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The Almighty Buck Books Media Book Reviews Science

My Life as a Quant 139

charliedickinson writes "Some of the most computationally-intensive tasks around are real-time valuations of derivative securities. Wall Street traders need these for executing the trade whenever anyone wants to hedge stocks, bonds, currencies, commodities, credit, mortgages, power ... the list goes on. Emanuel Derman's My Life as a Quant is the engaging odyssey of a theoretical physicist turned serious programmer (by way of Bell Labs), turned "rocket scientist" or "quant" (Wall Street slang for the folks who've taken computer-aided design and valuation of financial products to new levels these last two decades)." Read on for Dickinson's review of the book.
My Life as a Quant: Reflections on Physics and Finance
author Emanuel Derman
pages 292
publisher John Wiley & Sons, Inc.
rating 9
reviewer Charlie Dickinson
ISBN 0471394203
summary Autobiography of a theoretical physicist turned serious programmer, turned Wall Street quantitative finance wizard

A complete understanding of Derman's work as physicist, or as finance theoretician, is of course beyond the scope of a memoir. This reviewer studied quantum mechanics in college and took an MBA at UCLA (more about this later) -- adding to my interest in the memoir's technical discussion -- but Derman reasonably pitches his discussion toward a lay audience with many helpful visuals to describe less obvious mathematical relationships. Do not let the perceived arcana of Derman's work keep you away from this memoir.

Emanuel Derman came to New York City in 1966 from Cape Town, South Africa. He started a Ph.D in theoretical physics at Columbia, somewhat in awe to be studying among a cluster of Nobel Laureates. As a teenager, Derman had hopes of being another Einstein if he stayed with physics. But as he notes, time decay happens to ambition. Seven years after earning his Ph.D, he was happy to be an employed postdoc, sharecropping his knowledge of particle physics to willing bidders.

The job market for theoretical physicists continued south. Family responsibilities, his wife's career as a biologist, and iffy prospects for a tenured teaching position --these all added up to Derman abandoning his love of physics, and going to work for money at Bell Labs.

There, Derman fell in love with programming (lex and yacc being two favorite tools). During five years, he built compilers and designed a nonprocedural language, HEQS (Hiearchical EQuation Solver), a precursor to Visicalc. But he never quite adjusted to the politics of Bell Labs, and by 1985, Wall Street was beckoning.

Executive recruiters sought out high-value programmers like Derman. He took a position with Goldman, Sachs in the Financial Strategies Group and began modeling options. It was a good fit. He found himself using sophisticated modeling techniques comparable to "doing physics." Moreover, he soon would collaborate with another Goldman, Sachs employee, one of the most influential theoreticians around: Fischer Black, whose Black-Scholes option pricing model (1973) is a benchmark in the field.

But My Life as a Quant is more than technical discussion; it's also a human interest narrative. The chapter "Easy Travel to Other Planets," about Fischer Black, is worth the price of this book. With compassion and honesty, Derman evocatively portrays his genius mentor. Derman shrewdly assesses what the arc of his life has meant. He shares vulnerabilities, decisions made from the weakness of loneliness, for example. Or, in a self-deprecatory vein, faux pas he committed. He's around Nobel Laureates in both physics and economics, and while noting such illustrious company can at times seem self-serving, the overall effect remains an engaging, complex self-portrait.

One idea about the world of quants Derman dispels is that derivative securities are wholly computer-driven. Despite more computing power on Wall Street, Derman asserts human imagination still leads the way. It takes a Fischer Black to intuit the qualitative to set up the quantitative model. Modern computational tools, however, aid the visualization such creative work thrives on.

As an example of the foregoing, and on a personal note, this reviewer remembers derivative security analysis circa 1969. While pursuing an MBA at UCLA, I did grunt work for a private hedge fund, run out of a Westwood apartment. Technology then was a time-sharing computer terminal and a telephone. The fund strategy was to short warrants and go long on the underlying common stock, where arbitraging opportunities were identified, a strategy borrowed from earlier work by Edward Thorp and Sheen Kassouf. My job was simple: I charted historical price data on clear acetate sheets in colored inks for all outstanding warrants against the underlying stock.

