"...tells wonderful stories of trying to bring higher mathematics to the Goldman Sachs equity-derivatives trading desk." (Grant's Interest Rate Observer, Dec. 17, 2004)
Not many Wall Street veterans could write: "Visiting clients in Madrid, I dropped into the Thyssen museum, where I stumbled
across several [Arthur] Dove paintings . . . in The Hague, too, after a Euronext options conference, I saw early Mondrian
paintings of lilies that were influenced by [Rudolf] Steiner".
There are few "gentlemen bankers" left these days. Nor is
there much room in the great financial houses for anything that smacks of the amateur spirit. That is why Emanuel Derman's
memoirs are so compelling. As a physicist with a PhD from Columbia University, New York, he was not exactly a natural born
trader when he joined Goldman Sachs in 1985. He had spent most of the preceding 20 years in education and research.
But
Derman got in at the ground floor of financial engineering, or quantitative finance, and spent two decades exploring the almost
infinite potential (and complexity) of derivative products and sophisticated risk management. Now back in academia, Derman
has reflected on his experiences of the past 40 years.
He begins his story in 1966, when he arrived in New York city from
South Africa as a bewildered, rather lonely 20 year old. Derman's first degree in physics was from Cape Town university, but
he had come to Columbia determined to make his name. "I dreamed of being another Einstein," he confesses. "I wanted to spend
my life focusing on the discovery of truths that would live forever."
It took several years for Derman to accept that this
ambition would not be realised. Pure physics had room at the top for only a handful of people. He struggled for years in a
series of insecure post-doctoral positions. "In much the same way, by a process [that] option theorists call time decay,"
he writes, "financial stock options lose their potential as they approach their own expiration."
Derman's wry humour and
sense of irony are apparent throughout the book. "If you didn't mind wasting the best years of your youth," he says, "graduate
student life at Columbia was paradise." These qualities, allied to his many and varied literary and cultural references, reveal
him as a multi-layered personality. In spite of his later eminence on The Street in the 1980s and 1990s, this is no crude
Big Swinging Dick.
And he is not lying about wasting his youth. In 1969, when so many young people of his generation were
heading off to hang out at Woodstock, Derman admits: "I spent the summer of 1969 at a particle physics summer school at Brookhaven
National Laboratories in Upton, Long Island."
Eventually Derman abandoned pure physics for the - to him - less noble pursuit
of applied physics, spending five years at AT&T's Bell Laboratories in New Jersey. This chapter, entitled "In the Penal
Colony" - a reference to a Kafka short story of the same name - is a tale of corporate woe. The business world, while better
paid than academia, seemed to offer even less satisfaction and excitement.
Derman says he learnt almost nothing about business
or finance at AT&T, but he did learn to program and generally master the new generation of computers that were beginning
to appear in the early 1980s. When the headhunter's call finally took him to Goldman Sachs's financial strategies group in
December 1985, it came as an immense relief.
Derman was charged with developing the famous Black-Scholes option pricing
model so it could be applied to bonds, an urgent task in the more volatile markets of the post oil shock world. Fischer Black,
one of the original model's authors, worked at Goldman and became a mentor and inspiration to Derman. Black, he writes, "was
genuinely in love with the idea of equilibrium." Derman was eventually to become co-author of the Black-Derman-Toy model,
which priced bond options.
In total, Derman spent 16 years at Goldman, with one unhappy year at Salomon Brothers sandwiched
in between. The former academic was not immune to the usual Wall Street temptation of leveraging a better deal at another
firm. Nine months after September 11 2001, Derman left Goldman to return to Columbia, where he now leads the programme in
financial engineering.
Derman was one of the heroes of risk management in the 1990s, constantly pushing at the boundaries
of what was possible, coming up with ever more sophisticated and ingenious structures. And yet a sober scepticism, learned
the hard way all those years ago in university libraries, underpins his world view.
He is sardonic about his work: "The
capacity to wreak destruction with your models provides the ultimate respectability," he says. "Many of the Long Term Capital
Management protagonists are back in business."
Now teaching again full time, Derman has grown even more sceptical. "A decade
of speaking with traders and theorists has made me wonder what 'correct' means," he writes. "The more I look at the conflict
between markets and theories, the more that limitations of models in the financial and human world become apparent to me."
(Financial Times, November 18, 2004)
Indecisive, introspective, awkward, and sometimes morose, memoirist Emanuel Derman comes across like a character in a Saul
Bellow novel. He wallows in loneliness after leaving his home in South Africa to earn a PhD in theoretical physics at Columbia
University. Later, he obsesses over leaving pure physics to do applied research at Bell Laboratories. Then he punishes himself
with guilt when he abandons physics entirely to work on Wall Street. Although he succeeds as a math-savvy "quant" at Goldman,
Sachs & Co. (GS), he continues to ponder whether markets can really be understood. "We are still on a darkling plain,"
he writes toward the end of his new book. "If you are a theorist you must never forget that you are traveling through lawless
roads where the local inhabitants don't respect your principles."
