Emanuel Derman

Ten Principles for Recapitalizing Capitalism

Emanuel Derman
Nov 22, 2011 16:29 UTC
Everyone is a grownup and no one is more grown up than anyone else. Your words are as valuable as money. A few things are illegal; the rest is up to you. If you want the benefits of taking risk, you must also suffer the disadvantages. Printing or throwing money cannot solve political or spiritual problems. It can only postpone them. Don’t treat only some people’s insolvency as illiquidity. Optimization in human affairs is an illusion. You always need more capital than you think. Corporations are neither governments nor people. Provide golden parachutes for no one; provide tin parachutes for everyone. “If you believe that capitalism is a system in which money matters more than freedom, you are doomed when people who don’t believe in freedom attack using money.”*


* Quote courtesy of Edward Lucas’ book The New Cold War: Putin’s Russia and the Threat to the West.

Volker Schlöndorff and Europe

Emanuel Derman
Nov 18, 2011 12:51 UTC

I like many of the movies of the German director Volker Schlöndorff, whose first film I saw as a grad student a long time. It was called Young Törless and was an impressive adaptation of a book by Robert Musil, catching the sadness and confusion of adolescence and longing, and its attraction. Looking at his filmography, I realize now that what he’s really good at is movies that come from good books: The Tin Drum, for example, and Swann in Love, which I took to watching for inspiration and momentum when I mired down in the early part of Proust vol 1. It got me through to the end of that volume. As you can see, he’s got a very European sensibility.

I mention this because the other night I rented Voyager,  the English marketing name for a 1991 movie that in German was called Homo Faber, from a 1957 book of that title by Max Frisch. The movie stars an oh-so-young-and-beautiful Julie Delpy, with Sam Shepard as cold Mr Faber, and in a smaller role, Barbara Sukowa. It’s a strange and implausible story of coincidence and destiny, but it hangs together, ending in Athens in Greek tragedic fashion. I won’t give the ending away, which I knew in advance from the book.

It’s set in 1957 and beautifully filmed. The story is ultimately melodramatic, but it confronts what could be melodrama so flatly and matter-of-factly that it moves along like a fable and doesn’t make one question the plausibility, part fable but somehow real.

Good to go

Emanuel Derman
Nov 10, 2011 15:50 UTC

Everyone avers that honesty, ethics, morality, art, literature, science, etc. are good, but if you look at the way people behave most of the time, their actions give the lie to their beliefs.

The difficulty is essential: we struggle against each other, to compete, to survive, to exercise our egos in bursts of short term volatility, to shout Me Me Me or Mine Mine Mine, and each Me Me Me refers to a different Me. But we all know that those Me’s are made out of the same matter, and are progeny of the same human and even animal antecedents. Our brother or sisterhood isn’t a metaphor, it’s a fact.

The tension of society comes from the antagonism between each individual’s strong sense of a unique personal self and the fact that everyone has their own one.

Margin calls

Emanuel Derman
Nov 3, 2011 14:11 UTC

Two movies this week, one new — “Margin Call” — and one old a second time — Alan Pakula’s “Klute.” Both didn’t live up to what I expected or recalled.

“Margin Call” got off to a phenomenal start. I’ve never seen any movie capture the feeling of being at a large U.S. investment bank better: the swearing, the repeated expletives, the English traders sprinkled among the Americans, the let’s- fire people-and-talk-about-them-no-more days, the perpetual fascination with how much money other people are making. But then it went on a bit too long and got a little too improbable. A friend of mine claimed it wasn’t improbable at all, just an accelerated one-day version of what happened with mortgages over  six months, and that may be true, but it lost my interest towards the end. Nevertheless, a very accurate portrayal of the trappings of a culture.

I also watched “Klute” from Netflix. Good to pass the time, but less convincing and cornier than I remembered. Very dramatic music but not that much genuine tension. And Jane Fonda, the prostitute turning tricks who is ultimately won over by someone’s care? She is great at playing a tough woman, but very unconvincing as someone with a meltable  heart of gold. The only way you know that she’s been touched by Klute’s care is that she tells her shrink about how touched she is, repeatedly. But she doesn’t look or sound touched at all.

