My Life as a Quant: Reflections on Physics and Finance (Hardcover)

~ (Author) "If mathematics is the Queen of Sciences, as the great mathematician Karl Friedrich Gauss christened it in the nineteenth century, then physics is king..." (more)
Key Phrases: firmwide risk, arb group, options desk, New York, Wall Street, Goldman Sachs (more...)

Editorial Reviews

Review

“engaging” (CFO Europe, October 2005)

"...tells wonderful stories of trying to bring higher mathematics 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 in Madrid, I dropped into the Thyssen museum, where I stumbled across several [Arthur] Dove paintings . . . in The Hague, too, after a Euronext options conference, I saw early Mondrian paintings of lilies that were influenced by [Rudolf] Steiner".
There are few "gentlemen bankers" left these days. Nor is there much room in the great financial houses for anything that smacks of the amateur spirit. That is why Emanuel Derman's memoirs are so compelling. As a physicist with a PhD from Columbia University, New York, he was not exactly a natural born trader when he joined Goldman Sachs in 1985. He had spent most of the preceding 20 years in education and research.
But Derman got in at the ground floor of financial engineering, or quantitative finance, and spent two decades exploring the almost infinite potential (and complexity) of derivative products and sophisticated risk management. Now back in academia, Derman has reflected on his experiences of the past 40 years.
He begins his story in 1966, when he arrived in New York city from South Africa as a bewildered, rather lonely 20 year old. Derman's first degree in physics was from Cape Town university, but he had come to Columbia determined to make his name. "I dreamed of being another Einstein," he confesses. "I wanted to spend my life focusing on the discovery of truths that would live forever."
It took several years for Derman to accept that this ambition would not be realised. Pure physics had room at the top for only a handful of people. He struggled for years in a series of insecure post-doctoral positions. "In much the same way, by a process [that] option theorists call time decay," he writes, "financial stock options lose their potential as they approach their own expiration."
Derman's wry humour and sense of irony are apparent throughout the book. "If you didn't mind wasting the best years of your youth," he says, "graduate student life at Columbia was paradise." These qualities, allied to his many and varied literary and cultural references, reveal him as a multi-layered personality. In spite of his later eminence on The Street in the 1980s and 1990s, this is no crude Big Swinging Dick.
And he is not lying about wasting his youth. In 1969, when so many young people of his generation were heading off to hang out at Woodstock, Derman admits: "I spent the summer of 1969 at a particle physics summer school at Brookhaven National Laboratories in Upton, Long Island."
Eventually Derman abandoned pure physics for the - to him - less noble pursuit of applied physics, spending five years at AT&T's Bell Laboratories in New Jersey. This chapter, entitled "In the Penal Colony" - a reference to a Kafka short story of the same name - is a tale of corporate woe. The business world, while better paid than academia, seemed to offer even less satisfaction and excitement.
Derman says he learnt almost nothing about business or finance at AT&T, but he did learn to program and generally master the new generation of computers that were beginning to appear in the early 1980s. When the headhunter's call finally took him to Goldman Sachs's financial strategies group in December 1985, it came as an immense relief.
Derman was charged with developing the famous Black-Scholes option pricing model so it could be applied to bonds, an urgent task in the more volatile markets of the post oil shock world. Fischer Black, one of the original model's authors, worked at Goldman and became a mentor and inspiration to Derman. Black, he writes, "was genuinely in love with the idea of equilibrium." Derman was eventually to become co-author of the Black-Derman-Toy model, which priced bond options.
In total, Derman spent 16 years at Goldman, with one unhappy year at Salomon Brothers sandwiched in between. The former academic was not immune to the usual Wall Street temptation of leveraging a better deal at another firm. Nine months after September 11 2001, Derman left Goldman to return to Columbia, where he now leads the programme in financial engineering.
Derman was one of the heroes of risk management in the 1990s, constantly pushing at the boundaries of what was possible, coming up with ever more sophisticated and ingenious structures. And yet a sober scepticism, learned the hard way all those years ago in university libraries, underpins his world view.
He is sardonic about his work: "The capacity to wreak destruction with your models provides the ultimate respectability," he says. "Many of the Long Term Capital Management protagonists are back in business."
Now teaching again full time, Derman has grown even more sceptical. "A decade of speaking with traders and theorists has made me wonder what 'correct' means," he writes. "The more I look at the conflict between markets and theories, the more that limitations of models in 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 Saul Bellow novel. He wallows in loneliness after leaving his home in South Africa to earn a PhD in theoretical physics at Columbia University. Later, he obsesses over leaving pure physics to do applied research at Bell Laboratories. Then he punishes himself with guilt when he abandons physics entirely to work on Wall Street. Although he succeeds as a math-savvy "quant" at Goldman, Sachs & Co. (GS), he continues to ponder whether markets can really be understood. "We are still on a darkling plain," he writes toward the end of his new book. "If you are a theorist you must never forget that you are traveling through lawless roads where the local inhabitants don't respect your principles."
That sense of being an intruder in outlaw territory lends an intriguing mood to Derman's My Life As a Quant, a literate and entertaining memoir of his two-stage career -- in physics and then financial engineering. Wall Street looks quite different from a nerd's-eye view: "Geeks were fair game," Derman reflects. Once, a chief 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 some intense gamma radiation. He worked at Goldman from 1985 until 2003 except for one year at Salomon Brothers. At Goldman, he moved from fixed income to equity derivatives to risk management, becoming a managing director in 1997. He co-invented a tool for pricing options on Treasury bonds, working with Goldman colleagues Bill Toy and the late Fischer Black, who co-invented the Black-Scholes formula for valuing options on stocks. Derman received the industry's "Financial Engineer of the Year" award in 2000. Now he directs the financial-engineering program at Columbia University.
Derman failed at what he really wanted, which was to become an important physicist. He was merely very smart in a field dominated by geniuses, so he kicked around from one low-paying research job to 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 envied the postdoc in the office next door because he had been invited to give a seminar in France." His move to Wall Street -- an acknowledgment of failure -- brought him financial rewards beyond the dreams of academic physicists and a fair measure of satisfaction as well.
In the tradition of the idiosyncratic memoir, My Life As a Quant is a grab bag of the author's interests. It quotes Schopenhauer and Goethe while supplying not one but three diagrams of a muon neutrino colliding with a proton. There is a long section on the brilliant and punctilious Fischer Black; a glimpse of physicist Richard Feynman; and an embarrassing encounter with finance giant Robert Merton, who sat next to the author on a long flight (Derman treated him rudely before realizing who he was).
Derman's mood seems to vary from bemused on good days to sour on bad ones. The chapter on his postdoc travels is titled "A Sort of Life"; his brief career at Bell Labs, "In the Penal Colony"; his tenure at Salomon Brothers, "A Severed Head." Pre-IPO Goldman Sachs comes off as relatively gentle yet stimulating. He writes: "It was the only place I never secretly hoped would crash and burn."
At times, his awkwardness is so extreme that it's funny. Here's how he failed to work up his nerve to ask a Columbia professor to be his adviser: "Every time I saw him I smiled; every time I smiled he bared his lips back at me with greater awkwardness." It got so painful that he began to flee whenever he saw the prof coming.
The most challenging part of the book -- and for techies, probably the best -- is Derman's detailed explanation of trading tools he developed. The Black-Derman-Toy model, from 1986, allowed trading desks to come up with prices for Treasury bond options based on math rather than guesswork. In 1993 he and Goldman colleague Iraj Kani invented an options-pricing method that improved on an aspect of Black-Scholes -- its incorrect assumption that the volatility of options is unvarying. They deduced the "local" volatility of a conventional option at each possible stock price and at each moment up to expiration. That information could then be used to price exotic options more accurately.
As it turned out, both inventions had limitations in practice, but Derman accepts that. The theoretical purist finds a measure of contentment in contributing to the imprecise world of finance -- "intuiting, inventing, or concocting approximate laws and patterns." It ain't E=mc², but as he recognizes, it may be the bes...