I drew hundreds of graphs, assisted in part by an Israeli graduate student (who had fought in the 1967 Six-Day War). I can't recall his name, but remember that when I'd drop by with more price data, ready to take away graphs, he invariably offered toast and coffee. One morning, I brought yet another roll of graphs to the Fund manager's apartment/office. Steve met me outside, saying he'd just got off the phone with Paul Samuelson at MIT, who wanted to know what our graphs looked like. Samuelson had written an article on warrant pricing, Steve added, which was why he was interested in what we turned up. I knew Samuelson as the author of an economics textbook I'd used a few years earlier.

Another morning, when I motorcycled over to drop off charts, Steve again was outside. He said, "Shelton and Markowitz are here." Professor John Shelton had hired me, of course, but I had no idea who Markowitz was -- he evidently did unspecified work with Shelton. Inside, I was quickly introduced to Harry Markowitz, who unrolled my graphs, becoming immediately absorbed. "Let me get a gestalt on this," was all he said. I didn't know then I was in the same room with the inventor of Modern Portfolio Theory. Now I can say he would see something that maybe a Fischer Black, or, these years later, an Emanuel Derman, might see. When he looked up, he said I did good graphs. I never saw him again.

Years later, I felt honored the low-tech grunt work my Israeli colleague and I labored over had interested those two men, Samuelson and Markowitz. They both received the Nobel Laureate in Economics (1970 and 1990, respectively). My point being -- and I'm sure Derman agrees -- it's not great computers that make breakthroughs in the financial theory. It's great imagination plus the tools at hand! (Obviously, though, computers have changed much of the grunt work.)

For me, My Life as a Quant summoned personal memories, but the odyssey of Emanuel Derman from South Africa to Wall Street is a rewarding memoir for anyone with even a casual interest about how the world of finance is being re-imagined. Emanuel Derman didn't really go to Wall Street to get rich. This memoir is a testament to his true passion in life, whether in theoretical physics, in software programming, or in the modeling of derivative securities. He always wanted interesting problems to work on.


You can purchase My Life as a Quant: Reflections on Physics and Finance from bn.com. Slashdot welcomes readers' book reviews -- to see your own review here, read the book review guidelines, then visit the submission page.
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My Life as a Quant

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  • Weird... (Score:3, Funny)

    by grub ( 11606 ) <slashdot@grub.net> on Wednesday January 19, 2005 @04:41PM (#11412219) Homepage Journal
    Amazon doesn't have a listing for "My Life as a C... Oh wait a sec..
    • That's pretty funny man. I love any punts involving the C-word.

      Reminds me of the Curb Your Enthusiasm episode "Beloved Aunt" where there's a typo in the obituary and she is a "Beloved C--t".

      Such simple obvious humor but it's hilarious!!


      • Back in college my roommate dated a girl who was attending a neighboring college. When she dumped him, he went out and had a t-shirt made...

        My ex is a

        Coed at the

        University of

        North

        Texas

    • C'mon. You you people who modded the parent down can't honestly say that you didn't think of something along the same lines...

      Let's be honest now.
    • Amazon doesn't have a listing for "My Life as a C... Oh wait a sec..

      Don't worry - Bill O'Reilly's new book will be out soon.

  • by Anonymous Coward on Wednesday January 19, 2005 @04:45PM (#11412258)
    ...I thought they had come out with a sequel to The Vagina Monologues.
  • by gwernol ( 167574 ) on Wednesday January 19, 2005 @04:50PM (#11412316)
    Thanks for the review - sounds like an interesting book. On this topic, can anyone recommend a good technical introduction to the techniques used for quantative analysis on Wall Street? Derman's book is more of a memoir than a technical introduction: does the latter exist?
      • by TheWizardOfCheese ( 256968 ) on Wednesday January 19, 2005 @05:17PM (#11412602)
        The book recommended by the parent is an excellent practical discussion about exchange-traded options. It is not, however, "a good technical introduction to the techniques used for quantative analysis on Wall Street", being neither technical nor about derivative securities in general.

