Author: Emanuel Derman

Publisher: Wiley

Pub. in: December, 2007

ISBN: 0470192739

Pages: 292

Measurements: 8.9 x 5.8 x 1.3 inches

Origin of product: USA

Order code: BA01219

Other information: ISBN-13: 978-0470192733

It is very uncommon for scientists to be revealing of their personal lives, and even more rare for them to make written commentary on the people they have interacted with over the span of their careers or even a portion thereof. The author of this book, who began his career as a physicist and then chose to be a financial engineer, is thus a statistical outlier in this regard. His transparency has allowed the reader to gain insight not only into how it is to live, study, and work in academia, but also in the financial world. All personal life histories are subjected to random perturbations, to events and people that are unplanned and unexpected, but as this book clearly shows, with pertinacity, with determination, one can smooth out even the strongest of these perturbations, and trace out a world line that is personally satisfying and dignified.

A reader should not conclude from the title of the book that the author concentrates solely on his experiences as a "quant" on Wall Street. He also details his experiences as a graduate student at Columbia University and as such gives inspiring physics graduate students a look at life at a major research institution. For those who have been through graduate work in physics, his stories and anecdotes are very familiar, especially those that detail the personalities of some of physics professors which interestingly enough, seem to have a very small variance. It would be unfair to say that arrogance and envy are the predominant emotions among physics professors, since there has been no reliable scientific studies that would indicate this is the case, but there is such a plethora of rumors and innuendo to that conclusion that many graduate physics departments are not obtaining the students that they need. This is indeed a shame, given the inherent fascinations of both theoretical and applied physics that dissuaded young people will not get to experience.

There are more than just anecdotes in the book, for the author gives opinions on the nature of discovery in physics and the similarities and differences with discovery in computational and theoretical finance. Interestingly, he states that the discovery of physical laws was partly the result of what he calls "deep intuition" and also "pure thought." The author does not elaborate on what he means by these terms, no doubt because he does not want to engage in philosophical meanderings, but his claims would raise an eyebrow to those readers who have a strong background in the history of science. A reading of the history of discovery in physics will reveal a quite different story, namely that the present understanding and formulation of physical laws came about after many false leads and blind allies over centuries of effort. It would therefore be unfair to impute some magical sense of intuition or thought patterns to Newton, Maxwell, and Einstein. Their discoveries certainly came about as the result of "hard thinking" as the author believes, but they were also dependent on the observations, extrapolations, technological expertise, and failed hypotheses of many who came before them. Far from being step functions of history that made radical breaks with the past, these discoveries were instead an alternating sum of the work of many dedicated individuals, whose identities and institutional affiliations can be found out if one takes the time and effort.

Wall Street though was apparently impressed enough about the abilities of physicists to begin hiring them in the 1980's to do quantitative finance. Choosing physicists instead of mathematicians or engineers does make sense if one believes that physicists have both the "common sense" and mathematical expertise needed to build models of the financial markets and of various financial instruments, such as fixed income products and credit swaps. The participation of physicists in the field of financial engineering continues to this day, and it would be justified to believe that their hiring has been a wise choice, in spite of some of debacles widely reported in the press over the last two decades (most of the reporting being inaccurate and misleading if one examines the historical facts). The author does not want to call quantitative finance a "science" but he alludes to the fact that it has resulted in a few fields springing up in recent years, with "econophysics" being one of these.

The author's account of life at the physics department in Columbia in the 1960's is fascinating and has parallels in other departments throughout the United States, if not the entire world. The creativity and dynamism in these departments is to be contrasted with the envy and infighting, the latter of which can be extremely counterproductive to those students who experience it (and are afraid of speaking up against it). In particular the author spends a lot of time discussing the personality of T.D. Lee, a high-energy physicist who shared with Chen-Ning Yang a Nobel Prize in physics for their discovery of parity violation in the weak interaction. When reading the author's account, one is amazed by the immaturity and childishness exhibited by T.D. Lee, especially his attempts to humiliate invited seminar speakers, all with the intent it seems of gaining attention, and not to clarify scientifically the issues at hand. It would seem as though Lee was aware that the focus he obtained when winning the Nobel is short-lived, that glory is only fleeting, and he was going to take every step, no matter how irrational, to insure that he was kept under the bright lights of theatre. Even more shocking is to read that Yang and Lee actually split up and no longer communicated with each other a short time after receiving their Nobel. It would seem that the sharing of fame is an anathema to them. But left out of the author's discussion is any mention of how Yang and Lee arrived at their ideas. Did they arise solely because of discussions between the two of them, or did they arise from ruminations with colleagues or graduate students? And in his focus on T.D. Lee the author downplays his own intellectual status and importance relative to him. There is no question that T.D. Lee has done outstanding work, but could he have also done brilliant work in financial engineering of the type that the author and many others did? One could make a strong argument, based on both practical needs and intellectual ingenuity, that the contributions to quantitative finance that the author made are vastly more important than what T.D. Lee made to physics. Derivatives trading now amounts to over 200 trillion dollars, and the financial instruments that have been developed by the author and others have assisted the financial needs of hundreds of millions of people. The intellectual horsepower required, along with the needed background in frequently difficult and abtruse mathematics, certainly ranks quantitative finance as being one of the most challenging fields to be in, right up there with physics, and in many cases surpassing it.


(From quoting Lee Carlson, USA)

Target readers: Investment bankers, financial analysts, MBAs and other financial professionals.