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My Life as a Quant
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.
Amazon doesn't have a listing for "My Life as a C... Oh wait a sec..
Trolling is a art,
...I thought they had come out with a sequel to The Vagina Monologues.
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!!
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?
Sailing over the event horizon
This can especially be seen in M-theory, 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 which we perceive as 2-dimensional vibrating strings.
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.
I called my girlfriend a Quant once and boy did I get hell for that...
~S
Is it just me or is Groklaw 404'd? http://www.groklaw.net/
Somebody get that damn fish in here to translate!
Slate has a thing on computer aided trading today as well: http://www.slate.com/id/2112392/
George II -- Spreading Freedom and American values, one bomb at a time.
Any of you basement-dwelling filthy linux using slashbots fancy a job in this area, remember to take a shower before you go for the interview, and when asked what you think of Microsoft products, try and keep your rabid Lunix Zealotry to a minimum, and realise that people working in these places are almost certainly smarter than you.
Also, the working day at some of these places makes EA look like a bunch of part-timers. So know what you're getting yourself into.
I don't see anything that says he got rich doing whatever it is he did.
...is a person. Being given a laureate might be legal in certain parts of Africa, but not here in the west.
"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.
---- Den ene knappen er powerknapp, den andre er Bender voice knapp "Bite My Shiny Metal Ass"
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 money and he can either invest it now or parcel it out over a number of periods. The monte carlo says invest it all now.
WRONG. To hell with that monte carlo simulation. Damn it to hell. Not even one of the top circles, but damn it down to the greatest level of pain and suffering. A few years ago (you can fill in the dates easily) there was a very long period of high stock returns. We had relatives fearful of the market, stocks sound scary and all. And each year that went by we would tell them of our double digit returns even in the indexes, while they were getting CD rates. This went on year after year. We kept telling them to invest. Finally, they announced they opened a brokerage account and invested a significant part of their money in the Vanguard Growth Index mutual fund.
And, you can guess what happened. This was about 2 months before the crash. I have to see these relatives weekly, and weekly I am reminded how they finally listened to my professional advice. Great. I would never never never never never never never again suggest that someone invest without hedging it somewhat by stringing out the investments over a period of time. Difference between real life and the damn monte carlo. Damn damn monte carlo.
The surprise isn't how often we make bad choices; the surprise is how seldom they defeat us.
Twit.
So Derman went from black holes to its financial equivalent, Black Scholes.
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.
my FE classes used or "recommended" the hull book.
The author spends little time talking about the book, and much time spewing a lot of sycophany and finishes up with a self-indulgent rant about himself that no one cares about.
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...
Do any quants read Slashdot?
Yes, i'll read the book, but I think things may have changed since it was written.
Cheers, J
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.
Michael Page, a quite-big finance-orientated recruiter/headhunter, wrote a very excellent 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.
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.
sub f{($f)=@_;print"$f(q{$f});";}f(q{sub f{($f)=@_;print"$f(q{$f});";}f});
$10 says he takes a powerdrill to the temple.
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.
"sweet dreams are made of this..."
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".
determining correct market values helps make things more efficient. it's not just a "complex form of gambling". why would such a thing be deemed discouraging?
They have changed and the person in question is a has-been. Otherwise he wouldn't have had time to write a book after all.
If you have to think about being suitable, you're not by the way!
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.
--
make install -not war
Ok, Doc, I believe you.
/.
But it would be even more interesting if you would expound on exactly why your life is better.
I am quite sincere, and this is not some sort of idiotic attempt at insult, which is so often found in
- The Bond and Money Markets: strategy, trading, analysis by Moorad Choudhry
- Liar's Poker by Michael Lewis
- When Genius Failed by Roger Lowenstein
- FIASCO by Frank Partnoy
- Bombardiers by Po Bronson (fiction, but absolutely hilarious and well worth a read)
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 a trading floor, next to the traders.
Jack
The canonical text is Options, Futures, & Other Derivatives, by John C. Hull (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. 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.
2. An excellent overview of financial products.
If you find the field interesting, lucrative jobs are available in derivatives technology and quantitative analysis at hedge funds and investment banks. The biggest cities for this work (in the English-speaking world) are New York, London and Chicago.
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 obvious that this figure is many MANY times bigger than any ACTUAL amount of equity capital to support these contracts.
In other words, we live in a horribly over-leveraged system. A credit bubble. And nobody knows when a Barings bank, an orange county, or an LTCM goes bust and takes down an interconnected banking mess which, although the finance may have less and less to do with physical economic reality, a run on banks, hyper-inflated currencies, and other shockingly possible things certainly do.
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.
Quantitative financial analysis looks much like weather forecasting. One can
make it of truly mind-breaking difficulty but it continues to be "... just a
model" (c) Monty Python. And it is another search for the Holy Grail. In fact I
met people with different educational backgrounds, who found the market logic
in hydrology, quantum mechanics and women behavior. And the funny thing - they
were successful (financially) at trading.
To make this point somewhat sound I recall the LTCM (Long Term Capital
Management) crisis when they lost around $3bn but got a helping hand from
banks to prevent collapse of the whole market. Nobel-prize winners were
co-founders there - Scholes and Merton (Black-Scholes option pricing model).
Academics are good to make reports forcing clients to act (generating revenues for the institutional banks). But in real life it is so easy to turn away from reality happily modelling something that doesn't even exist in the real world.
PS: The series I find very interesting's called Market Wizards. Refreshing reading about
ways of thinking of financial nerds.
I thought that was the title to Michael Moore's new book.
Oh wait, his title is My Life as a F'ing Fat Lardass C..t
Sorry!
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.
To those physicists/mathematicians/engineers contemplating such a career switch, I highly recommend this book. In fact, it's the first thing I would suggest to read. From the physics perspective, Derman captures the pleasure and pain of grad school and "doing physics" as well as the misery of job hunting. From the Street perspective, he captures the weirdness of traders and corporate managers, the relentless pace of work, the surprising importance of computational infrastructure. Most important, he makes it clear that one can derive as much personal satisfaction from modeling financial reality as from modeling physical reality.
you would get your ass kicked calling somebody a "Quant". Just saying.
Now before I get modded down, I be to remind whoever might read this that what I am saying is FACT. - bogaboga
ha;
You mean that girl that steped in front of a bulldozer and expected it to stop? Maybe you should get around some dozers of that size and take a saftey course or 2 about them. If she did, she would have never steped in front of it like that when she did.
Those dozers are not like cars. She commited suicide like it or not. there just isn't any other way to describe it. accidents just like that happen in the US and the operators are declared inocent of wrong doing becasue there is a known risk of not being able to see.
I guess stuff like this doesn't matter to racist like you. Maybe the world would be a better place if you tried to beat the living shit out of the parent poster and you dies in the process.