My Life as a Quant: Reflections on Physics and Finance

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My Life as a Quant: Reflections on Physics and Finance

Thursday, October 19, 2006

The New York Academy of Sciences

Join us for the Launch Events for the Physical Sciences & Engineering Initiative.

Dr. Emanuel Derman will discuss his book My Life as a Quant: Reflections on Physics and Finance (John Wiley & Sons). Wall Street is no longer the old-fashioned business it once was. In recent years, investment banks and hedge funds have increasingly turned to quantitative trading strategies and derivative securities for their profits, and have raided academia for PhDs to model these volatile products and manage their risk.

Nowadays, the fortunes of firms and the stability of markets often rest on mathematical models. "Quants"–the scientifically trained practitioners of quantitative finance who build these models–have become key players on the Wall Street stage.

And no Wall Street quant is better known than Emanuel Derman. One of the first high-energy particle physicists to migrate to Wall Street, he spent seventeen years in the business, eventually becoming managing director and head of the renowned Quantitative Strategies group at Goldman, Sachs & Co. There he coauthored some of today's most widely used and influential financial models, including the widely used Black-Derman-Toy model of interest rates.

Physics and quantitative finance look deceptively similar. But, writes Derman, "When you do physics you're playing against God; in finance, you're playing against God's creatures." How can one justify using the precise methods of physics in the frenzied world of financial markets? Is it reasonable to treat the economy and its markets as a complex machine? Or is quantitative finance merely flawed thinking masquerading as science, a brave whistling in the dark?

My Life as a Quant is Derman's candid account of his search for answers as he undergoes his transformation from ambitious young scientist to managing director. He tells the story of his passage between two worlds; he recounts his adventures with physicists, quants, options traders, and other highfliers on Wall Street; he analyzes the incompatible personas of traders and quants; and he meditates on the dissimilar natures of knowledge in physics and finance. Throughout his tale, he reflects on the appropriate way to apply the refined methods of physics to the hurly-burly world of markets and the people that inhabit them.

Emanuel Derman is the Director of the Program in Financial Engineering at Columbia University, a columnist for Risk magazine, and the Head of Risk at Prisma Capital Partners. He has a PhD in theoretical physics from Columbia University. He is the author of numerous articles in elementary particle physics, computer science, and finance, and a coauthor of the widely used Black-Derman-Toy interest rate model and the Derman-Kani local volatility model. After an initial career in academic life and a stint at AT&T Bell Laboratories, he moved to Goldman, Sachs & Co. in 1985, where he became a managing director in 1997. Among his many awards and honors, he was named the SunGard/IAFE Financial Engineer of the Year in 2000, was appointed to the Risk Hall of Fame in 2002, and won the Wilmott Award in 2006.