Emanuel Derman

All characters appearing in this work are fictitious. Any resemblance to real persons, living or dead, is purely coincidental.

Derman is not enamoured with the growing field of behavioural finance, which he fears has become a plaything for policy-makers, because it is not comprehensive enough to exist as a stand-alone theory to explain financial markets. As long as markets have existed, models to explain them have failed.

“Part of me wanted to believe that human beings are part of nature and eventually people can understand people. But as soon as someone gets a model of human behaviour, people will change their behaviour as a consequence.”

Derman says: “Your iPad works because someone understands Maxwell’s equations and quantum electrodynamics, and they can build something that does what you want when you hit a button. They use the same kind of math to describe options and markets.

“It looks the same but it’s based on a vague analogy which says stock prices behave like smoke diffusions, it’s not a description of reality. Whereas for Newton’s laws or Maxwell’s equations, that’s the way the world is.”

Writing books on finance is one thing; reading them is another.

So I discovered when I invited Satyajit Das and Emanuel Derman to discuss their reading in the wake of the crisis that killed off Lehman Brothers Holdings Inc. (LEHMQ)

What do quantum theory, Schopenhauer, Goethe, and Spinoza have to teach us about the economic disaster of 2007-8?

With “Models Behaving Badly” he offers 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. Bringing ethics into his analysis, Mr. Derman has no patience for coddling the folly of individuals and institutions who over-rely on faulty models and then seek to escape the consequences.

Some smart people at BNN asking good questions.

The Globe and Mail: Mr. Derman was in Toronto discussing his new book, Models. Behaving. Badly: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life.

David Magee interviews Emanuel Derman on IBTimes.tv

The Daily Ticker: It’s a question of confidence in funding, not just confidence in models

As examples of theories, he discusses not just QED, the quintessential accurate theory of the physical world, but also Spinoza’s theory of the emotions. Besides the financial models that are the focus of the book, he also covers a wide range of other failed models. 

A person plans and God laughs.  Yiddish proverb.

Models.Behaving.Badly review by Francine McKenna on Forbes.com

The more sensationalistic of contemporary quant books want to equate the strategies of all hedge funds (and the ubiquitously nerdy, greedy quants who run them) to a wanton, drunken night of Vegas gambling. [But Derman’s] fantastically wrought My Life as a Quant: Reflections on Physics and Finance  is a must read for any non-professional wishing to learn more about what quants are and how they do their job. The tale is told with tremendous deftness and aplomb.

Beyond theories and far beyond models there is intuition …

… an impressive effort in soul-searching combined with real thinking. Derman is what I now think of as an “old-school human”

All instinctively recognizable Good things have in common is that they are the product of individual acts that make the actor simultaneously aware of both his personal uniqueness AND at the same time aware of his commonality with, even indistinguishability from, in the larger view, other people and objects …

One cannot eliminate the individual self. But many of the Good things have in common their capacity to utilize the Subjective in the purpose of the Objective.