Emanuel Derman's Blog

RSS Feed to Reuters Blog

Fri, 01 Jul 2011 16:02:00 --0100

I've been told tht Putting ?http://blogs.reuters.com/emanuelderman/ ? into an RSS reader did the trick.

RSS to Reuters

Sun, 26 Jun 2011 15:22:00 --0100

I'm not quite certain how you set up an RSS feed to the Reuters blog, but once I know I will post it on the blog

Hello I Must Be Going ?

Sun, 26 Jun 2011 14:38:00 --0100

This is likely my last blog post at wilmott.com. I'd be glad if you continued reading me http://blogs.reuters.com/emanuelderman. ------- For a good many years I have been blogging at http://www.wilmott.com/blogs/eman/. Paul, a friend as well as a colleague with whom I wrote The Financial Modelers' Manifesto, and someone whose taste in finance I admire, invited me to blog there and I probably wouldn't have done it if it hadn't been him. I think I'm one of the few really regular bloggers there though, and recently Jim Ledbetter and Felix Salmon invited me to blog on Reuters, here and I decided to switch. I also write on Twitter @emanuelderman What follows, for continuity's sake is roughly the contents of my first blog on Reuters, who use Wordpress which allows a little more format flexibility. A bit about myself and my interests: Myself 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 www.ederman.com 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. Models.Behaving.Badly is the name of a new book of mine, to be published by Free Press on Oct 25 2011 in the US 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. It's 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 www.wilmott.com/blogs/eman. 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 ? Spinoza I like Spinoza, a deep theorizer (not a modeler) and part of my book is about him too. Spinoza regarded all emotions as derivatives of pain, pleasure and desire, just as all options are derivatives of equity, fixed income and credit. Here above is a part of a diagram that illustrates Spinoza's theory of emotions. I originally drew it in color but Free Press, suitably frugal in these hard times, won't print it in color and so I had to convert it to b&w, also reproduced below. That was quite a job, because in b&w you have to use shape and font to convey similarity and dissimilarity that can be more easily conveyed with color. More later ? at http://blogs.reuters.com/emanuelderman

Style Drift: Tenure as an Infinite Lockup

Wed, 22 Jun 2011 14:08:00 --0100

This is a sample from a recent newsletter of a listing of bunch of papers in behavioral finance:

Conditional Cooperation: Evidence for the Role of Self-Control Peter Martinsson, University of Gothenburg - Department of Economics Kristian Ove R. Myrseth, ESMT European School of Management and Technology Conny E. Wollbrant, Göteborg University - School of Business, Economics and Law Willpower and the Optimal Control of Visceral Urges Emre Ozdenoren, London Business School, University of Michigan at Ann Arbor - Department of Economics, Centre for Economic Policy Research (CEPR) Stephen W. Salant, University of Michigan, Resources for the Future Dan Silverman, University of Michigan at Ann Arbor - Economics Department, National Bureau of Economic Research (NBER) How Much can Taxation Alleviate Temptation and Self-Control Problems? Per L. Krusell, Princeton University - Department of Economics, Stockholm University - Institute for International Economic Studies (IIES), Centre for Economic Policy Research (CEPR) Burhanettin Kuruscu, University of Toronto - Department of Economics Anthony A. Smith, Yale University - Cowles Foundation Demand for Self Control: A Model of Consumer Response to Programs and Products that Moderate Consumption Nathan Berg, University of Texas at Dallas - School of Economic, Political and Policy Sciences Jeong-Yoo Kim, Kyung Hee University - Department of Economics Risk, Delay, and Convex Self-Control Costs Drew Fudenberg, Harvard University - Department of Economics David K. Levine, Washington University in St. Louis Consumer Spending Self-Control Effectiveness and Outcome Elaboration Prompts Kelly Haws, Texas A&M University William O. Bearden, affiliation not provided to SSRN Gergana Y. Nenkov, Boston College - Carroll School of Management Grapes of Wrath: The Angry Effects of Self Control David Gal, Northwestern University - Kellogg School of Management Wendy Liu, UCSD Rady School of Management Self-Regulation Through Goal Setting Alexander K. Koch, University of Aarhus - School of Economics and Management, Institute for the Study of Labor (IZA) Julia Nafziger, affiliation not provided to SSRN Endogenous Preferences, Self-Control, and Dynamic Contract Design Wei Zhang, Northern Illinois University

It's amazing where business schools have gone with behavioral "finance". Is this stuff seriously related to business, and is it useful? If the business school were a hedge fund you hired to manage your money, and they did something analogous, I think this would count as style drift, and you would redeem your investment. Can hedge funds get tenure? It's kind of an infinite lockup, or the ability to gate forever.