        The standard recommendation is Options, Futures, and Other Derivatives by John Hull, and this is in fact a very good book and simultaneously a good introduction to many OTC derivatives. I like Paul Wilmott's book On Quantitative Finance. (This book comes in several versions, some longer and some shorter.)

        The books mentioned above stress PDE-based analysis. If you would prefer an approach based on martingale theory, try Financial Calculus by Baxter and Rennie. An Introduction to the Mathematics of Financial Derivatives by Neftci is a more elementary version; think of it as "Stochastic Calculus for Dummies." Neither of these two books contains much information about traded contracts.
        • by Anonymous Coward
          I worked in the field for ten years CBOE / BOT.

          Hull's book is where its at. Don't understand it? Then don't jump in.
        • by willis ( 84779 ) on Wednesday January 19, 2005 @05:35PM (#11412830) Homepage
          For the beginner, who's just getting a handle on volatility, etc, I think Natenberg is a far better starting place (just the first 6 chapters) -- everything is explained conceptually. After that, it makes sense to jump into the equations in Hull, etc. Taleb is good once you get the hang of things, too...
          • by Lawrence_Bird ( 67278 ) on Wednesday January 19, 2005 @06:07PM (#11413201) Homepage
            Having a MS in FE I can say that if you can't handle Hull
            straight out of the box you should persue other career
            objectives.

            Also as a former currency and bond trader I can say one of
            the issues with modelling in general is liquidity is not
            adequately accounted for. It's wonderful to have a
            theoretical price, but if the spread is wide enough to drive
            a truck through that takes a way a lot of its good.
            Likewise when it comes to determining fair market when the
            shit is hitting the fan. 1994 was a *very* good year to
            illustrate that.

            That isn't at all to say modelling and the rest of hte
            work of quants is not useful or necessary, just that some
            people tend to elevate it to levels beyond reasonable and
            worse, apply theory in a vacuum.

            But any of you at all interested in this stuff really need
            to have a sound grounding in calc and differential equations
            at a minimum. A few courses in numerical methods are
            helpful too.
            • I hear ya - hull makes more sense for the structurer/modeler/trader, and could be a good screener. I deal a lot with support staff that wants to understand what an option is / introduction to volatility (like people who do exchange connectivity, etc). For IT people looking to understand roughly what it's about, I think Natenberg is a good introduction.
        • The last one's fiction, but well worth reading.

          Obviously, these are all about the fixed income markets, as opposed to equities.

          Anyway, having said all that, you can read all the books you want, but the best way of learning the business is to sit on

      • And for something more technical, try this:

        Options, Futures, and Other Derivatives [amazon.com]
    • It's a wide-ranging and extremely esoteric topic. I'd suggest you go look at Nuclear Phynance [nuclearphynance.com] for some discussions on the different pricing issues, just to get a taste of the sort of stuff involved.

      I wouldn't expect to see any world-beating techniques in any book you can find, because the industry is new enough that these ideas remain proprietary.

      • The question was about Dollar Cost Averaging not being the best method of investment (vs. investing it all at once).

        Someone replies with a point which I believe is key to investing;

        I have not read that paper or anything like it, but ignorance has never stopped me before from commenting. I am completely sure that if I did some monte carlo simulations it would show that statistically dollar cost averaging is not the optimal strategy. For example, if I understand your issue, an investor has a bunch of
        • Hehe. I do a bunch of monte carlos myself. I have to keep reminding my less financially-literate boss that past performance is not indicative of future results when I show him the analysis.

          "You mean we could have a Sharpe ratio of 5 if we create this portfolio!!?!"
          "No, you would have done if you'd created it five years ago."

          Big...freaking...difference.

        • Dude,

          Monte Carlo modelling is a technique, which is pretty sweet. The hard part is specifying the relationship and choosing the distribution of the error - but these are human choices. Investing over a period of time will reduce risk, but not necessarily in an optimal way - good model specification and an aggressive strategy has lower risk than time-averaging, but then good model specification is the holy grail, I suppose.

