Customer Reviews

My Life as a Quant: Reflections on Physics and Finance

5 star:		(47)
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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).

The author discusses the process of deriving original models and emphasizes that the elegant stochastic calculus derivations of these models are deceptively simple and make it difficult for students to fully appreciate the amount of effort that went into developing the initial embodiments -- what seems obvious now was once heavily debated.

Armed with the recently acquired knowledge, Derman accepts a new challenge at Salomon Brothers, doubling his compensation in the process. Unfortunately, the unhealthy competitiveness at Salomon forces him to reconsider quickly and he returns to Goldman after an undeserved layoff. The roundtrip allows Derman to develop an appreciation for the collaborative environment at Goldman.

Throughout the book, the interactions with family members, professors, bosses, traders, programmers and sales people are both amusing and enlightening. Derman succeeds in blending physics, finance, and human emotion in this masterful and entertaining autobiography.

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.

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.

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. On the other hand he does discuss his personal relationship with many physicists and financial professionals; his account of his famous late colleague Fischer Black is particularly interesting. He also candidly discusses moments when he wasn't as good a person as he feels he ought to have been. These touches make him human and approachable and can offer lessons at least as important as the career advice he gives.

Vincent Poirier, Tokyo

A great book for anyone with an interest in Physics, Programming, or Finance. You will accompany Emanuel Derman in his journey to NYC as a young, enthusiastic PhD student, wander around the US and UK with him as he jumps from one postdoc position to another, have a feel of what is like to abandon a research career for a "business" job at Bell Labs "penal colony" and finally enter the secret doors of the money temples in Wall Street. You will find interesting remarks and reflections on the life of academics, programmers , quants and traders and get a glimpse of interesting characters like the nobel prize winner and Columbia Physics dept Emperor T.D. Lee and Wall Street legend Fisher Black. (yes, the Black-Scholes equation guy).
It is a fascinating read, but still quite depressing...one cannot avoid the question: "why didn't Dr. Derman manage to stay in Academia"? Watching the steady decline of his enthusiasm and the gradual curbing of his hopes while he progresses through his PhD and postdocs makes a clear pictures of how helpful and nurturing academic life can be to the ones who dare to choose it. Isolation, extreme competition, lack of decent working opportunities and conditions and the need to "produce something" to sustain his academic career slowly disoriented and disgusted a truly passionate, talented and enthusiastic young physicist to the point that he found the business, money crunching world more intersting and pleasant! This paradox clearly and sadly illustrates how the "publish or perish" routine has deformed the beauty of research and academic life.

The first thing this book strikes me so much is how frank and to certain extent self-criticising the author is on his life from a doctoral student in the Physics Department of Columbia Univ., to a post-doc scholar, to Bell Labs, then to the Wall Street. Among a good number of books allegedly about lives on the Street, this one with its plain-speaking, matter-of-fact narration definitely offers me a refreshing sensation.

For example, the author states flat on how he rode down continuously descending expectations in career from an enthusiastic Ph.D. student who had dreams of groundbreaking discoveries in theoretical physics down to a junior professor in a public college running between jobs to an unremarkable researcher at Bell Labs.

The author lays out lucid descriptions about the works with financial models he had done. Yet unlike most others on similar topics, he goes on to explain to the readers what inadequacies/weaknesses those models have.

A few personal friends of mine came through their doctoral degrees in physics around the same era before quants became ubiquitous on the Street. To a good sense I can relate how all their lives shared the similar paths of seeing their zests of a career in science being depressed by the harsh reality of seeking a stable teaching/research job after the migrant post-doc years.

The author presents to us his own path in a most poetic way.

Emanuel Derman has written an interesting & very personal book --- part autobiography, part discourse on physics & financial engineering, part meditation on the nature of physics and finance, and part history of quantitative finance over the past 20 years.

Derman begins his story at the start of his PhD program in physics at Columbia University. He describes several interesting problems in particle physics, and the exhilaration of working on them & with may famous physicists. However, since the field is extremely competitive & full of geniuses, tenure-track positions are few and difficult to get. Derman hops from one post-doc appointment to another over 6 years, but sadly decides to leave academia for Bell Labs. He worked at the labs for 5 years, until he was in his late 30's, and when Wall Street headhunters began calling. Disappointed by the bureaucracy at Bell Labs, he then took a job on Wall Street at Goldman Sachs.

