Emanuel Derman

33 results back to index

The Physics of Wall Street: A Brief History of Predicting the Unpredictable by James Owen Weatherall

Alan Greenspan, Albert Einstein, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Apollo 11, Asian financial crisis, bank run, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, butterfly effect, buy and hold, capital asset pricing model, Carmen Reinhart, Claude Shannon: information theory, coastline paradox / Richardson effect, collateralized debt obligation, collective bargaining, currency risk, dark matter, Edward Lorenz: Chaos theory, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, Financial Modelers Manifesto, fixed income, George Akerlof, Gerolamo Cardano, Henri Poincaré, invisible hand, Isaac Newton, iterative process, Jim Simons, John Nash: game theory, junk bonds, Kenneth Rogoff, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, Market Wizards by Jack D. Schwager, martingale, Michael Milken, military-industrial complex, Myron Scholes, Neil Armstrong, new economy, Nixon triggered the end of the Bretton Woods system, Paul Lévy, Paul Samuelson, power law, prediction markets, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk free rate, risk-adjusted returns, Robert Gordon, Robert Shiller, Ronald Coase, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical arbitrage, statistical model, stochastic process, Stuart Kauffman, The Chicago School, The Myth of the Rational Market, tulip mania, Vilfredo Pareto, volatility smile

Omni Magazine 6 (5): 64. Davy, P. H., A. Sornette, and D. Sornette. 1990. “Some Consequences of a Proposed Fractal Nature of Continental Faulting.” Nature 348 (November): 56–58. Derman, Emanuel. 2004. My Life as a Quant. Hoboken, NJ: John Wiley and Sons. — — — . 2011a. “Emanuel Derman on Fischer Black.” Available at https://www.quantnet.com/emanuel-derman-fischer-black/. — — — . 2011b. Models Behaving Badly. New York: Free Press. Derman, Emanuel, and Iraj Kani. 1994. “The Volatility Smile and Its Implied Tree.” Goldman Sachs Quantitative Strategies Research Note. Derman, Emanuel, and Nassim Nicholas Taleb. 2005.

…

The success of the Apollo 11 mission gave Nixon an excuse to divert funds from NASA and other research groups to the military effort. By 1971, NASA’s budget was less than half of what it had been in 1966 (in real terms). Meanwhile, college enrollment began to drop, largely because the Baby Boom years were over. Once the “Boomers” had graduated, universities stopped hiring new faculty members. Emanuel Derman was a South African physicist who experienced this funding roller coaster firsthand. He entered graduate school, at Columbia University, in 1966, at the high point of U.S. science funding. He worked on experimental particle physics — a field far from NASA’s central interests, but a beneficiary of the uptick in government support for physics nonetheless.

…

Whereas in the years leading up to the crash the Black-Scholes model seemed to get options prices exactly right, in virtually all contexts and all markets, after the crash certain discrepancies began to appear. These discrepancies are often called the volatility smile because of their distinctive shape in certain graphs. The smile appeared suddenly and presented a major mystery for financial engineers in the early 1990s, when its prevalence was first recognized. Notably, Emanuel Derman came up with a way of modifying the Black-Scholes model to account for the volatility smile, though he never came up with a principled reason why the Black-Scholes model had stopped working. Mandelbrot’s work, however, offers a compelling explanation for the volatility smile. One way of interpreting the smile is as an indication that the market believes large shifts in prices are more likely than the Black-Scholes model assumes.

Models. Behaving. Badly.: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life by Emanuel Derman

Albert Einstein, Asian financial crisis, Augustin-Louis Cauchy, Black-Scholes formula, British Empire, Brownian motion, capital asset pricing model, Cepheid variable, creative destruction, crony capitalism, currency risk, diversified portfolio, Douglas Hofstadter, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, Financial Modelers Manifesto, fixed income, Ford Model T, Great Leap Forward, Henri Poincaré, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, Isaac Newton, Johannes Kepler, law of one price, low interest rates, Mikhail Gorbachev, Myron Scholes, quantitative trading / quantitative finance, random walk, Richard Feynman, riskless arbitrage, savings glut, Schrödinger's Cat, Sharpe ratio, stochastic volatility, the scientific method, washing machines reduced drudgery, yield curve

THE FINANCIAL MODELERS’ MANIFESTO AN ETHICAL COROLLARY MARKETS AND MORALS TAT TV AM ASI Appendix Acknowledgments Notes Index About the Author ALSO BY EMANUEL DERMAN My Life as a Quant: Reflections on Physics and Finance This edition first published in 2011 Copyright © 2011 by Emanuel Derman Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com. The right of Emanuel Derman to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988.

