Models behaving badly

June 25, 2011

Hello, I must be going
For a good many years I have been blogging at, a quantitative finance website run by Paul Wilmott, with whom I wrote The Financial Modelers’ Manifesto, a sort of ethical guide for financial modelers triggered by the Great Financial Crisis and inspired by the Communist  Manifesto and the Hippocratic oath. Then recently Jim Ledbetter and Felix Salmon invited me to blog on Reuters, i.e. here, where I will be continuing, and so, here is my first Reuters blog.

I also write on Twitter @emanuelderman

A bit about myself and my interests:

I grew up in South Africa, came to the US to study physics, got a PhD from Columbia in 1973, worked in academia doing theoretical physics for seven years, worked at Bell Labs for five, worked at Goldman Sachs for about 17, where I ran several quant groups and was eventually head of quantitative risk management. I left Goldman in 2002 and have been a professor at Columbia University since then, where I run the financial engineering program, and am also  a principal at Prisma Capital Partners, where I co-head risk management.

Needless to say, but important to stress, this blog and anything in it is entirely mine, and has nothing to do with Columbia or Prisma.

In 2004 I wrote a book called My Life as a Quant which introduced the quant world to a wider public. I also have a website at

Being labeled a quant used to be a pejorative in the geeky sense, but now  it’s become trendier, but also occasionally pejorative in a harsher way. Ben Zimmer in the NY Times wrote an article about quants here and the NY Times Science section had an article here. But quant means something different now from what it used to, and many people who now call themselves quants wouldn’t have qualified as quants in the old days, something I will write about later.

is the name of a new book of mine, to be published by Free Press on Oct 25, 2011 in the U.S. and Canada, and by Wiley  in the UK. It’s prelisted on Amazon but not really available yet — I’m still waiting to see a cover design from the publisher. Its full title is: Models.Behaving.Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life.

It’s about metaphors and analogies, about the nature of modeling and theorizing, the difference between them,  why financial models will intrinsically and always at best be very limited approximations to reality, and what to do as a consequence.

What I’m interested in
Though I started blogging as a quantitative financier, I found myself writing about many other things, which I intend to do here too. If you want to get an idea, you can look at my old blog site at

I’m interested in

  • Models, and in particular models behaving badly. The first chapter of my forthcoming book is called A Foolish Consistency and is about models behaving badly in personal and political  life — I grew up under apartheid.
  • Finance and financial theory, and what it can tell you about the wider world, since many financial models deal with volatility, omnipresent in human life. I was going to call my current book Time Decay rather than Models.Behaving.Badly, and wrote a novella to illustrate the idea of Time Decay in human life, but that will have to wait for another attempt.
  • Ethics, particularly in the financial world.
  • Philosophy, but only as a guide to living.
  • Literature. One of my favorite authors is Nabokov; another is Flaubert.

Some topics I’ll write about eventually

  • Options models and how to understand them
  • Finance
  • Financial engineering, computational finance, etc
  • The volatility smile
  • Physics sometimes
  • The benefits of shallowness vs deepness in financial modeling
  • Sophisticated vulgarity, an approach I like to financial modeling etc
  • Plus random things I notice that interest me …
  • More later.


    We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

    Greetings! I hope you are as fun a read as Felix is, I’ll be watching.


    Posted by REDruin | Report as abusive

    Felix’s middle name is fun. I’m not sure I’m up to his level but I’ll try. Thanks.

    Posted by EmanuelDerman | Report as abusive

    Great to see you here. Lekker and duidelik. May we call you Tom?

    If you’re taking suggestions, what I’d really like to know is how to dismantle the world of finance. It just doesn’t seem to be very useful for many people. Do you think it carries within itself the germ of its own destruction, and we needn’t think about it too much?

    Posted by Uncle_Billy | Report as abusive

    I can find a comments rss, but not an articles one. Setup, or am I being dim?

    Posted by RichardWatson | Report as abusive

    As far as I can tell, Reuters is still figuring out how to set up an RSS for the blog.

    Re dismantling the world of finance: capitalism has a fierce anarchistic energy that flows in all directions and fills all vacua. Hard to dismantle.

    Posted by EmanuelDerman | Report as abusive

    Nope, you’re not being dim. It takes a while to get set up with an RSS, I’m told. Soon, I hope.

    I don’t think the world of finance can be dismantled. Capitalism has a wild anarchic energy that is both creative and destructive, seeking outlets anywhere. And when it gets destructive, it takes many things down with it. One has to somehow tame it but not eviscerate it.

    Posted by EmanuelDerman | Report as abusive

    Putting ‘ ’ into my RSS reader did the trick.

    I’ve been a long time reader of your old blog.

    Nice to be able to say thank you for the interesting posts in the past :)

    Posted by mmport80 | Report as abusive

    @RichardWatson & EmanuelDerman – if you simply plug the URL of the blog,, into the “add subscription” box on Google Reader, the blog (in full feed glory) will be picked up!

    not sure about any of the other readers out there…

    Posted by GregHao | Report as abusive

    Thanks for the RSS advice, and the encouragament. I will try this myself.

    Posted by EmanuelDerman | Report as abusive

    […] lead to disaster on Wall Street and in life.  You can read a bit about Derman (in his own words) here and here; his occasional blog is here. He is currently a professor at Columbia University, […]

    Posted by Models.Behaving.Badly | Above the Market | Report as abusive