A Guide for the Perplexed Quant

POSTED — October 12, 2000 — Archives

Quantitative financial modelling seems to employ both the language and techniques of physics, but how similar are the two disciplines? Emanuel Derman comments on the practice of financial modelling and the environment in which it is done.

Life for quants has changed since I first came to work on Wall Street in 1985. Then, I quickly noticed the embarrassment involved in being ‘quantitative’ . Some- times, when talking in a crowded elevator to another ‘quant’, you might start to say something about the duration or convexity of a financial instrument. If the person you were talking to had been at the firm a little longer than you, he—it was usually a he— would cringe a little, and rapidly try to change the subject. ‘See the Yankees game last night?’ he might ask, or ‘Futures dropped more than a handle today!’ he might exclaim, the sort of things a real bond trader might say. Soon, you began to realize, there was something a little shameful about two consenting adults talk- ing math in a crowded elevator; there was something embarrassing about mention- ing UNIX or C in the company of traders, salespeople and bankers. There was some- thing awful about being ‘outed’ as a quant in public. People in the elevator just looked away.

Even five years ago, quantitative skills were reluctantly accepted. Once, a friend and I were talking on the trading floor when one of the convertible traders walked between us, momentarily. Suddenly he gri- maced and winced; he clutched his tem- ples with both hands as though a sharp pain had pierced him and exclaimed, ‘Aaar- rgghhhh! The force field! It’s too intense! Let me get out of the way!’.
In those days, I always used to make a bet with anyone new to our group. Some- time soon, I would wager, some junior trader or salesperson will enter the elevator
we’re in and, seeing all of us together, will say something like: ‘Uh-oh! Isn’t there some company rule against all of you be- ing in the elevator at once?’ .
Sure enough, I usually won.

The coolest approach to all of this I ever saw was that of Stan Diller, then head of Goldman’s Financial Strategies Group in the early 1980s. In an article in Forbes about his group, I recall him being asked what degree he had. ‘A PhD’, he told the reporter, ‘but don’t tell the people I work for—they’ll knock a half million off my pay!’

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