…

University of California, Berkeley, Department of Statistics, Technical Report 611, January 2003. 8. In mathematics the symbol A (Delta) before any other symbol indicates an infinitesimally small change in the quantity represented by the second symbol. Thus At is an arbitrarily small increment in time. 9. See Emanuel Derman, “The Perception of Time, Risk and Return During Periods of Speculation,” Quantitative Finance 2, no. 4 (2002): 282–96. 10. “Exclusive” in describing an apartment means desirable and expensive because it excludes many people. In a financial crisis, though, exclusivity means illiquidity. What you want to own in a widespread financial crunch are inclusive securities. 11.

…

Thought: Extension and three meta-affects time Tomonaga, Shin’ichiro transparency: ethics of designing financial products and Treasury bills Treasury bonds Treynor, Jack Trumpeldor, Yosef truth uncertainty: EMM and financial models and physics and quantifiable risk and theory and unquantifiable of value unconscious underliers understanding: action and of adequate causes of body of experience intuition and of passions self- will and of world Universal Law of Gravitation (Newton) universe, laws of the University of Cape Town untouchables utility functions utility stocks value: benefits of financial models and Black-Scholes Model and definition of determination of EMM and estimates of financial markets and financial models and Law of One Price and mysteries of the world and determining price and purpose of finance models and ranking of securities by uncertainty of and universal value for risk and valuing of options vulgarity of financial models and vanilla options volatility: benefits of financial models and Black-Scholes Model and CAPM and EMM and financial models and futility of using financial models and purpose of finance models and risk and stochastic vulgarity of financial models and Volta, Alessandro voltaic pile W-bosons War of Independence, Israeli waves: electromagnetic theory and weather models Weinberg-Salam Model Weinberg, Steven Wells, Robin will Wilmott, Paul The Wind in the Willow (Grahame) wonder: Spinoza’s emotions theory and words: limitations of world: composition of as focus of physics intuition as way of understanding the invention/discovery as synthesis of mind and mysteries of World War II. See Second World War/ World War II worth: definition of Yahweh, Z-bosons Zionism Zippy model airplane About The Author Emanuel Derman is head of risk at Prisma Capital Partners and a professor at Columbia University, where he directs the program in financial engineering. He is the author of My Life as a Quant, one of Businessweek's top ten books of the year, in which he introduced the quant world to a wide audience. He was born in South Africa but has spent most of his professional life in New York City, where he has made contributions to several fields.

The Volatility Smile by Emanuel Derman,Michael B.Miller

Albert Einstein, Asian financial crisis, Benoit Mandelbrot, Black Monday: stock market crash in 1987, book value, Brownian motion, capital asset pricing model, collateralized debt obligation, continuous integration, Credit Default Swap, credit default swaps / collateralized debt obligations, discrete time, diversified portfolio, dividend-yielding stocks, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, implied volatility, incomplete markets, law of one price, London Whale, mandelbrot fractal, market bubble, market friction, Myron Scholes, prediction markets, quantitative trading / quantitative finance, risk tolerance, riskless arbitrage, Sharpe ratio, statistical arbitrage, stochastic process, stochastic volatility, transaction costs, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Volatility Smile EMANUEL DERMAN MICHAEL B. MILLER with contributions by David Park Cover image: Under the Wave off Kanagawa by Hokusai © Fine Art Premium / Corbis Images Cover design: Wiley Copyright © 2016 by Emanuel Derman and Michael B. Miller. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com.

