Quantum Bayesian Networks

February 5, 2010

Our Man in Havana, or a Physicist Working in Wall Street

Filed under: Uncategorized — rrtucci @ 3:24 am

Category: book report 🙂

Check out this autobiographical book:

My Life as a Quant: Reflections on Physics and Finance
by Emanuel Derman
(Wiley, 2004)
Amazon link for book (high Amazon rating of 4 out of 5 stars, 80+ reviews)

This memoir recounts the professional history (also a smattering of technical stuff and philosophy but very little about his personal, family life) of a person who ended up in a career quite different from the one he had originally intended. (As many of us do!) It was a painful journey, but he ultimately found a comfortable niche for himself. Along the way, he learned an important lesson in humility; that he is no Feynman, but that you can live a fulfilling, productive life without being one.

If you are currently an undergraduate or graduate student in physics, this book will be particularly illuminating to you. It will give you an idea of what life is like as a physics postdoc, what are your chances of getting a tenured academic position in physics, and what to expect if you give up on your quest for such a position and decide instead to pursue a career as a quant in Wall Street.

Reading this book will give you a flavor of the day to day life of a quant. A quant (quantitative analyst) is a highly paid “financial engineer” that invents and codes computer models that aid a Wall Street firm manage risk and assign prices to its financial products (especially options and the more general derivatives). A pinnacle of financial engineering math is the Black-Scholes-Merton model, which uses “Ito stochastic calculus” to derive an algorithm for pricing options. Sholes and Merton got the 1997 Nobel Prize in Economics for this model. Black, with whom Derman collaborated, would have shared in the Nobel prize, but he died a few years before 1997.

Derman is a very clear writer and explainer. Moreover, he has an exceptional memory, so he is able to recall many interesting details about events that occurred to him decades ago. For example, even after having worked in finance for more than two decades, he still remembers his physics very well, and he can recall a wealth of detail about the people that he encountered during his former life as a physicist.

Derman was born in 1946. He was raised in South Africa and did his undergraduate studies at the University of Cape Town. The book starts on the day he arrived at Columbia University (New York City) to do graduate studies in Physics. Here are the stages in Derman’s life that he touches upon in this book

1966-1973: graduate student at Columbia University.
1973-1975: postdoc at University of Pennsylvania
1975-1977: postdoc at Oxford University
1977-1979: postdoc at Rockefeller University
1979-1980: assistant professor at University of Colorado at Boulder
1980-1985: Bell Labs
1985-1988: Goldman Sachs
1988-1989: Salomon Brothers
1990-2002: Goldman Sachs
2002-present: Professor of financial engineering at Columbia University. Also partner of a hedge fund (Prisma Capital Partners)

Derman’s Ph.D. thesis and post-doctoral work was in High Energy Physics, Phenomenology (Deep Inelastic Scattering, Weinberg Salam Model).

He found Bell-Labs to be very bureaucratic. At Bell Labs, he worked for a group (Area 90) whose leader was a doltish bully. Area 90 was quite different from the legendary nirvana, Area 10, that garnered all the Nobel prizes. Even though Derman found his stint at Bell Labs stifling and depressing for the most part, at least he was able to use that time to learn much about programming, and to initiate a love affair with this art form that continues to this day.

Derman started his quant career relatively late in life, at age 40. As a physicist, he endured the stressful, uncertain, nomadic life style of a postdoc, and he witnessed fierce, seething rivalries between physics professors. But Wall Street was not a harmonious paradise either. Especially cut-throat were the people at Salomon brothers. Most people that work in Wall Street are extremely ambitious, so it’s common for them to change jobs very frequently (e.g., every 6 months) in order to move upwards. Quants and other technical geeks are looked down on by traders and executives.

The book was published in 2004. It’s not particularly prescient about the 2008 economic disaster, although it does repeatedly point out the limitations of financial models. In my opinion, Quants should have rung the alarm bells more forcefully. However, I doubt that this action alone would have prevented the disaster. Most quants have only very limited decision making power in Wall Street firms. Even if the power wielding executives at the top had been warned more forcefully by the quants, I doubt that the execs would have listened.

  • Wikipedia on Derman
  • Derman’s blog at wilmott.com
    (Paul Wilmott, mathematics Ph.D., is another practitioner and pedagogue of financial engineering. From Wikipedia article: “Wilmott magazine has the distinction of having the highest subscription price of any magazine” 🙂 )

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