Opinion

Emanuel Derman

Tail risk, the police, and grad school

Emanuel Derman
Jul 25, 2012 17:53 UTC

This past Saturday morning I walked past the Loews movie house on 68th and Broadway and saw, stationed outside, a NYC police car with sirens flashing, and standing in front of it, with his back to the car and with a holstered gun, a cop, his eye on the movie house … which was, I then realized, showing The Dark Knight.

My first instinct was: Isn’t this ridiculous? Someone crazy tragically shoots up one movie house and now they’re going to guard all movie houses showing that movie. This isn’t like political attacks on synagogues on Yom Kippur, which after September 11 led to police guarding synagogues.

A little later I saw the same situation at the Loews on 83rd Street.

But I’ve changed my mind. What the police were doing was practicing tail risk elimination.

At Goldman 12 years ago, the risk committee didn’t rely exclusively on VaR and poor probability analysis to estimate their risk. Though they estimated their VaR, they also considered disaster scenarios that were dangerous, and then took positions that ensured that their losses wouldn’t be unbearable if those events (a repeat of the Russian default crisis, a repeat of the ’87 crash, etc) occurred, no matter what their probabilities.

And that’s what the police were doing. Irrespective of the small odds, they were trying to cover themselves for a repeat. And that’s the best their imagination could do.

An excerpt from Prost, a work in progress

Emanuel Derman
Jul 13, 2012 16:08 UTC

All our fashions, in those days, were imported from America. In the summer of 1956, when I was eleven, the hot items were fluorescent nylon socks in lime green or neon pink that shone in the dark as we strolled up and down the beachfront at night. These beachfront strolls were a local version of what my Yiddish-speaking parents called shpatzieren, the pre-WWII Mittel-European slow promenading up and down the main street on a Saturday or Sunday summer afternoon, men in white suits walking arm-in-arm with their parasol-carrying wives, the men doffing their hats to the opposing women on someone else’s arm, the women smiling back in response. Shop on Main Street.

That’s how we kids strolled on the elevated Promenade in Muizenberg and on the strip of Beach Road in Sea Point in those Fifties days. Muizenberg, then but now no longer, was a South African Brighton or Blackpool, a copycat English-style summer resort for the masses. At lunchtime day-tripping crowds picnicked on the Muizenberg lawns; before and after they sat jammed together under beach umbrellas on the narrow stretch of beach between the raised cement sidewalk and the sea. The beach was divided in two by a line of brightly colored (red or yellow or blue or green) wooden beach bungalows that ran parallel to the water. Families rented a semidetached half of a bungalow for the season; you could lock and store beach equipment in them, and change in and out of your swimsuit in privacy, though friends I knew peeked through holes in the dividing wall of their parents’ bungalow to watch girls in the adjacent half changing out of their costumes, as we called swimsuits. Muizenberg had a Milk Bar where you could twirl on raised leather bar seats and order milk shakes, and next to it a copycat English-style penny arcade where you could play mechanical games for a penny or two. Inside the arcade was a little studio where you could pay to record your voice on a shellac-covered tin disk, as did Pinky in Brighton Beach. I still have one my father recorded with me, where you can hear him, heavily Yiddish-accented, prompting my four-year-old self at 78 rpm with the words I forgot in Mother Goose nursery rhymes. At the entrance to the long cement Promenade was a ten-foot-high hexagonal windowless cement kiosk that housed a camera obscura whose lens, situated at the top of the kiosk, on a sunny day projected, onto a horizontal table at the center of the kiosk, moving images of the people outside walking (shpatziering) up and down “The Prom.” It was magical.

Sea Point, in contrast to Blackpoolish Muizenberg, was Nice or Venice. The beachfront was dotted with cafés, Italian-owned pizzerias, apartment blocks with French- or Italian-Riviera names (Marseilles, San Remo). You could buy gelatos, frullatos, espressos. All of this exotic foreigness had sprung up during the postwar boom in which Italy became synonymous with sophisticated food, movies and clothes.

The Powerful League of Missing Persons

Emanuel Derman
Jul 3, 2012 02:28 UTC

Sometimes, quite often, Absence is so powerful that it’s a Presence of its own.

I wrote a little about this in Models.Behaving.Badly. The positron was regarded as the absence of an electron in early quantum field theory, but turned out to be as real as anything. Pain, an apparently negative thing, is also real, perhaps more so than Joy, as described in Yehuda Amichai’s poem on The Precision of Pain. I once read a sequel to Robert Pirsig’s Zen and the Art of Motorcycle Maintenance, in which he claimed that, even after someone dear to him died, he was persuaded that they were still there by their presence in his thoughts and life.

I think of this again because there are some people I see very little, some even not at all, and yet … they are almost constantly with me, in my thoughts and affecting my actions. I don’t even mean “with me” in a subconscious way, but as a real force and presence, despite being almost out of contact.

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