          Although I have my own biases of things I 'like' and thing I, well, don't, I f
    • A good, thorough introduction to the general principles underlying Quant analysis is Grinold and Kahn's Active Portfolio Management (see http://finmath.com/GrinoldKahnAPM.html [finmath.com]).
    • Michael Page, a quite-big finance-orientated recruiter/headhunter, wrote a very excellent [chalmers.se] piece on actually getting work as a quant, which people reading the comments on this story may find useful.

      The link if chalmers.se because that's what Google gave me (didn't have the story bookmarked, had to search for it) - sorry don't have an original Michael Page URL. Please survive.
    • A lot of the quant action is in valuing and hedging options. A good primer on what options are, how to use them and some of the basic aspects of pricing and hedging is the book by Hull, also recommended by some other people here.

      It is a bit of a stretch to consider his book technical. The mathematics behind options valuation is stochastic integration (or stochastic differential equations), which is slightly mind-boggling at first. A good and reasonably simple book on this theory was recently published by

    • Hull's book is very empirical, it contains a lot of details of how markets work. Not a very sound theory book.

      Wilmott has several versions of books on QF. He pretends to be Feynman, it is always laughable. Most of his approach is based on PDE, not martingale method (SDE). But it is very good intro book.

      I guess many physicists would like Baxter and Rennie's book. It is written in a style of your fellow graduate student giving you two hour "how it is done" lecture. Fast and straight to the point, not much
    • The canonical text is Options, Futures, & Other Derivatives, by John C. Hull [amazon.com] (I have the 4th edition). It's an excellent introduction to standard pricing models for options and simple interest rate derivatives. If you're interested in the mathematical underpinnings, I highly recommend Financial Calculus by Baxter & Rennie. [amazon.com] It's concise but densely packed, and the principles are universal.

      If you want some web resources, try:

      1. A solid collection of credit derivative resources. [credit-deriv.com]
      2. An excellent o [dreamwiz.com]
  • Pattern analysis (Score:1, Interesting)

    by ikewillis ( 586793 )
    I would say what this is fundamentally saying is that the interrelationships of the stock market mimic the interrelationships of the spontaneously broken symmetries of the universe.

    This can especially be seen in M-theory [cam.ac.uk], the successor to string theory, which states that what we perceive as the background noise of the universe, fluxuations in the fabric of space-time itself, result not from perturbations of the big bang but the interactions of structures called "branes" which span multiple universes whic

    • by K. ( 10774 ) on Wednesday January 19, 2005 @04:54PM (#11412347) Homepage Journal
      Please don't sign me up for your newsletter.
    • Re:Pattern analysis (Score:5, Informative)

      by Bill Walker ( 835082 ) on Wednesday January 19, 2005 @05:16PM (#11412593)
      These relationships can be likened to the stock market where the valuations of particular stocks affect the valuations of other related stocks, and the only way to gain a gestalt view is to analyze and derive the interrelationships of the entire system.

      This is impossible. First off there is structural error when you attempt to correlate returns-- the returns of a lot of instruments are far from normally distributed, and I have yet to see a factor model that even comes close.

      Secondly, and more importantly, you are not receiving a complete picture if you just look at the numbers in the system. As we are speaking about the global economy, the 'entire system' you mention includes the actions of every single person on the planet as well as the weather, etc.

      The quants aren't usually trying to predict the overall movement of the market. This is called a "Global Macro" strategy, and relies mostly on qualitative assessments. Quants mainly work on pricing inefficiencies (arbitrage), which can get extremely complicated. Check out When Genius Failed [amazon.com] for an example of a quant-based strategy. (Financial purists please leave me that simplification).

      • IAWTP

        Of course never forget the independent variance-covariance condition, which is quant-101 material, but seems to get forgotten by all finance commentaries.

        Relating to non-normal returns (some models use t-stats, but these may be similarly faulty) have you come across 'Omega Metrics' - it is a risk/return tradeoff function that uses the entire underlying distribution without making any assumptions r.e. the shape. Of course this means it is a sample descriptor, not a universal error function which c
        • Oh, Christ, don't mention that shit around me ;).