Intuition, initial and final

Emanuel Derman
Oct 28, 2011 13:28 UTC

I had dinner with Kahneman once a few months ago, and have now been dipping into his deep and thoughtful book Thinking, Fast and Slow.

Though I haven’t read all of it, I begin to realize that though he and I both sometimes use the word intuition, we are talking about different qualities.

For Kahneman, I think, intuition is fast thinking, snap judgements,  attractive because they avoid hard rational thinking of the second kind. As a result, it’s riddled with biases and mistakes which are interesting to psychologists.

OS Moi

Emanuel Derman
Oct 27, 2011 17:55 UTC

Someone directed me to this remark by Larry Page: “DNA is about 600 megabytes compressed making it smaller than any modern operating system like Linux or Windows.”

I’m a firm believer in logic. Therefore Either my programmer is much better than the 1000s of people who created Windows; or My hardware is much better than Intel’s; or Both of the above.

Linux, I’m not so sure about.

Maybe markets need more principles and less regulation

Emanuel Derman
Oct 21, 2011 13:30 UTC

What follows are some remarks I intend to make on Friday Oct 21 2011 at a panel on global risk organized by GARP and the Federal Reserve Bank of New York. Introduction

I have the luxury of not being a regulator, which I think is a very difficult job. I used to be a physicist, and Nature doesn’t care about regulations; she cares about principles. (If you tried to regulate the motions of the planets you would have a very hard time: turn here, Earth, not too fast, spin more slowly, watch out for the moon, etc. Instead, a few principles of Newton’s take care of everything.) Therefore I’m more partial to principles than regulations, and so I’m going to take the luxury of talking about principles of modeling and the principles of capitalism that, if respected, might mitigate the need for so many regulations.

What I say is based on direct experience of building models in physics and also building and using models at Goldman and Salomon on various derivatives desks, and then at Goldman in Firmwide Risk.

The Tides on the Ides at Times Square

Emanuel Derman
Oct 17, 2011 14:43 UTC
The Tides

The sun’s gravity pulls at all parts of the planet, and the bits of earth closer to the sun get pulled harder than the bits farther away.

This gradient in the force on the earth tries to tear it apart, atom from atom, but as long as the earth is far from the sun the gradient is not too steep, and the stronger mutual attraction between bits of the earth keeps it intact.

The moon causes a similar gradient that produces the tides. Water on earth nearer the moon bulges towards it as the earth rotates; the center of the earth is pulled towards the moon too, and the water on the opposite side remains a little behind. So you get two tides a day. Spring tides occur when the moon and sun line up and act in unison on the earth.

“A bang or two”

Emanuel Derman
Oct 14, 2011 14:55 UTC

This is an extended version of a review I wrote on Amazon for Lucky Bruce: A Memoir (Hardcover) Terrifically Charming, Funny, Insightful, Interesting Mix of Braggadocio and Self-Deprecation

Many years ago I read “A Mother’s Kisses” and laughed out loud. The only other books I ever did that with were Kingsley Amis’s “Lucky Jim” and Donleavy’s “The Unexpurgated Code: A Complete Manual of Survival and Manners.”

The latter is devilishly funny. “Lucky Jim” is funny and rebellious but also perceptive. “A Mother’s Kisses” is funny too, but much more insightful about adolescence, about trying to grow up and break away from parental ties and from a fascinating womanly but ultimately suffocating mother whom he’s loyal to.

Why I’m right

Emanuel Derman
Oct 12, 2011 15:31 UTC

This article about Raymond Tallis, whom I’ve never heard of, strikes a chord with me because it’s related to a post I wrote recently on this blog, as follows:

In an article on nightmares in the WSJ of Oct 4, there was the following paragraph:

Modern psychiatrists, led by Allan Hobson of Harvard Medical School, believe dreams are electrical pulses from the brain stem randomly bombarding the center of the brain where visual memories are stored, creating kaleidoscopes of images around which the brain concocts stories.