Physics Science

The book commences with a history of physics that is reminiscent of “The Elegant Universe” by Brian Greene. From Newton to Maxwell to Einstein and beyond, Derman discovers the great theories of yesterday and finds himself in the middle of a seven year marathon to a PhD and the launch of his academic career.

The struggle for intellectual purity and the distain for applied work abound in Derman’s academic environment and the pressures of achieving greatness are pronounced in a place where genius is a commodity.

In a leap of faith, Derman decides to return to New York to spend more time with his family and to surrender to what he considered a less dignified job.

Lost in the Dilbert-esque hierarchies of the Bell Labs, Derman discovers the joy of programming, while submerged in office politics. After numerous attempts of beating the currents, Derman finally reaches the shores of Wall Street and is relieved to find an avant-garde environment, where meritocracy is no longer a foreign word.

The initial period of awakening takes place at Goldman Sachs, where he is mentored by Fischer Black, one of the great financial practitioners of our time. Derman is immediately impressed by Black’s pragmatic style and intuitive quest for simplicity.

Black’s influence becomes evident in the lucid and accessible description of the famous Black-Derman-Toy interest rate model and the subsequent elaborations on local volatility models that are at the foundation of more exotic instruments (which cannot be accurately priced using the overly simplistic implied volatility provided by the Black-Scholes-Merton model).

The author discusses the process of deriving original models and emphasizes that the elegant stochastic calculus derivations of these models are deceptively simple and make it difficult for students to fully appreciate the amount of effort that went into developing the initial embodiments — what seems obvious now was once heavily debated.

Armed with the recently acquired knowledge, Derman accepts a new challenge at Salomon Brothers, doubling his compensation in the process. Unfortunately, the unhealthy competitiveness at Salomon forces him to reconsider quickly and he returns to Goldman after an undeserved layoff. The roundtrip allows Derman to develop an appreciation for the collaborative environment at Goldman.

Throughout the book, the interactions with family members, professors, bosses, traders, programmers and sales people are both amusing and enlightening. Derman succeeds in blending physics, finance, and human emotion in this masterful and entertaining autobiography.

Rating: 5 / 5

This book is not for those interested in learning quantitative finance. Rather, it is a memoir written by a physicist who came to finance relatively late in life.

There is some poignancy in Derman’s transformation from theoretical physicist bent on a life in academia (where he hoped to make groundbreaking discoveries about elementary particles) to mid-level employee of one of the world’s great financial institutions (Goldman Sachs). Although he was undoubtedly well paid for the skills he brought to the financial markets, Derman’s story is tinged with sadness about the loss of an ideal.

The book is particularly valuable for the insights it provides about the inner workings of a major investment bank, and in particular about the role played by the “quants” in the development of new products and trading strategies. It also provides some perspective on the development of quantitative finance as a practical discipline; and it makes clear that quantitative skills, while important to a successful career in a major financial institution, generally take a back seat to salesmanship, practical trading skills, and internal politicking.

Those with a liking for pure mathematics will have to grin and bear Derman’s critical comments about mathematical rigor and economic theory.

Rating: 5 / 5

Quants, formerly called rocket scientists in the days when traders thought rocketry was the deepest and hardest science, are the new engineers of the financial world. I suppose the trader is the architect and thus a quant’s job is to evaluate the trader’s design for reliability, plausibility, and safety.

In many ways “My Life as a Quant” is a deceptively ho-hum book. Derman does whine a little and his life is somewhat ordinary, at least not that much more special than yours or mine. But this can endear him to readers as Derman is also humble and self-critical to a fault. Further, the book stands out of the crowd on two points: first, it is a timely account of the beginnings of financial engineering; second, Derman writes surprisingly graceful and elegant prose, worth reading even if you’re not interested in finance.

While Derman trained and practiced as a professional physicist for many years before entering finance, he reminds his readers that financial analysis is not a precise science the way physics is. It is more of an art. Physicists, writes Derman, are reductionists, meaning they simplify the world to astonishingly successful models describing its behaviour. Quants on the other hand must never forget that all financial models are wrong and naive. The questions for them, writes Derman, are how wrong and how naive. The problems of finance are the problems of modeling human behaviour and so should not be reduced too far. In this light he his especially critical of VaR (Value-at-Risk) a single figure measure of the riskiness of a portfolio.

On personal matters, Derman shies away from invading his family’s privacy. He mentions his relatives, his wife and children without describing them much. On the other hand he does discuss his personal relationship with many physicists and financial professionals; his account of his famous late colleague Fischer Black is particularly interesting. He also candidly discusses moments when he wasn’t as good a person as he feels he ought to have been. These touches make him human and approachable and can offer lessons at least as important as the career advice he gives.

Vincent Poirier, Tokyo

Rating: 4 / 5