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My Life As a Quant: Reflections on Physics and Financeby Emanuel Derman
Synopses & Reviews
Emanuel Derman was one of the first physicists to move to Wall Street, and his career paralleled the growth of quantitative trading over the past twenty years. In My Life as a Quant, he traces his transformation from ambitious young scientist to managing director and head of the renowned Quantitative Strategies group at Goldman, Sachs & Co.
Derman's tale recounts his adventures with quants, traders and other high fliers on Wall Street as he became the best-known quant in the business. He describes the struggles of research and his interactions with an assorted cast of famous scientists. He relates his impressions of some of the most creative minds on Wall Street, including Fischer Black, with whom he collaborated on the widely used Black-Derman-Toy model of interest rates. Throughout his story he reflects on the appropriate way to apply the refined methods of physics to the hurly-burly world of markets and the people that inhabit them.
"My Life as a Quant...is, indeed, a perfect memoir, as Derman, a South African-born physicist turned financial engineer, is a perfect memoirist." Grant's Interest Rate Observer
"Derman's memoir of his transition from mathematical physicist to expert finance whiz at Goldman Sachs and Salomon Brothers reads like a novel, but tells a lot about brains applied to making money grow." Paul A. Samuelson, MIT, Nobel Laureate in Economic Sciences, 1970
"Not only a delightful memoir, but one full of information, both about people and their enterprise. I never thought that I would be interested in quantitative financial analysis, but reading this book has been a fascinating education." Jeremy Bernstein, author of Oppenheimer: Portrait of an Enigma
"The quintessential quarky quant, Emanuel Derman has it all. Physicist, mathematician, philosopher, and poet blend together to produce a narrative that all financial engineers will find worth reading." Mark Rubinstein, Paul Stephens Professor of Applied Investment Analysis, University of California, Berkeley
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.
Wall Street is no longer the old-fashioned business it once was. In recent years, investment banks and hedge funds have increasingly turned to quantitative trading strategies and derivative securities for their profits, and have raided academia for PhDs to model these volatile products and manage their risk. Nowadays, the fortunes of firms and the stability of markets often rest on mathematical models. "Quants"the scientifically trained practitioners of quantitative finance who build these modelshave become key players 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 Wall Street, he spent seventeen years in the business, eventually becoming managing director and head of the renowned Quantitative Strategies group at Goldman, Sachs & Co. There he coauthored some of todays most widely used and influential financial models.
Physics and quantitative finance look deceptively similar. But, writes Derman, "When you do physics youre playing against God; in finance, youre playing against Gods creatures." How can one justify using the precise methods of physics in the frenzied world of financial markets? Is it reasonable to treat the economy and its markets as a complex machine? Or is quantitative finance merely flawed thinking masquerading as science, a brave whistling in the dark?
My Life as a Quant is Dermans entertaining and candid account of his search for answers as he undergoes his transformation from ambitious young scientist to managing director. His book is simultaneously wide-ranging and personal. He tells the story of his passage between two worlds; he recounts his adventures with physicists, quants, options traders, and other highfliers on Wall Street; he analyzes the incompatible personas of traders and quants; and he meditates on the dissimilar natures of knowledge in physics and finance. Throughout his tale, he reflects on the appropriate way to apply the refined methods of physics to the hurly-burly world of markets.
My Life as a Quant is a unique first-person story and a perceptive and revealing exploration of the quantitative side of Wall Street.
About the Author
Emanuel Derman has a PhD in theoretical physics from Columbia University. He is the author of numerous articles in elementary particle physics, computer science, and finance, and a coauthor of the widely used Black-Derman-Toy interest rate model and the Derman-Kani local volatility model. After an initial career in academic life and a stint at AT&T Bell Laboratories, he moved to Goldman, Sachs & Co. in 1985, where he became a managing director in 1997. Among his many awards and honors, he was named the SunGard/IAFE Financial Engineer of the Year in 2000 and was appointed to the Risk Hall of Fame in 2002. He is currently the Director of the Program in Financial Engineering at Columbia University, a columnist for Risk magazine, and a risk advisor to an investment management company. He lives in New York City.
Table of Contents
Prologue: The Two Cultures.
Physics and finance. What quants do. The Black-Scholes model. Quants and traders. Pure thought and beautiful mathematics can divine the laws of physics. Can they do the same for finance?
Chapter 1. Elective Affinities.
The attractions of science. The glory days of particle physics. Driven by ambitious dreams to Columbia. Legendary physicists and budding wunderkinder. Talent vs. character, plans vs. luck.
Chapter 2. Dog Years.
Life as a graduate student. Wonderful lectures. T.D. Lee, the brightest star in the firmament. Seven lean years. Getting out of graduate school, only half-alive.
Chapter 3. A Sort of Life.
The priesthood of itinerant postdocs. Research isn’t easy. Almost perishing, then publishing. The delirious thrill of collaboration and discovery.
Chapter 4. A Sentimental Education Oxford’s civilized charms. One physics paper leads to another. English idiosyncrasies. The anthroposophists.
Chapter 5. The Mandarins.
Research and parenthood on New York’s Upper East Side. A good life, but ... the difficulties of a two-career family.
Chapter 6. Knowledge of the Higher Worlds.
A two-city family. New age meditations. Karma. Goodbye to physics.
Chapter 7. In the Penal Colony.
The world of industry – working for money rather than love. The Business Analysis Systems Center at Bell Labs. A small part of a giant hierarchy. Creating software is beautiful.
Chapter 8. Stop-Time.
Wall Street beckons. Interviewing at investment banks. Leaving the Labs.
Chapter 9. Transformer.
The Financial Strategies Group at Goldman, Sachs & Co. Learning options theory. Becoming a quant. Interacting with traders. A new cast of characters.
Chapter 10. Easy Travel To Other Planets.
The history of options theory. Meeting and working with Fischer Black.The Black-Derman-Toy model.
Chapter 11. Force of Circumstance.
Manners and mores on Wall Street. The further adventures of some of my acquaintances. Volatility is infectious.
Chapter 12. A Severed Head.
A troubled year at Salomon Bros. Modeling mortgages. Salomon’s skill at quantitative marketing. Mercifully laid off.
Chapter 13. Civilization & Its Discontents.
Goldman as home. Heading the Quantitative Strategies Group. Equity derivatives. The Nikkei puts and exotic options. Nothing beats working closely with traders. Financial engineering becomes a real field.
Chapter 14. Laughter in the Dark.
The puzzle of the volatility smile. Beyond Black-Scholes: the race to develop local-volatility models of options. The right model is hard to find.
Chapter 15. The Snows of Yesteryear.
Wall Street consolidates. Clothing goes casual. I move from equity derivatives to firmwide risk. The bursting of the internet bubble. I take my leave.
Chapter 16. The Great Pretender.
Full circle, back to Columbia. Physics and finance redux. Different endeavors require different degrees of precision. Financial models as gedanken experiments.
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