Product Description

In My Life as a Quant, Emanuel Derman relives his exciting journey as one of the first high-energy particle physicists to migrate to Wall Street. Page by page, Derman details his adventures in this field—analyzing the incompatible personas of traders and quants, and discussing the dissimilar nature of knowledge in physics and finance. Throughout this tale, he also reflects on the appropriate way to apply the refined methods of physics to the hurly-burly world of markets.

See all Editorial Reviews

Product Details

• Hardcover: 304 pages
• Publisher: Wiley (September 16, 2004)
• Language: English
• ISBN-10: 0471394203
• ISBN-13: 978-0471394204
• Product Dimensions: 9.1 x 6.1 x 0.9 inches
• Shipping Weight: 1.2 pounds (View shipping rates and policies)
• Average Customer Review: 4.3 out of 5 stars  See all reviews (79 customer reviews)
• Amazon.com Sales Rank: #165,415 in Books (See Bestsellers in Books)

  Popular in these categories: (What's this?)

  #70 in	Books > Science > Mathematics > Mathematical Physics
  #70 in	Books > Professional & Technical > Professional Science > Mathematics > Mathematical Physics

Customer Reviews

Most Helpful Customer Reviews

73 of 85 people found the following review helpful:

5.0 out of 5 stars The Human Side of Quantitative Finance -- Great Read! , September 27, 2004

By	Rico Blaser (San Francisco, CA United States) - See all my reviews (REAL NAME)

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.

14 of 15 people found the following review helpful:

3.0 out of 5 stars Not really what I expected..., October 12, 2005

By	gilstrac "gilstrac" (az) - See all my reviews

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.

44 of 55 people found the following review helpful:

5.0 out of 5 stars 1000 Millidermans!, January 18, 2005

By	Riccardo Audano (Chiavari, Italy) - See all my reviews (REAL NAME)

Amazon Verified Purchase

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.