Derman then describes the series of quant jobs he had at Goldman (as well as a short career detour for 2 years at Salomon Brothers). In the process, he describes the exotic derivative instruments & theories he worked on. He touches on the technical details in a way that a motivated lay-person can understand. He also describes the cultures & corporate politics he encountered, as well as the differences and pressures of quants versus traders.

Overall, I found it an interesting read. As one reviewer noted, this is the book every Wall St. quant wishes they could find the time to write. Derman is also a fluid writer, and his technical, philosophical, and autobiographical threads are adroitly interwoven. The technical issues are described so that even a lay-reader can understand quantos and binomial trees (by the same token true "quants" won't learn much new, at least in a technical sense). However, if you're interested in the big ideas, thought processes, and career progression of a leading "quant," then this book is a must-read. Recommended.

After reading Derman's Platonic idea of the origin of physics on the first two pages, I was so angry that for a while I couldn't read further. When finally I did read further, I couldn't put the book down until midnight. This autobiography of a physicist turned financial engineer is more entertaining than most novels, and is informative in a way that no other book is. Derman's description of his life and times is the chronicle of an era. This is a book that should be read by physics grad students who fantacize about working for banks or trading houses.

I remember how in 1957 we and our neighbors went out at night to watch Sputnik pass overhead as a pale, visibly moving light. This was the same year that Mercury had produced the 6 cyl. 60 h.p. outboard motor, Chevy produced its classic model, Elvis sang 'Loving You', and my youngest brother was born. Then, each morning before school, we would turn on the Today Show and often watch as a rocket from Redstone Arsenal (Huntsville) or Cape Canaveral went up a few meters, then fell over and crashed. Finally, von Braun (who'd escaped from Penemünde via Thüringen to North Tirol (where I mainly live) and then engineered his capture by the U.S. rather than the Russians or the French) eventually got it right and launched too, but not before Americans were treated to huge, Life Magazine photos of Chicago teenagers jitterbugging their lives away, and of Russian teenagers intensely studying math and physics. The US reaction to Sputnik was in part the NDEA loans that got me and a lot of other science majors through the university, and produced a very large excess supply of physics Ph.D.s by about 1970. In the seventies, academic jobs in physics in the US were so few, and the competition so great, that it was the kiss of death to take a postdoctoral fellowship in Europe. Going there put you outside the loop. One could generalize a British postdoc's experience after his arrival at Cal Tech in the following way: the US was the center of the universe in physics, and to a first approximation Europe did not exist. In the early eighties I noticed that a former physics grad student in nonlinear dynamics had been hired by a trading house. I didn't understand the significance then. Eventually, one of my later to be closest collaborators (and is Feigenbaum's only grad student to boot) worked for a year in 1990 at a Chicago trading house before coming to the University of Houston. In 1999, the same year that I heard of the Physics and finance meeting in Dublin where Gene Stanley coined the awful but effective term 'Econophysics', I read that Mitch Feigenbaum and Nigel Goldenfeld had opened a derivatives-related business in New York. Derman was one of the first physicists to go to work as a modeler on Wall Street. Derman's book, written humorously, self-deprecatingly and introspectively, yet objectively, is a chronicle of that era, a chronicle of physics and job hunting by physics grads in the post-Vietman war era, the era that began with Nixon's deregulation of the dollar (tied to gold at $35/oz. from 1935-1971, gold that Americans were not permitted to own for reasons of attempted currency stability). I'll stop here with my introduction and recommend that anyone who really wants to understand something about the world financial system read Eichengreen's `Globalizing Capital'. Here are some comments about parts of the book that I liked particularly well, or particularly disliked. The book can be read as a useful complement to `The Predictors', Liar's Poker', and `Inventing Money'.