          If any of you non-finance geeks are reading this, omega is basically the betting odds that you'll do as well or better than a given threshold return. You usually look at the logarithm of the entire function of thresholds.

          But wtf do you do with that? It doesn't make much intuitive sense once you have it as a logarithm, but you can't graph the function without transforming it.

          Moreover, you can't use it as a quick rule of thumb, as you can with Sharpe ratio

          • Gets frustrating resisting the urge to reply to some of the crap that passes as economics around here :).

            Ah ha! Indeed.

            Omega really is pretty interesting (it has a really nice spinoff into prospect theory, using it as utility function/method rather than the traditional (and pretty suspect) additive utility). Don't look at the logs, it starts to get hard to understand scales then. But the threshold idea makes sense - if the distribution is asymetric (and not specifiable through skew or kurtosis) -
          • Doh, there's another omega?

            Nonstandard notation bothers the hell outta me. You statistics and finance people need to be brought into line.

            In measure theoretic probability we define a random variable X on the probability space (Omega, F, P).

            In partial differential equations, Omega is usually the the open subset of R^n within which a given PDE holds.

            Sorry to be a mathematical notation Nazi, but I'm a bit of a follower of Bourbaki. Shit's hard enough without bad notation.

      • The trades executed by Long Term Capital Management, the hedge fund whose woeful tale is told in When Genius Failed were very much a "global macro" fund. Most of their work dealt with the relative values of various government bonds. There is quite a bit of quantitative analysis that can go into this, however, you can do many things without tons of data-crunching as well. It is true, however, that they did consider their strategies to be arbitrage.
  • I called my girlfriend a Quant once and boy did I get hell for that...

    ~S
    • Reminds me of a joke I once heard: I spent the summer abroad. Couldn't get used to wearing heels and a dress. (sounds better spoken and I know.... off topic).
  • Is it just me or is Groklaw 404'd? http://www.groklaw.net/ [groklaw.net]
  • More info (Score:3, Informative)

    by Raunch ( 191457 ) <http://sicklayouts.com> on Wednesday January 19, 2005 @04:55PM (#11412356) Homepage
    Slate has a thing on computer aided trading today as well: http://www.slate.com/id/2112392/ [slate.com]

  • "Goldman Sachs" (the bank Derman works for) doesn't have a comma in it's name. Strictly speaking it's actually "Goldman Sachs & Co.", but the last bit is frequently missed off when you're referring to the group as a whole rather than the individual US company.
  • by utexaspunk ( 527541 ) on Wednesday January 19, 2005 @05:50PM (#11413014)
    I've temped at a mutual fund place before, which had me thinking about this kind of stuff, and I was wondering where one can get this kind of information on the internet. I realize that one can pull up stuff from yahoo or whatever, but is there some place where one can get large quantities of raw historical data on a multitude of stocks? and how does one tie their computer into trading programs? surely there's something better than just scripting e*trade, or whatever, right? there should be an open source toolkit for this kind of stuff...
    • by DotDotSlasher ( 675502 ) on Wednesday January 19, 2005 @06:11PM (#11413260)
      HSQuote [1free-hist...loader.com] is a front-end to Yahoo's historic data. Free full-featured demo for 15 days or so. Basically it lets you download years of each-day-end information (open value, close, high, low, volume). In a few miniutes I was able to get years (I set begin year to 1900) of results from the fortune 500 companies (had to find that list separately - then process in groups smaller than 125 tickers). I was all ready to code up some predictive functions to figure out what the market was probably going to do next, if it was a good time to sell or buy or hold, similar to Timing Cube [timingcube.com]. Oh well, maybe one day.
    • The standard academic sources for stock quotes in US markets are CRSP (for daily quotes) and TAQ (for transaction-by-transaction) databases. Both are currently maintained at Wharton and are not free.
      • I believe we use TAQ at a cost of approx. $800 US per month. But that's hardly even an afterthought in this business... things like Bloomberg terminals for news and quotes run around $1600 US per month per terminal. It's a dog eat dog biz.
    • Easy peezy:

      http://finance.yahoo.com/q/hp?s=MSFT

      There are modules in CPAN to do the scraping for you (check out BeanCounter.pm)
    • I've tried to look for this, but so far have found only sources that charge for this information, and not even in very high (time) resolution.. I've love to know more about this too.
  • Do any quants read Slashdot?

