Emanuel Derman

The perils of pragmamorphism

Emanuel Derman
Sep 23, 2011 14:57 UTC

Having been a scientist, one of my major pet peeves is the naïve use of science. Let me give you several examples.

The influential biologist and evangelistic atheist Richard Dawkins wrote in the Los Angeles Times several years ago about what he called the scientific “vandalism” involved in hanging Saddam Hussein:

“Hussein’s mind would have been a unique resource for historical, political and psychological research, a resource that is now forever unavailable to scholars. … Psychologists, struggling to understand how an individual human being could be so evil … would give their eye teeth for such a rich research subject. Political scientists … have now lost key evidence forever.”

Elsewhere, Dawkins has also opined on the pernicious effect of fairy tales on children:

“So many of the stories I read allowed the possibility of frogs turning into princes and I’m not sure whether that has a sort of insidious affect on rationality.”

Every street’s a boulevard in old New York

Emanuel Derman
Sep 14, 2011 14:00 UTC

On my way to New York from South Africa in the Sixties, I stopped in Israel. It was midsummer, and in Ramat Gan where I stayed for a few weeks, people sat out at night on their breezeless balconies and played cards till late. Food vendors sold sunflower seeds on the street; people popped them into their mouths and then split them with their teeth, swallowed the core and spat out the shell through the bus window in one continuous mouth-teeth-tongue movement, no hands. Streets, apartment and balconies merged into a kind of shared outdoorsiness. I’d never seen it before and I liked it.

When I came to New York a few weeks later, I was taken aback. The ride from JFK to Manhattan was ugly and bumpy (though probably still better than today). It was globally dramatic (the skyline) but locally dispiriting (the disrepair in front of you). New York was nice from far but far from nice. I lived in a dormitory on the Upper West Side at the edge of Harlem. There were no telephones in rooms and no AC. The corridors looked prison-like,  green lower half and white upper half, and the guards at the entrances confirmed that view. I was UNimpressed.

The first thing that struck me after I got over my shock at being 10,000 miles from everything I knew was how foreign everyone was. New York was a polyglot city of immigrants. People around me spoke Spanish and Yiddish and Italian and German. Middle-aged men and women with concentration camp numbers on their arms ran local luncheonettes. The deli store run by immigrants nearby on Broadway and 123rd Street sold chocolate-covered ants. The pizza store we refueled at late at night right next to it was run by real Italian-speaking Italians, an enormously large Mama on a metal folding chair scowling at her dapper grey-haired flour-dusted husband who combed his hair as he eyed the girls. Puerto Ricans sat out on their stoops till late at night smoking and talking. Though it didn’t look like it, New York reminded me of the Tel Aviv I’d just left, a city of immigrants who lived out on a street that encompassed the entire city. New York was a Mediterranean or Caribbean town, the only American one like that, at least at that time.

Dystopic finance

Emanuel Derman
Sep 8, 2011 11:54 UTC

For a couple of years now I’ve had a bad feeling about the field of finance. Though I often inveighed against the mechanical use of models, I didn’t damn the entire endeavor. I still don’t, but the other day, talking to a colleague who was much younger than me, I discovered that we had somewhat similar sentiments. Mine are summarized as follows. I hope it’s just a mood.

Neoclassical finance, the entire structure that includes the efficient market model, Brownian motion, stochastic calculus, the capital asset pricing model, and of course Black-Scholes-Merton, is a beautiful comprehensive far-reaching discipline. It describes a risky system and its consequences elegantly and sparely, and provides lots of insight. I like it. Unfortunately, the real world is more complicated.

One of the responses to that complexity is behavioral finance. This started out with prospect theory as an attempt to provide a comprehensive new foundation for finance and economics. It hasn’t turned out that way. That part of behavioral finance is by and large ignored. Instead, its proponents have streamed off into two directions. The first is neuro/psycho finance, filled with papers discussing brain scans of traders and their risk appetite, which isn’t really finance at all, but belongs (if it belongs anywhere outside of grant applications) in a psychology department. The second is the study of how people react to choice, a collection of mildly interesting statistical studies of CEOs and investors that mostly confirm what everyone knew before, and whose results are most useful in justifying various paternalistic social policies. None of it adds up to a comprehensive discipline; it seems to be mostly strategies for writing papers.

God’s 11 principles

Emanuel Derman
Sep 8, 2011 11:51 UTC

If God had only had a committee of business writers to help him, I think he could have done a better job: Single Author The Committee Version 1 I am the Lord your God who brought you out of the land of Egypt, out of the house of bondage. You shall have no other gods before me. 

  Our assets are our people, our culture, and our Lord, who motivated us to leave Egypt with a determination that has become our ultimate hallmark. Experience shows that if we serve the Lord well, our own success will follow. 2 You shall not make unto you any graven image, or any likeness of any thing that is in heaven above, or that is in the earth beneath, or that is in the water under the earth. We make an unusual effort to avoid serving anyone else but the Lord.
The threat of severe punishment unto the third and fourth generation is intended to align our interests with those of the Lord.  

Physicists & economists, influence & responsibility

Emanuel Derman
Sep 2, 2011 17:01 UTC

I grew up in a post-WWII world where, temporarily, because of their capacity to create devices that wreak destruction, physicists had lots of influence in government. Think Einstein, Oppenheimer, Teller. By the time I went to graduate school at Columbia, the U.S. was involved in Vietnam, and a new bunch of much younger physicists were active in JASON, a Government advisory group. There were many protests against JASON at Columbia in the Sixties, as a result of mild-mannered physicists writing reports with titles (I recall)  like “Interdiction of Trucks By Night,” apparently to do with bombing the Ho Chi Minh Trail. Recently someone claimed that JASON stood for “Junior Achiever, Somewhat Older Now” which captured the hubris of scientists at the time. Influence and power is seductive.

Those days are over. The Cold War is faded, and the Superconducting Collider is dead.  No one cares too much about physicists any more, and won’t, unless the string theorists can come up with a doomsday weapon. (Actually, there’s a 2005 Herman Wouk novel about the political consequences of a Higgs boson gap between the U.S. and China.)

Physicists had only  indirect political  influence; their ability to accurately harness nature’s powers via pure science and accurate engineering based on that science gave them power over presidents, and made people think they might be smart about other things too. Biologists are the real 21st Century physicists in that sense, and, like them, in the long run have the larger influence on the future. As Feynman wrote about Maxwell, From a long view of the history of mankind — seen from, say, ten thousand years from now, there can be little doubt that the most significant event of the 19th century will be judged as Maxwell’s discovery of the laws of electrodynamics. The American Civil War will pale into provincial insignificance in comparison with this important scientific event of the same decade.” There are biologists like Darwin and Watson and Crick for whom the same is true.

A serious question

Emanuel Derman
Sep 1, 2011 15:13 UTC

Capitalism depends on lending and borrowing, and hence on banks. In that sense banks are a utility, like Water Works or Electric Company.

Utilities have to be protected from collapse.

Banks borrow from depositors and have to earn a spread by lending or investing.

How do you set a sensible limit, individually or as a group, on the activities borrowers can lend to or invest in, so as to avoid future economy-shattering disasters?

I don’t think the answer should involve advanced statistics or mathematics.