical physicist, doing research on unified theories of elementary particle interactions. At AT&T Bell Laboratories in the 1980s he developed programming languages for business modeling. From 1985 to 2002 he worked on Wall Street, running quantitative strategies research groups in fixed income, equities and risk management, and was appointed a managing director at Goldman Sachs & Co. in 1997. The financial models he developed there, the Black-Derman-Toy interest rate model and the Derman-Kani local volatility model, have become widely used industry standards.

In his 1996 article Model Risk Derman pointed out the dangers that inevitably accompany the use of models, a theme he developed in My Life as a Quant. Among his many awards and honors, he was named the SunGard/IAFE Financial Engineer of the Year in 2000. He has a PhD in theoretical physics from Columbia University and is the author of numerous articles in elementary particle physics, computer science, and finance.

He blogs at http://blogs.reuters.com/emanuelderman/
Website www.emanuelderman.com
Twitter @emanuelderman