    Yes, i'll read the book, but I think things may have changed since it was written.

    Cheers, J
  • by randomwalker ( 758064 ) on Wednesday January 19, 2005 @06:12PM (#11413271)
    I am currently reading this book and i am not quite so thrilled by it as the reviewer. My complaints so far include
    - i am almost half way through and he has not started working as a quant yet
    - Can be boring at times. At one point he starts discussing which radio station he was listening to on his commute. It is inconsistent in content, sometimes very interesting and some time really boring. Maybe it was padded to fill up the required pages.
    - Not technical, some of his physics research sounds really interesting, but he does not go into details.
    - Not the most lively writting style.

    I have no regrets about reading this book, and i will finish it, but i am starting to loose interest in the middle. Hopefully it picks up bit in the second half.

    • Yes, to be honest, I think the narrative drive of this memoir was sputtering a bit by the time Derman made it to Boulder. But please hang in there, by page 143, when Derman shows up at Goldman Sachs and meets Fischer Black, the story really kicked into gear for me. I didn't expect in a book replete with technical models to find, dare I say, a soulful reminiscence about one's mentor. Thanks for the comment & I think you're half-right ;-)
  • by Pseudonym ( 62607 ) on Wednesday January 19, 2005 @06:23PM (#11413400)

    Does anyone else find it discouraging that a very smart theoretical physicist ended up being paid huge amounts of money for what is, essentially, non-productive work? This guy could have found a unified field theory by now. Instead, he's helping rich people to transfer money between each other in what is effectively a complex form of gambling.

    We have our priorities all wrong.

    • by Anonymous Coward on Wednesday January 19, 2005 @06:58PM (#11413755)
      Does anyone else find it discouraging that a very smart theoretical physicist ended up being paid huge amounts of money for what is, essentially, non-productive work?
      Non-productive? Derivatives can be used for gambling, but they can also be used for transferring risk and creating greater efficiency in the marketplace. If there weren't smart people figuring out what the right prices should be, bid-ask spreads would be wider and commerce would be less efficient. People are paid good money for doing this stuff because there is real value in the result.

      This guy could have found a unified field theory by now. Instead, he's helping rich people to transfer money between each other in what is effectively a complex form of gambling.
      So your idea of "productive" work is creating a unified field theory? If such a theory were found tomorrow, how would it improve anyone's life? A unified field theory would be useful for calculating things during the first second of the big bang. It is otherwise worthless.

      I have a PhD in theoretical physics and I've worked as a quant. Life as a quant beats the hell out of physics any day.
      • "Derivatives can be used for gambling, but they can also be used for transferring risk"

        What I know about derivatives can be written on the head of pin ... however (as this is slashdot :0)> ... surely the "transferring risk" means getting better odds on your gamble? And the greater efficiency [sounds like marketing speak]: I'm thinking you are using a narrowly defined definition of efficiency such as monetary growth or something.

        The UFT quote might be a little off the mark, however (s)he is right about
        • pbhj said:
          Someone else comments on moving money around between Fat-Cats. That's not how it works. People get rich (on the whole) by other people getting poor.
          Actually, merely "moving money around between Fat-Cats" will raise how much people value whatever currency is being used and will make "People get rich".
          Explanation: Economic growth is when more money changes hands faster (trade). Reference: Circular Flow Model - it's basic stuff.
          Ashton
          • But it seems you can't move money around without leakage from the CFM as eg. banks are not totally included in the framework.

            Of course capitalists can applaud the strength of their system as the poorer you make people the harder they have to work to make ends meet, thus stimulating growth!!

            • Er...yes banks are...?
              Banks borrow from individuals to lend at a higher rate to individuals and organisations. The profits from this pay dividends to investors, salaries for workers, and expenses to other organisations.