…

If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com. Library of Congress Cataloging-in-Publication Data: Names: Derman, Emanuel, author. | Miller, Michael B. (Michael Bernard), 1973- author. Title: The volatility smile / Emanuel Derman, Michael B. Miller. Description: Hoboken, New Jersey : Wiley, 2016. | Series: The Wiley finance series | Includes index. Identifiers: LCCN 2016012191 (print) | LCCN 2016019398 (ebook) | ISBN 9781118959169 (hardback) | ISBN 9781118959176 (pdf) | ISBN 9781118959183 (epub) Subjects: LCSH: Finance–Mathematical models. | Securities–Valuation. | BISAC: BUSINESS & ECONOMICS / Finance.

…

First we write ( − ln ST S0 ) ( = −ln S∗ S0 ) ( − ln ST S∗ ) (4.35) to include the strike break point S∗ . Then, substituting from Equation 4.16, we obtain ( −ln ST S0 ) ( = −ln S∗ S0 ) ∗ S S − S∗ 1 + P (K, T) dK − T ∗ ∫ S K2 0 (4.36) ∞ + 2 1 C(K, T) dK ∫S∗ K2 This section follows closely Kresimir Demeterfi, Emanuel Derman, Michael Kamal, and Joseph Zou, “A Guide to Volatility and Variance Swaps,” Journal of Derivatives 4 (1999): 9–32. 76 THE VOLATILITY SMILE Here P(K, T) and C(K, T) denote the values at expiration time T of puts and calls respectively with strike K, and (ST – S∗ )/S∗ is the payoff of 1/S∗ forward contracts on the stock with a delivery price of S∗ .

The Quants by Scott Patterson

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, automated trading system, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, book value, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Carl Icahn, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Dr. Strangelove, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, Financial Modelers Manifesto, fixed income, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, Jim Simons, job automation, John Meriwether, John Nash: game theory, junk bonds, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, Mark Spitznagel, merger arbitrage, Michael Milken, military-industrial complex, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, short squeeze, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

The volatility smile perplexed Wall Street’s quants. For one thing, it made a hash of their carefully calibrated hedging strategies. It also raised questions about the underlying theory itself. “I realized that the existence of the smile was completely at odds with Black and Scholes’s 20-year-old foundation of options theory,” wrote Emanuel Derman, a longtime financial engineer who worked alongside Fischer Black at Goldman Sachs, in his book My Life as a Quant. “And, if the Black-Scholes formula was wrong, then so was the predicted sensitivity of an option’s price to movements in its underlying index. … The smile, therefore, poked a small hole deep into the dike of theory that sheltered options trading.”

…

The mad scientists who’d been running wild in the heart of the financial system for decades had finally done it: they’d blown it up. On a frigid day in early January 2009, several weeks after addressing the crowd of hopeful quants at the Renaissance Hotel, Wilmott boarded a plane at Heathrow Airport in London and returned to New York City. In New York, he met with über-quant Emanuel Derman. A lanky, white-haired South African, Derman headed up Columbia University’s financial engineering program. He was one of the original quants on Wall Street and had spent decades designing derivatives for Goldman Sachs, working alongside legends such as Fischer Black. Wilmott and Derman had become alarmed by the chaotic state of their profession and by the mind-boggling destruction it had helped bring about.

…

When German tanks rumbled into France: Some details of Mandelbrot’s life come from a series of interviews with Mandelbrot in the summer of 2008. Many also come from the book The (Mis)Behavior of Markets: A Fractal View of Financial Turbulence, by Benoit Mandelbrot and Richard L. Hudson (Basic Books, 2006). “I realized that the existence of the smile”: My Life as a Quant, by Emanuel Derman (John Wiley & Sons, 2004), 226. A squad of fifty armed federal marshals: Certain details come from Den of Thieves, by James Stewart (Simon & Schuster, 1991). He also worked as a consultant: I learned the fascinating story of Thorp’s discovery of the Madoff fraud in several interviews with Thorp in December 2008 as the fraud was discovered.

