Synopses & Reviews
Now in paperback, “a compelling, accessible, and provocative piece of work that forces us to question many of our assumptions” (Gillian Tett, author of Fool’s Gold).Emanuel Derman was one of the financial engineers whose mathematical models became crucial for Wall Street. The reliance investors put on such quantitative analysis was catastrophic for the economy, setting off the ongoing string of financial crises that began with the mortgage market in 2007 and continues today. Here Derman looks at why people—bankers in particular—still put so much faith in these models, and why it’s a terrible mistake to do so.
Though financial models imitate the style of physics and employ the language of mathematics, ultimately they deal with human beings. In physics, theories aim for a description of reality; in finance, at best, models can shoot only for a simplistic and very limited approximation to it. Physicists and economists have been too enthusiastic to acknowledge the limits of their equations in the sphere of human behavior—which of course is what economics is all about.
Describing the collapse of the subprime mortgage CDO market in 2007, Derman urges us to stop the naÏve reliance on these models, and offers suggestions for mending them. This is a fascinating, lyrical, and very human look behind the curtain at the intersection between mathematics and human nature.
Review
"Ranging wittily across philosophy, literature, and the arcane world of high finance, Derman's argument is a heady mix of physics, economics, and memoir." —Nature
Review
“A fascinating cross-disciplinary exploration of how and why financial and scientific models fail…A unique examination of the limits of models and theories in understanding and predicting human behavior, and a nice rejoinder to the equations-can-solve-or-explain-everything crowd.” —Kirkus Reviews
Review
“Emanuel Derman has written my kind of a book, an elegant combination of memoir, confession, and essay on ethics, philosophy of science and professional practice. He convincingly establishes the difference between model and theory and shows why attempts to model financial markets can never be genuinely scientific. It vindicates those of us who hold that financial modeling is neither practical nor scientific. Exceedingly readable.” —Nassim N. Taleb, author of The Black Swan
Review
"This is a compelling, accessible and provocative piece of work, that forces us to question many of the assumptions that we work with. As Derman explains so clearly, models are not "bad" in themselves; on the contrary, they are crucial for modern society. However, they have been used in a dangerously sloppy and careless way, with sometimes terrible results. Derman explains this clearly, and draws heavily onhis own lifetime experiences - ranging from growing up in appartheid south africa, working in the scientific field and then as a financial engineer on wall street - to provide a moving and fascinating set of illustrations of these principles. The conclusion is unexpectedly otpimistic - if people choose to listen." —Gillian Tett, author of Fool's Gold
Review
"Models. Behaving. Badly. is an engaging and personal meditation on the limitations of our ability to predict the future, especially—but not only—in the context of financial markets. He is not interested in blame or politics, but in the deeper lessons to be drawn from the financial crisis. As a physicist who was also highly placed in the financial world, he explains clearly the difference between prediction and advice, theory and model and knowledge and wisdom." —Lee Smolin, Senior Researcher at Perimeter Institute for Theoretical Physics, author of The Trouble with Physics; Life of the Cosmos, and Three Roads to Quantum Gravity
Review
“I found this book fascinating. Derman has a skill of mixing the personal with the abstract. You will not find another that takes you from the vagaries of the human eye to the vagaries of the stock market with stops at quantum electrodynmics. It is quite a ride.” —Jeremy Bernstein, author of Quantum Leaps, and Plutonium
Review
"This is a thoughtful book for anyone interested in the overlap between the hard sciences and the soft sciences, from physicists to bankers. But finance academics beware, Professor Derman, with an iron fist in a velvet glove, gives them a good slapping." —Paul Wilmott, co-author "Financial Modelers' Manifesto"
Review
"If you don't want your models to behave badly, you should study carefully these words of wisdom on the philosophy of quantitative modeling. Emanuel Derman has always been one of the most respected quants on Wall Street. Now he has proven that he is also one of the most thoughtful. Though, in the sequel he should tell us what happened to the large man over the Sudan!"
—Clifford S. Asness, Ph.D., Managing & Founding Principal AQR Capital Management
Review
"An erudite yet pleasantly readable exploration of why financial models failed during the U.S. mortgage meltdown and why modelers must learn to use them more wisely. Derman has distilled a lifetime of reading, research and thinking into these pages, and I read the book twice to see how he pulled the threads together without losing the reader." —Bloomberg News
Review
“A readable, even eloquent combination of personal history, philosophical musing and honest confession concerning the dangers of relying on numerical models not only on Wall Street but also in life....it is undeniable that Models.Behaving.Badly. itself performs splendidly.” —Burton Malkiel, Wall Street Journal
Synopsis
Now in paperback, "a compelling, accessible, and provocative piece of work that forces us to question many of our assumptions" (Gillian Tett, author of Fool's Gold).
Quants, physicists working on Wall Street as quantitative analysts, have been widely blamed for triggering financial crises with their complex mathematical models. Their formulas were meant to allow Wall Street to prosper without risk. But in this penetrating insider's look at the recent economic collapse, Emanuel Derman--former head quant at Goldman Sachs--explains the collision between mathematical modeling and economics and what makes financial models so dangerous. Though such models imitate the style of physics and employ the language of mathematics, theories in physics aim for a description of reality--but in finance, models can shoot only for a very limited approximation of reality. Derman uses his firsthand experience in financial theory and practice to explain the complicated tangles that have paralyzed the economy. Models.Behaving.Badly. exposes Wall Street's love affair with models, and shows us why nobody will ever be able to write a model that can encapsulate human behavior.
Synopsis
andlt;Bandgt;Qandlt;/Bandgt;uants, physicists working on Wall Street as quantitative analysts, have been widely blamed for triggering financial crises with their complex mathematical models. Their formulas were meant to allow Wall Street to prosper without risk. But in this penetrating insiderand#8217;s look at the recent economic collapse, Emanuel Dermanand#8212;former head quant at Goldman Sachsand#8212;explains the collision between mathematical modeling and economics and what makes financial models so dangerous. Though such models imitate the style of physics and employ the language of mathematics, theories in physics aim for a description of realityand#8212;but in finance, models can shoot only for a very limited approximation of reality. Derman uses his firsthand experience in financial theory and practice to explain the complicated tangles that have paralyzed the economy. andlt;Iandgt;Models.Behaving.Badly. andlt;/Iandgt;exposes Wall Streetand#8217;s love affair with models, and shows us why nobody will ever be able to write a model that can encapsulate human behavior.
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 andlt;iandgt;My Life As A Quantandlt;/iandgt;, one of Business Weekand#8217;s top ten books of the year, in which he introduced the quant world to a wide audience.andlt;BRandgt;andnbsp;andlt;BRandgt;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 ATandamp;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 andamp; 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.andlt;BRandgt;andnbsp;andlt;BRandgt;In his 1996 article andlt;iandgt;Model Riskandlt;/iandgt; Derman pointed out the dangers that inevitably accompany the use of models, a theme he developed in andlt;iandgt;My Life as a Quantandlt;/iandgt;. Among his many awards and honors, he was named the SunGard/IAFEandnbsp; 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.