              What else do banks do that isn't included in that?
      • Non-productive? Derivatives can be used for gambling, but they can also be used for transferring risk and creating greater efficiency in the marketplace.

        i.e. calculating the odds for gambling and more efficiently gambling, respectively. :-)

        I admit to being a bit tongue-in-cheek, but let's face it: "the marketplace" is so unbelievably artificial, you start to wonder if you occupy the same universe that it does. Not only are we buying and selling things, we're now buying and selling first derivatives of


        • Actually, if I buy derivatives as a risk mitigation instrument - I am actually *reducing* the gamble I'll be taking if I do not buy it.

          Anyhow, if you pursue to the end the argument that jobs that deal with such intangibles are 'artificial' and not 'real', then you will end up throwing out almost all service professions as 'artificial': like lawyers, politicians, accountants, bankers, IT specialists, etc. In fact, anyone that does employ their labour to directly transform an actual physical product (say, wo
          • Anyhow, if you pursue to the end the argument that jobs that deal with such intangibles are 'artificial' and not 'real',

            ...which I did not even pursue from the beginning.

            Take a waiter, for example. There is nothing artificial about eating. Similarly, for a lawyer, there is nothing artificial about being a powerful advocate in a tricky situation. An IT specialist maintains tools. OTOH, there is something very, very artificial about trading in derivatives.

        • Please call up Southwest Airlines and tell them that they're doing nothing but gambling. They avoided the current dismal fate of most U.S. airlines by eliminating their exposure to fuel prices via futures purchases, something they could not have done effectively without a liquid derivatives market. In fact I think many corporations which are "actually making and doing things" would be very unhappy to hear that their carefully calculated risk-mitigating derivatives trades are nothing more than gambling!

          It
          • Please call up Southwest Airlines and tell them that they're doing nothing but gambling.

            Since they're flying planes as well as gambling, no I won't.

            When I say that the market is highly artificial, I mean it, and when I say that we have our priorities wrong, I mean it. The fact that oil prices go up in anticipation of scarcity, let alone because of scarcity, is completely irrational and artificial. The fact that you can change the interest rate on someone's loan on a whim is artificial. The fact that

            • I think you're wrong on a lot of counts, but I'll highlight one with a question.

              Scenario one. Your company will make a large profit if oil prices go down, but it will be in danger of bankruptcy if oil prices go up.

              Scenario two. Your company's profits are essentially independent of oil prices.

              In which scenario are you gambling on oil prices?

              By buying derivatives, Southwest converted scenario one into scenario two. Without oil futures, they would have been forced to gamble on oil prices (or to waste mo
              • I think that you're missing my main point.

                The only reason that oil prices go up and down at all is that those who produce oil get together and decide what price it will be. It's not because there's less of it to go around (though even if there is, most economists would agree that there is no rational reason for the price to go up). It's not because oil is more useful, or better quality, than it once was.

                The reason is because the world has its priorities wrong. The reason why quants are employed is not

                • Honestly, if your main point is that you don't want to believe in supply and demand, I can't stop you. I don't think "most economists" would agree with you-- consult any basic (non-Marxist) text in economics-- but it's your perogative.

                  The fact remains that reasonable businesses have a legitimate demand for instruments like options and futures, primarily for the mitigation of risk. Even if you personally only buy soda and ipods, the companies that make these things for you have a real use for these produc
                  • Honestly, if your main point is that you don't want to believe in supply and demand, I can't stop you.

                    Either I'm being unclear or you're misinterpreting me. Probably both.

                    The fact remains that reasonable businesses have a legitimate demand for instruments like options and futures, primarily for the mitigation of risk.