The platonic view of the origin of mathematical laws of nature expressed on the first two pages is wrong. One can understand how a theorist with a focus on gauge theories might get on that track, but it is not true that Einstein thought that way in his early discoveries. For a better picture of why mathematics is unreasonably effective in physics, read Wigner's `Symmetries and Reflections', and read Barbour's `Absolute or Relative Motion' for the history of the discoveries.

The difference between physics (academic research) and financial engineering (on the Street) is described pretty well. In the latter, a good graphics interface is more important for business than is a good model. The description of the difference is generally true of physics and engineering per se, and is not peculiar to the financial brand.

The description of reductionism is the extreme brand believed uncritically by people like Steven Weinberg. Any correct mathematical description of nature, any isolation of cause and effect, is a form of reductionism. Attempts to understand markets empirically is a form of reductionism.

The description of Lee and Yang's quarrels is revealing (both visited the University of Houston Physics Dept. at various times in the seventies and eighties). The description of Cvitanovic rings too true! I was not aware (!?) that Feigenbaum and Libchaber (name misspelled) like Steiner's writings, although it's fairly well known that Feigenbaum reads Goethe.
Derman describes vividly how no one can get past T.D. Lee in a colloquium, then with British understatement writes that his own thesis defense, with Lee on the committee, was no problem. And his advice to students about blind alleys and perseverance is correct. The race is often won not by the quickest but rather by the one who doesn't quit in the face of adversity.

The author had a tantalizing taste early on of the life of the successful (i.e., well-connected) physicist on the conference circuit. I myself read too many biographies of German professors who took a Kur for 6 weeks on the Baltic or the North Sea.

His description of life at Oxford, and the string of postdoctoral positions is believable and hilarious. The description of the pain of having to live apart from his wife and son is painful to read, although many physicists live so.

Derman also describes what makes physicists arrogant without naming it: life in a scientific culture where the standards are set by certified geniuses. It's hard to live in the shadow of these people. One learns a certain degree of arrogance merely for survival in the culture, and that makes us hard to live with at home and in society. Advice from a bright colleague how to get along with your partner: 'grovel, grovel, grovel'. It works.

His advice about publications is absolutely right: it rarely hurts to put a collaborator's, host's or advisor's name on a paper. I contemplated publishing my thesis alone because Onsager had not really contributed to it, although he suggested the problem. Actually, I doubted that he wanted his name on such a seemingly trivial piece of work, but it turned out that he liked it and did want his name on the papers. He liked all sorts of calculations. As long as they were right ....

There is no correct analogy between economics/finance and thermodynamics, the far from equilibrium nature of markets prohibits it. Fischer Black, whom I admire enormously and have read carefully, was wrong about 'equilibrium': he swallowed the economists' notions uncritically (Derman describes Black as 'in love' with the idea of equilibrium, and one can swallow anything when one is in love). CAPM is certainly not an 'equilibrium' model, and CAPM does not lead to the Black-Scholes pde, there's an error in the 1973 paper. I prefer the Black-Scholes paper to all of Merton's useless rigmarole about utility, a nonfalsifiable notion at best, although it's true that replication is not in the Black-Scholes paper. I can't see that Merton's derivation of the backward time pde is 'more rigorous' than Black's delta-hedge condition.

Derman's description of his self-imposed exile to Bell Labs is hilarious. His loving description of UNIX is beyond me (I know how to use a word processor).

Weltanschauung is mis-spelled, there are n+1 split infinitives in the text.

Now I know where Lisa Borland's boss comes from.

The description of Fischer Black is worth the book alone, even if the rest were not good. Osborne, Black, and Mandelbrot can be counted as the ancestors of Econophysics, which differs from Financial Engineering the way that physics differs from engineering. Black was right that expected returns, seen as anticipating the future, is not an observable notion. But, then, what does Soros do when he beats the market (nonmathematically)?

Derman's description of economic theory as nonsense (my term) is absolutely correct, when applied to micro- and macro-economics texts. What one finds inside those books is useless, falsified mathematized ideology. To make matters worse, economists know that and still teach the stuff in the classroom, misleading generations of students.

All in all, this is a highly recommendable book!