That sense of being an intruder in outlaw territory lends
an intriguing mood to Derman's My Life As a Quant, a literate and entertaining memoir of his two-stage career -- in
physics and then financial engineering. Wall Street looks quite different from a nerd's-eye view: "Geeks were fair game,"
Derman reflects. Once, a chief trader who passed between him and a fellow quant "winced, clutched his head with both hands
as though in excruciating pain, and exclaimed, 'Aaarrggh-hhh! The force field! It's too intense! Let me out of the way!"'
As
one of Wall Street's leading quants, Derman did throw off some intense gamma radiation. He worked at Goldman from 1985 until
2003 except for one year at Salomon Brothers. At Goldman, he moved from fixed income to equity derivatives to risk management,
becoming a managing director in 1997. He co-invented a tool for pricing options on Treasury bonds, working with Goldman colleagues
Bill Toy and the late Fischer Black, who co-invented the Black-Scholes formula for valuing options on stocks. Derman received
the industry's "Financial Engineer of the Year" award in 2000. Now he directs the financial-engineering program at Columbia
University.
Derman failed at what he really wanted, which was to become an important physicist. He was merely very smart
in a field dominated by geniuses, so he kicked around from one low-paying research job to another. "At age 16 or 17, I had
wanted to be another Einstein," he writes. "By 1976...I had reached the point where I merely envied the postdoc in the office
next door because he had been invited to give a seminar in France." His move to Wall Street -- an acknowledgment of failure
-- brought him financial rewards beyond the dreams of academic physicists and a fair measure of satisfaction as well.
In
the tradition of the idiosyncratic memoir, My Life As a Quant is a grab bag of the author's interests. It quotes Schopenhauer
and Goethe while supplying not one but three diagrams of a muon neutrino colliding with a proton. There is a long section
on the brilliant and punctilious Fischer Black; a glimpse of physicist Richard Feynman; and an embarrassing encounter with
finance giant Robert Merton, who sat next to the author on a long flight (Derman treated him rudely before realizing who he
was).
Derman's mood seems to vary from bemused on good days to sour on bad ones. The chapter on his postdoc travels is
titled "A Sort of Life"; his brief career at Bell Labs, "In the Penal Colony"; his tenure at Salomon Brothers, "A Severed
Head." Pre-IPO Goldman Sachs comes off as relatively gentle yet stimulating. He writes: "It was the only place I never secretly
hoped would crash and burn."
At times, his awkwardness is so extreme that it's funny. Here's how he failed to work up his
nerve to ask a Columbia professor to be his adviser: "Every time I saw him I smiled; every time I smiled he bared his lips
back at me with greater awkwardness." It got so painful that he began to flee whenever he saw the prof coming.
The most
challenging part of the book -- and for techies, probably the best -- is Derman's detailed explanation of trading tools he
developed. The Black-Derman-Toy model, from 1986, allowed trading desks to come up with prices for Treasury bond options based
on math rather than guesswork. In 1993 he and Goldman colleague Iraj Kani invented an options-pricing method that improved
on an aspect of Black-Scholes -- its incorrect assumption that the volatility of options is unvarying. They deduced the "local"
volatility of a conventional option at each possible stock price and at each moment up to expiration. That information could
then be used to price exotic options more accurately.
As it turned out, both inventions had limitations in practice, but
Derman accepts that. The theoretical purist finds a measure of contentment in contributing to the imprecise world of finance
-- "intuiting, inventing, or concocting approximate laws and patterns." It ain't E=mc2, but as he recognizes, it
may be the best anyone can hope for. By Peter Coy (Business Week, November 15, 2004)
"Sadly, there's not much to buy in the stock or bond market this holiday season, but John Wiley & Sons has published
the perfect gift. "My Life as a Quant," by Emanuel Derman (292 pages, $29.95) is, indeed, a perfect memoir, as Derman, a South
African-born physicist turned financial engineer, is a perfect memoirist."--Grant's Interest Rate Observer
Review
"...tells
wonderful stories of trying to bring higher mathematics to the Goldman Sachs equity-derivatives trading desk." (Grant's
Interest Rate Observer, Dec. 17, 2004)
"compelling" (Financial Times, November 18, 2004)
"literate and entertaining memoir" (Business Week, November 15, 2004)
Product Details
|
based on 35 reviews. (