                    Similarly, reasonable nations have a legitimate demand for nuclear weapons. It's like the Prisoner's Dilemma: You're better off with them, but everyone would be better off if nobody ha

                    • I don't really understand how you can sound so reasonable and yet take a basic misunderstanding of economics and risk and turn it into some kind of personal vendetta. Did you lose big money on some bad stock trade? Lose your job at Enron? Yes, people do stupid things with derivatives. Yes, people speculate irresponsibly with them. But they are much more akin to cars than nuclear weapons. There are stupid, irresponsible ways to use them, but at the core they are highly useful things that people use to
                    • I guess I'll leave the final word up to you:

                      [I realize that life's not fair. I still reserve the right to get mad about it.]

                      Couldn't have said it better myself. :-)

    • If you borrowed money to buy a house (or your landlord borrowed money to buy your apartment) you can thank a quant for getting the callable bond market off the ground. Valuing those securities was one of the first applications of this field. Without this work you would probably be paying several percentage points more in interest.
      • If you borrowed money to buy a house (or your landlord borrowed money to buy your apartment) you can thank a quant for getting the callable bond market off the ground.

        OMG! Nooo! Serious? You mean there were no money lenders and money borrowers before quants?! Why, although I am an agnostic, I could swear that dude Jesus was moaning something about "usurers" and "money-changers"...

        And I could swear the "percentage points" had way more to do with greed, competition and the central bank's politically motiva

    • actually, mostly they are taking the money away from less sophisticated (and usually less wealthy) people, not transfering it among each other. once you have money, you pay smart trading strategists to "beat the market" in exchange for a share of the profits.

      still discouraged? :-)
  • $10 says he takes a powerdrill to the temple.
  • That was actually a really nice story. It does make me interested actually in hearing more about the reviewer!

    One correction that I'd like to make is that there is no Nobel Prize in Economics. It is called the "Bank of Sweden Prize in Economic Sciences in memory of Alfred Nobel."

    For some reason, the injection of an Israeli veteran of the six-day war making analyses seems humorous.

  • There are no "Nobel laureates" in economics, because there is no such thing as the "Nobel Prize in Economics".

    The Norwegian Nobel Institute awards prizes in physics, chemistry, physiology or medicine, literature, and peace. People who win these prizes can say they won the Nobel prize.

    However, someone who wins the "The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel" hasn't won a "Nobel prize".
  • Richard Feynmann also had to decide between theoretical physics and Bell Labs (where he would have been surrounded by Nobel Laureates). He went for physics (CalTech), and became the kind of person Derman dreamed of becoming: another "Einstein", possibly the "smartest person in the world" in the second half of the 20th Century. My life is so much better for his decision.
  • although the remark about derivatives being complex forms of gambling and a horrible waste of supposed experts in the field of physics is accurate, I thought it might be useful to point out that derivatives are much more malicious than mere gambling.

    The amount of derivatives bets in the global economy is somewhere around 300 to 600 trillion dollars (the amount is not all that clear because since derivatives arent "actual" securities, they aren't made transparent under things like Fed regulationT). Its obvi
    • Derivatives used properly aren't gambling or malicious. In fact, they are a way to sell off risk to make sure you don't assume risks you don't have to. For example, a farmer will be guaranteed a fixed sum of money upon delivery of a crop. That way he can feed his family and not have to worry about flucuating market prices. On the other side, hedging can take these instruments and create new instruments to simulate the returns of the S&P 500 with minimized variance. If the math is done right, there'
  • When Genius Failed (Score:2, Informative)

    by dgmckay ( 757282 )
    Another excellent book that touches on what quants do is When Genius Failed, by Roger Lowenstein. This book charts the rise & fall of Long-Term Capital Management, a hedge fund that relied heavily on mathematical models to guide their trading activity. It's a cautionary tale about placing too much faith in mathematical models of markets that are not always rational.
    • I read this book, and I agree that it is an excellent book, very well written and entertaining. However, I thought that the author was too harsh on some of the principle players at LTCM, at times edging from simple criticism to excessive bludgeoning.
  • Does anyone else find it a bit irritating that the reviewer spends half the time talking about his own life? I mean, I'm looking for a book review, not the reviewer's life story! Cut out the chatter, please.
  • you would get your ass kicked calling somebody a "Quant". Just saying.

"Just think, with VLSI we can have 100 ENIACS on a chip!" -- Alan Perlis

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