Derman Models. Behaving. Badly.

Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life
1. Auflage 2011
ISBN: 978-1-119-94468-3
Verlag: John Wiley & Sons
Format: PDF
Kopierschutz: Adobe DRM (»Systemvoraussetzungen)

E-Book, Englisch, 240 Seiten, E-Book

Emanuel Derman was a quantitative analyst (Quant) at Goldman Sachs,one of the financial engineers whose mathematical models becamecrucial for Wall Street. The reliance investors put on suchquantitative analysis was catastrophic for the economy, setting offthe ongoing string of financial crises that began with the mortgagemarket in 2007 and continues through today. Here Derman looks atwhy people -- bankers in particular -- still put so much faith inthese models, and why it's a terrible mistake to do so.
Though financial models imitate the style of physics and employthe language of mathematics, ultimately they deal with humanbeings. There is a fundamental difference between the aims andpotential achievements of physics and those of finance. In physics,theories aim for a description of reality; in finance, at best,models can shoot only for a simplistic and very limitedapproximation to it. When we make a model involving human beings,we are trying to force the ugly stepsister's foot into Cinderella'spretty glass slipper. It doesn't fit without cutting off some ofthe essential parts. Physicists and economists have been tooenthusiastic to acknowledge the limits of their equations in thesphere of human behavior--which of course is what economics is allabout.
Models.Behaving.Badly includes a personal account ofDerman's childhood encounters with failed models--the oppressionsof apartheid and the utopia of the kibbutz. He describes hisexperience as a physicist on Wall Street, the models quantsgenerated, the benefits they brought and the problems, practicaland ethical, they caused. Derman takes a close look at what a modelis, and then highlights the differences between the successes ofmodeling in physics and its failures in economics. Describing thecollapse of the subprime mortgage CDO market in 2007, Derman urgesus to stop the naïve reliance on these models, and offerssuggestions for mending them. This is a fascinating, lyrical, andvery human look behind the curtain at the intersection betweenmathematics and human nature.

Autoren/Hrsg.

Derman, Emanuel

Inhaltsverzeichnis

I. MODELS
1. A Foolish Consistency 3
2. Metaphors, Models, and Theories 33
II. MODELS BEHAVING
3. The Absolute 73
4. The Sublime 107
III. MODELS BEHAVING BADLY
5. The Inadequate 139
6. Breaking the Cycle 189
Appendix: Escaping Bondage 201
Acknowledgments 205
Notes 207
Index 217

Über Autor(innen)

EMANUEL DERMAN is Head of Risk at Prisma Capital Partnersand a professor at Columbia University, where he directs theirprogram in financial engineering. He is the author of My Life AsA Quant, one of Business Week's top ten books of the year, inwhich he introduced the quant world to a wide audience.
He was born in South Africa but has lived most of his professionallife in Manhattan in New York City, where he has made contributionsto several fields. He started out as a theoretical physicist, doingresearch on unified theories of elementary particle interactions.At AT&T Bell Laboratories in the 1980s he developed programminglanguages for business modeling. From 1985 to 2002 he worked onWall Street, running quantitative strategies research groups infixed income, equities and risk management, and was appointed amanaging director at Goldman Sachs & Co. in 1997. The financialmodels he developed there, the Black-Derman-Toy interest rate modeland the Derman-Kani local volatility model, have become widely usedindustry standards.
In his 1996 article Model Risk Derman pointed out thedangers that inevitably accompany the use of models, a theme hedeveloped in My Life as a Quant. Among his many awards andhonors, he was named the SunGard/IAFE Financial Engineer of theYear in 2000. He has a PhD in theoretical physics from ColumbiaUniversity and is the author of numerous articles in elementaryparticle physics, computer science, and finance.