Strange Fables: 1. A Recursive Story

Tue, 21 Jun 2011 21:00:00 --0100

Once upon a time a man had a small daughter that he was crazy about. Everything she did seemed like a mark of genius. Her vocabulary grew by leaps and bounds; she had beautiful blond hair; her drawings were Matisses and her piano playing, even though she was but two years old, was Mozartian, or so it seemed. Everyone said she was wonderful and he was overwhelmingly proud of her. No other child seemed comparable and he laughed inwardly when people told him of their children's smart sayings, and even resented them, because he knew his daughter was much much better. There was no one like her. Eventually she grew up and she was still wonderful. Then she married, and in no time had a daughter of her own. And when she told him how wonderful and clever her daughter was, he resented her for comparing her daughter to his.

The Shapes that Corresponds to Colors

Tue, 21 Jun 2011 04:45:00 --0100

I have spent a day battling a problem that actually turns out to be kind of interesting. In my book there was supposed to be a figure illustrating Spinoza's theory of emotions, a large figure I once drew in color and included in an article I put on the internet about a year ago, here. My publisher, not keen to waste money on frivolous things like color printing and foldouts, had someone transform it into black and white, split it into two halves, and fit it onto two pages. In the process, the significance of the colors and shades I had chosen was lost, and the morphology of the diagram disappeared. I would have preferred it if they simply printed my original drawing in black and white, but they claim it won't reproduce well in the limited number of shades of gray they allow. Also, the size is wrong. I decided to redraw it myself in black and white, and perhaps a few shades of gray. I had used red to indicate pain, blue to indicate pleasure, and magenta for desire, and the derivative emotions were combinations of these colors. Now I faced having to do it all in black and white. So, I spent the day and evening figuring out how to transform colors into shapes and fonts that carry the same emotional significance. Desire, instead of a magenta square, is now a black diamond with Desire written on it in white. Pain is weird gothic type in black on a greyish diamond. And Pleasure is elegant belle epoque double letters in caps inside a cloud. And so on. I am constrained, by my choice, to what Omnigraffle gives you to work with, and by the number of hours I'm willing to spend on it. I'm also constrained by the fact that the production editor informs me that more than one or two shades of gray will be indistinguishable from each other. I could do better, but life is short. What I have now is better than the simple transposition to b&w of the original colored diagram, but far from perfect. I'm also having to make the boxed emotions kind of large -- they jumble up the page -- so that there is will be a chance the text in the 50 or so boxes will be legible when reduced to book page size ?

How to Win Friends and Influence People

Mon, 20 Jun 2011 14:33:00 --0100

Man on Columbus Circle handing out flyers. Everyone sidesteps him. Closer look: his polo has a large Tinactin logo.

Qualia vs Correlates: Who's Right?

Mon, 20 Jun 2011 12:09:00 --0100

The NYR of Books has a bit of an exchange, here, in an argument between a neuroscientist and a philosopher. Personally, I'm on the philosopher's side. McGinn writes:

Philosophers want to know whether free will is possible in a deterministic world and whether qualia are reducible to brain states (among many other things): these questions are not going to be resolved by discovering the neural correlates of such things.

But I'm not 100% sure. Maybe if you discover enough interesting things about correlates, you suddenly find one new piece of information that leads you to the qualia? If you study the properties of oil paints long enough, do you learn something about the nature of paintings? I don't think so, but maaaaybe. So far, no sign of how that would happen.

