Emanuel Derman

There are second acts, but …

Emanuel Derman
Jun 30, 2011 13:31 UTC

… not all of them are totally convincing.

I am perpetually amazed at the way people can/are allowed to reinvent themselves. When I was growing up you thought you had to figure out at age 16 what you were going to do for the rest of your life. When you went to college you had to decide between medicine, arts, science, engineering, etc: either/or. The nice thing about America, and the rest of the world is slowly copying it, is that you don’t have to stick with something you started out on. There’s no “you can’t get there from here.” There are second and even third acts.

Still, some second acts are harder to understand when they seem in conflict with the first.

    I understand that Mikhail Khodorkovsky is unjustly imprisoned, and I despise totalitarian arbitrary corrupt governments, and I hope they let him go, but I don’t think he got where he was at before they took it away from him by his good deeds, so I don’t want to regard him as a fount of wisdom. I’m sorry for him, but sometimes I feel that if you live by the sword etc. Rationally or not, I sometimes feel the same about Soros. If tennis were markets, Ilie Nastase would be writing op-eds about the sad state of American sportsmanship. I know St. Augustine turned himself around, but to me he’s the exception that proves the rule. John McEnroe, au contraire, is someone who successfully changed his image — I find I can forget or at least ignore his bratty behavior in his prime because he has a sense of humor and hasn’t turned 180 degrees. Connors, maybe, too. A sense of humor and self-deprecation can diminish many sins.

“A foolish consistency is the hobgoblin of little minds” is a saying I heard soon after I came to New York, and I liked it immediately, knowing I was going to be guilty of it.

Most people want consistency in others while exercising spontaneity in their own lives. They declare other people’s misbehavior, seen from the outside, as being wilfulness, while in their own case they understand their misbehavior, experienced from the inside, as having an explanation they can understand.  Spinoza,who thought about this stuff,  wrote that Will and Understanding are one and the same, by which I believe he means that they are simply the inside and the outside of the same thing.

Ubiquitous derivatives

Emanuel Derman
Jun 28, 2011 13:54 UTC

Having spent a large part of my life working on options and volatility, I tend to see options everywhere. In my forthcoming book I write about Spinoza, a deep theorizer (and not a  modeler), who regarded all emotions as derivatives of the underliers pain, pleasure and desire, just as financial options are derivatives of the underliers of equity, fixed income and credit.

Spinoza spelled this the dependency of the higher order emotions on their underliers. Here below is a color diagram that illustrates his theory. I parsed all his definitions and converted them into this chart. It’s similar to what people do for setting up structured products in their trading systems. I originally drew it in color:

My publisher Free Press, suitably frugal in these hard times for publishers, won’t print it in color and so I had to convert it to b&w, also reproduced below:

Models behaving badly

Emanuel Derman
Jun 25, 2011 14:58 UTC

Hello, I must be going
For a good many years I have been blogging at http://www.wilmott.com/blogs/eman/, 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.