How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Bear Stearns, Black-Scholes formula, Bob Litterman, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, business process, butter production in bangladesh, buy and hold, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, commoditize, computerized markets, corporate governance, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency risk, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, full employment, George Akerlof, global macro, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, Ivan Sutherland, John Bogle, John von Neumann, junk bonds, linear programming, Loma Prieta earthquake, Long Term Capital Management, machine readable, margin call, market friction, market microstructure, martingale, merger arbitrage, Michael Milken, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Richard Feynman, Richard Stallman, risk free rate, risk-adjusted returns, risk/return, seminal paper, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, subscription business, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

Consider this quotation from Time magazine of April 1994, cited by Peter Bernstein: “Prices of derivatives are not based on old-fashioned human hunches but on calculations designed and monitored by computer wizards using abstruse mathematical formulas . . . developed by so-called quants . . . ”2 Wizards, indeed. Even Emanuel Derman, one of the most famous of quants, feels compelled to assert that “[t]he Black-Scholes model tells us, almost miraculously, how to manufacture an option . . . ”3 (italics added). As the knowledge necessary to perform such feats is not a part of the regular secondary-school math curriculum, facility with derivatives requires a level of quantitative (hence “quant”) training and skill confined to the mathematical specialist.

…

In the paper in question, I showed that you could price options assuming the underlying stock followed a Poisson process. Later I showed with Michael Ong that this could be used to “correctly” price binary options using call spreads.16 JWPR007-Lindsey May 7, 2007 16:55 Neil Chriss 123 I wanted to get feedback on my paper and so I sent it around to various academics and also to Emanuel Derman, who was head of Goldman Sachs’ Quantitative Strategies Group, which was the leading group in derivatives pricing research at the time. Derman’s group was in charge of derivatives research and technology, and he was the most recognized figure in the industry at the time. One day, while sitting around IAS, Emanuel called me to tell me he had received my paper.

…

I taught a course of my own at Columbia in the mid 1980s and then started teaching as an adjunct at Yale. At Yale I had the pleasure over 15 years of coteaching with both my early mentor, Martin Shubik, and later my former Yale classmate but now well-known professor Will Goetzmann. In 2005, I returned to teach at Columbia at the encouragement of Emanuel Derman, along with Leon Metzger. In the early 1990s Jack Marshall and Bob Schwartz asked me to become involved in a professional society they were then organizing, the International Association of Financial Engineers. I was enthusiastic about being a part of that organization as I love everything about financial engineering.

Escape From Model Land: How Mathematical Models Can Lead Us Astray and What We Can Do About It by Erica Thompson

Alan Greenspan, Bayesian statistics, behavioural economics, Big Tech, Black Swan, butterfly effect, carbon tax, coronavirus, correlation does not imply causation, COVID-19, data is the new oil, data science, decarbonisation, DeepMind, Donald Trump, Drosophila, Emanuel Derman, Financial Modelers Manifesto, fudge factor, germ theory of disease, global pandemic, hindcast, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, implied volatility, Intergovernmental Panel on Climate Change (IPCC), John von Neumann, junk bonds, Kim Stanley Robinson, lockdown, Long Term Capital Management, moral hazard, mouse model, Myron Scholes, Nate Silver, Neal Stephenson, negative emissions, paperclip maximiser, precautionary principle, RAND corporation, random walk, risk tolerance, selection bias, self-driving car, social distancing, Stanford marshmallow experiment, statistical model, systematic bias, tacit knowledge, tail risk, TED Talk, The Great Moderation, The Great Resignation, the scientific method, too big to fail, trolley problem, value at risk, volatility smile, Y2K

I think there is a risk that the tree may not survive a hard pruning, but there is equally a risk of collapse if we allow it to continue being so unbalanced. Longer-term pruning and focused care will be needed to encourage the other branches to blossom. 7 Masters of the Universe I will remember that I didn’t make the world, and it doesn’t satisfy my equations. Emanuel Derman and Peter Wilmott, ‘The Financial Modelers’ Manifesto’ (2009) The use of models in economics, like other modelling endeavours, stems from a wish to control uncertainty about the future. Yet we remain highly uncertain, perhaps more uncertain than ever, about the outcome of modelled economic variables like stock prices or insurance losses over decision-relevant timescales: say, the next ten or twenty years.