50% Perspiration + 50% Inspiration

Mon, 20 Jun 2011 03:41:00 --0100

I have finally finished reading "How The Hippies Saved Physics" by David Kaiser. It made me admire again people who have a passion for something and don't give up, no matter what people advise them. Doubtless there are many, perhaps most, people for whom that strategy doesn't work, but I've seen a bunch of them in physics or allied fields, and it's inspiring. The hippies book discusses John Clauser, the experimentalist who first tested Bell's theorem in quantum mechanics. He was a grad student at Columbia in the late 60s, someone I knew of rather than really knew. After years of neglect by most of the academic community, he received the Wolf prize a year ago, together with Zeilinger and Aspect who did related work after him. He could never get an academic job. Another was Steve Wiesner, also a student at Columbia the same time, who invented quantum encryption. Two more people this brings to mind I remarked on in My Life as a Quant -- Doug Hofstadter (Godel Escher Bach) and Mike Green (string theory), whom I knew better, and both did it Their Way to ultimate success despite people's discouragement. Nice to read about and ponder.

Titillatio (Latin)

Thu, 16 Jun 2011 22:45:00 --0100

I have been spending a fair amount of time reading the first pass proofs of my forthcoming book. One paragraph I came across reminded me of Weiner et al.

Spinoza is not naïve about pleasure; he knows that it is not an unmitigated good, and that it is best when it is balanced. He distinguishes pleasure from stimulation (Latin titillatio), a pleasure that is focused more on some parts of the body than others. Localized pleasure, he writes, can exert an obsessive power ?that can overcome other actions of the body, and may remain obstinately fixed therein, thus rendering it incapable of being affected in a variety of other ways: therefore it may be bad.?

Oh Dad, Poor Dad, Momma's Hung You in the Closet and I'm Feelin' So Sad

Tue, 14 Jun 2011 15:26:00 --0100

Who gets the software?

Publishilling

Sun, 12 Jun 2011 19:16:00 --0100

I used to skeptical, but I could be convinced that there is something to be said for self-publishing. If you are good at word processing, you can do the typesetting yourself, probably as well as they can if you take the time. Douglas Hofstadter did all his own. It's fun if you have the right tools. I always liked that kind of stuff. With enough time and software you can do the figures you need or find them in stock on the internet. Or hire someone to do them -- illustrators have a hard time these days and are happy for work. You can get literate friends to help you edit, though that may be the end of the friendship. So what's left? Distribution and PR. And encouragement of course. Are publishers good at that? Their life is a lot tougher in a world where dueling media vie for your attention in multiple ways.

Honky Tonk Women

Sun, 12 Jun 2011 13:26:00 --0100

Although people lump them together, there is a difference between Anthony Weiner and DSK. Assuming that what you read about them is true, this is my take: Weiner's behavior stems from a neediness; what he needs is something other than what he has; if he gets what he needs he may be cured. DSK behavior stems from a neediness too; what he needs is exactly what he is doing. There isn't a cure.

Monopolar

Sat, 11 Jun 2011 21:38:00 --0100

I'm sure I'm saying nothing new, but having FB'd and Twittered for a few weeks, I can see that it can easily drive you into a state of perpetual low-key mania that resembles exhilaration. It's (Google)^n. You use your fast-twitch muscles all the time, and God knows what happens to your slow twitch ones. Zadie Smith recently wrote in the NYR of Books that she finally swore off FB, and I can see why.

Progress, Portability, Autonomy

Sat, 11 Jun 2011 12:14:00 --0100

What we call progress is often linked to portability and the autonomy it appears to bring: spears to daggers to guns, pendulum clocks to watches, computers to cellphones, vegetables to vitamin pills or Power Bars, movie theaters to videos on phones. All the formerly big things end up being carried on our body wherever we go. And so we become autonomous, able to act independently, apparently self-sufficient despite the environment. The increasing cerebralization of everything. But the autonomy is only partial; the cost of portability is a dependency on technology and miniaturization and you end up with devices you can't create or fix yourself, and most people don't understand how they work. More autonomous in the short run, but probably less stable over time. Not quite sure where cloud computing fits into this: it's a giant server farm rather than a miniature, it makes you more autonomous wherever you go, but nothing belongs to you.