My Life as a Quant Read Online Free Page B
Author: Emanuel Derman
much hope of even getting into graduate school. They may not have wanted to. The letters were mostly a cri de cæur from isolated and solitary physicist manqués all over the world.
Most of my classmates laughed at the naiveté of the letter writers, but as I skimmed through the crank file I found it hard to feel superior. Instead, peering into the box of manuscripts, I always saw my pale reflection. Out there, beyond academia and industry, were people like us, similarly in thrall to the same sense of mystery and power that lay behind the attempt to understand and master the universe with only imagination and symbols. They were cranks, those letter writers, but they were also genuine amateurs, lovers of the field interested in wisdom and magic rather than money.
There are amateurs in the financial modeling world, too, but they often come in more mercenary flavors, and why not? Because I used to run a group called Quantitative Strategies at Goldman Sachs for many years, after a while almost any letter from the outside world addressed to the âQuantitative Something-or-Otherâ at Goldman found its way to me. Once every few months I received a note from someone isolated and far away who thought he or she had made some great breakthrough in financial theory. Often, they would explain, it was a breakthrough whose exact details they were unwilling to divulge without being given a contract promising them a share of the future profits they were certain its use would guarantee. I sympathized with them. They, too, believed in the power of imagination.
Theoretical physicists are accustomed to the success of mathematics in formulating the laws of the universe and elaborating their consequences. The universe does indeed seem to run like some splendid Swiss clockwork: We can predict the orbits of planets and the frequency of light emitted by atoms to eight or ten decimal places. But when a physicist first pages through a graduate economics or finance textbook, he or she begins to feel aghast. The mathematics of economics is so much more formal than the mathematics of physics textbooksâmuch of it reads like Euclid or set theory, replete with axioms, theorems, and lemmas. You would think that all this formality would produce precision. And yet, compared with physics, economics has so little explanatory or predictive power. Everything looks suspect; questions abound.
When physicists pursue the laws of the universe, it seems selfless. But watching quants pursue sacred laws for the profane production of profit, I sometimes find myself thinking disturbingly of worshippers at a black mass. What does it signify to use the methods of physics and the language of mathematics to model the economic world? Is it justifiable to treat the economy and its markets as a complex machine? How can traders put their faith in this stuff? Isnât value determined by people? And how can people be described by equations and predetermined rules? Isnât this endeavor the misguided consequence of some sort of physics envy, an inappropriate attempt to model messy human systems with the wrong paradigm? Is social science, as the economic historian Robert Skidelsky once observed, merely a compendium of flawed thinking disguised as scientific understanding? If mathematics is the Queen of Sciences, is quantitative finance a science at all? And finally, are quants scientists or cranks?
This book is an account of my experiences as a scientist, quant, and, on occasion, a fellow traveler of cranks.
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 versus character, plans versus luck
I expected New York to glitter. Instead, when I arrived on that hot August afternoon in 1966, the city was grimy and littered, disappointingly unmodern. I was jet-lagged and weary, and the sweaty cab ride from Kennedy airport to
Most of my classmates laughed at the naiveté of the letter writers, but as I skimmed through the crank file I found it hard to feel superior. Instead, peering into the box of manuscripts, I always saw my pale reflection. Out there, beyond academia and industry, were people like us, similarly in thrall to the same sense of mystery and power that lay behind the attempt to understand and master the universe with only imagination and symbols. They were cranks, those letter writers, but they were also genuine amateurs, lovers of the field interested in wisdom and magic rather than money.
There are amateurs in the financial modeling world, too, but they often come in more mercenary flavors, and why not? Because I used to run a group called Quantitative Strategies at Goldman Sachs for many years, after a while almost any letter from the outside world addressed to the âQuantitative Something-or-Otherâ at Goldman found its way to me. Once every few months I received a note from someone isolated and far away who thought he or she had made some great breakthrough in financial theory. Often, they would explain, it was a breakthrough whose exact details they were unwilling to divulge without being given a contract promising them a share of the future profits they were certain its use would guarantee. I sympathized with them. They, too, believed in the power of imagination.
Theoretical physicists are accustomed to the success of mathematics in formulating the laws of the universe and elaborating their consequences. The universe does indeed seem to run like some splendid Swiss clockwork: We can predict the orbits of planets and the frequency of light emitted by atoms to eight or ten decimal places. But when a physicist first pages through a graduate economics or finance textbook, he or she begins to feel aghast. The mathematics of economics is so much more formal than the mathematics of physics textbooksâmuch of it reads like Euclid or set theory, replete with axioms, theorems, and lemmas. You would think that all this formality would produce precision. And yet, compared with physics, economics has so little explanatory or predictive power. Everything looks suspect; questions abound.
When physicists pursue the laws of the universe, it seems selfless. But watching quants pursue sacred laws for the profane production of profit, I sometimes find myself thinking disturbingly of worshippers at a black mass. What does it signify to use the methods of physics and the language of mathematics to model the economic world? Is it justifiable to treat the economy and its markets as a complex machine? How can traders put their faith in this stuff? Isnât value determined by people? And how can people be described by equations and predetermined rules? Isnât this endeavor the misguided consequence of some sort of physics envy, an inappropriate attempt to model messy human systems with the wrong paradigm? Is social science, as the economic historian Robert Skidelsky once observed, merely a compendium of flawed thinking disguised as scientific understanding? If mathematics is the Queen of Sciences, is quantitative finance a science at all? And finally, are quants scientists or cranks?
This book is an account of my experiences as a scientist, quant, and, on occasion, a fellow traveler of cranks.
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 versus character, plans versus luck
I expected New York to glitter. Instead, when I arrived on that hot August afternoon in 1966, the city was grimy and littered, disappointingly unmodern. I was jet-lagged and weary, and the sweaty cab ride from Kennedy airport to
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