I have developed a strong interest in finance and quantitative techniques. When I saw Emanuel Derman's book on Amazon, I immediately ordered it. I expected a book like The Mind of Wall Street by Leon Levy: an interesting and informative read. I was not disappointed: I learned something about what it is like to work at a large Wall Street firm and about quantitative finance (in particular valuation of derivatives). But I also found a book which was very well written and engaging. My Life as a Quant was an unexpected pleasure.

My Life as a Quant recounts the evolution of Derman's life, from his youth in Cape Town, South Africa to the Wall Street firm Goldman Sachs where Derman spent most of seventeen years working in quantitative finance. The trajectory of Derman's life between these two points passed through the graduate Physics program at Columbia University and a decade in postgraduate theoretical particle physics.

My Life as a Quant is not a "confessional" autobiography. There is much about his inner life and experience that Derman keeps private. But he does give the reader a view of some of his inner struggles, both in his profession and in his search to find meaning and direction in his life.

Wall Street companies provide some of the largest financial rewards available outside the rarefied levels of corporate executive suite. These rewards attract people like Emanuel Derman, who are some of the brightest people in the world (brilliance does not seem to be required of corporate executives). Derman was in the forefront of a wave of physicists who went to work on Wall Street. Like Derman, many of them left research and University life as jobs became more difficult to obtain.

The most successful people on Wall Street are able to amass large fortunes. However, people like John Merriweather (of the Solomon Brothers bond group and a founder of Long Term Capital Management) seem to find that they cannot leave Wall Street. At their level the money is only a way to determine whether they are winning more losing. Win or lose, they cannot seem to imagine a life where they are not "players".

Derman does not discuss his compensation at Goldman. I speculate that at a minimum he managed to put aside enough money to put his children through Ivy League schools. In the end, however, greed for more money and the draw of being a "player" had no hold on Derman. When he found something that would make him happier, he stepped away from Wall Street (although he did not leave it entirely).

If you want to know what to expect from this book, just read the complete title in order: this is a story about Mr. Derman's life first, about being a quant second, with some random observations about both physics and finance thrown in. As a story about a guy's uneasy journey from the academic world to the business world (and eventually back again), it's a reasonably fulfilling read.

Here's a sum-up of what happens, as best as I can remember: a mathematically gifted guy in his 20s emigrates from South Africa to Ivy League Land to pursue a Physics PhD, full of drive and enthusiasm about becoming the next Einstein. As time goes on this dream seems less and less likely, and he consequently gets disillusioned about academia. At one point, a headhunter invites him to Wall Street, and after getting over the reluctance of abandoning his former world, he accepts. He spends a few years at Bell Labs (doesn't like it -- too corporate), then Goldman Sachs (sort of likes it), then jumps jobs to competing Salomon Brothers (hates the culture, doesn't last long), then falls back to Goldman. Along the way he discovers he enjoys computer programming; that he prefers smaller private companies to giant public ones (less politics, less stifling work environment, better people); and that there exists a big cultural rift between quants/geeks (who do most of the dirty complex work) and traders (action-oriented Type As who get most of the credit). The first half of the book contains several technical tangents about physics that physicists might find interesting, with the second half containing tangents about finance that business types might find interesting. Toward the end, he philosophizes about how being a physics whiz doesn't make you a master of the finance world because they're just too different. Finance, he reasons, is less a real science and more a social science, too susceptible to human whims and psychology, immune to models and controlled manipulation. That seems to be his concluding message.

Without many big dramatic moments to heighten the entertainment, the main appeal of the book ends up being the author. His writing is elegant and human (rare for a math type), and most of the time, talks about stuff normal people might want to read. As you learn about the author's sentiments, you get the sense of an appealing, nice guy that's easy to identify with.

I could have done without the technical tangents on both finance and physics, though; they weren't that interesting and didn't advance the story. We don't need so much straight-up narration and blind plowing through every occurrence in the author's lifetime, either. Finally, how about a stronger ending? Instead of that rundown on how physics and finance run on different mechanics, how about some reflections on which world would be more appealing? Any big regrets? Grand advice? Warnings? A take-home message for readers... something. Heck, he never even really explains his motives for leaving finance behind.

Read it if you have time to kill, I guess. You might get something out of it.