…

Where the modeller endows their model with their own values, priorities and blind spots, the model then reflects those values, priorities and blind spots back, both in terms of how the system works and in terms of the kinds of interventions one could make. Stiglitz noted exactly this, that ‘our models do affect how we think’. Paul Wilmott and Emanuel Derman included in their Modeller’s Hippocratic Oath the following: ‘I will remember that I didn’t make the world, and it doesn’t satisfy my equations.’ While taking into account known uncertainties (via models), we also need to structure our thinking so that it is not completely blindsided by unknown or unknowable uncertainties.

…

.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life, Free Press, 2012 Frydman, Roman, and Michael Goldberg, Beyond Mechanical Markets, Princeton University Press, 2011 Haldane, Andrew, ‘The Dog and the Frisbee’, speech at Jackson Hole, Wyoming, 31 August 2012 Lowenstein, Roger, When Genius Failed: The Rise and Fall of Long Term Capital Management, Fourth Estate, 2002 MacKenzie, Donald, An Engine, Not a Camera: How Financial Models Shape Markets, MIT Press (Inside Technology Series), 2008 March, James, Lee Sproull and Michal Tamuz, ‘Learning from Samples of One or Fewer’, Organization Science, 2(1), 1991 Rebonato, Riccardo, Volatility and Correlation, John Wiley, 1999 Stiglitz, Joseph, ‘Where Modern Macroeconomics Went Wrong’, Oxford Review of Economic Policy, 34, 2018 Taleb, Nassim, The Black Swan: The Impact of the Highly Improbable, Random House, 2007 Wilmott, Paul, and David Orrell, The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets, Wiley, 2017 ——, and Emanuel Derman, ‘The Financial Modelers’ Manifesto’, https://wilmott.com/financialmodelers-manifesto/, 2009 Chapter 8: The Atmosphere is Complicated Allen, Myles, Mustafa Babiker, Yang Chen, et al., ‘IPCC SR15: Summary for Policymakers’, in IPCC Special Report: Global Warming of 1.5C, Intergovernmental Panel on Climate Change, 2018 Anderson, Kevin, ‘Duality in Climate Science’, Nature Geoscience, 8(12), 2015 Beck, Silke, and Martin Mahony, ‘The Politics of Anticipation: The IPCC and the Negative Emissions Technologies Experience’, Global Sustainability, 1, 2018 Burke, Marshall, Solomon Hsiang and Edward Miguel, ‘Global Non-Linear Effect of Temperature on Economic Production’, Nature, 527(7577), 2015 Edwards, Paul, A Vast Machine: Computer Models, Climate Data, and the Politics of Global Warming, MIT Press, 2010 Hänsel, Martin C., Moritz A.

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

"World Economic Forum" Davos, AI winter, Alan Greenspan, algorithmic trading, AOL-Time Warner, Apollo 11, asset allocation, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, Bob Litterman, book value, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Charles Babbage, citizen journalism, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, electricity market, Emanuel Derman, en.wikipedia.org, experimental economics, fake news, financial engineering, financial innovation, fixed income, Ford Model T, Gordon Gekko, Hans Moravec, Herman Kahn, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, Ivan Sutherland, Jim Simons, John Bogle, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, machine readable, machine translation, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, military-industrial complex, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, semantic web, Sharpe ratio, short selling, short squeeze, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, stock buybacks, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, tontine, too big to fail, transaction costs, Turing machine, two and twenty, Upton Sinclair, value at risk, value engineering, Vernor Vinge, Wayback Machine, yield curve, Yogi Berra, your tax dollars at work

The other people writing for the book included some of the smartest kids on the block and some old friends, so I said yes on the spot. There are chapters by pillars of the quant world, authors of the standard texts, and writers of oft-cited papers. Others did interesting and rewarding things with technology and markets. Emanuel Derman, author of My Life as a Quant: Reflections on Physics and Finance ( John Wiley & Sons, 2004), made this point in the first line of his review for the Wall Street Journal: “By my reckoning, several of the 25 memoirists in How I Became a Quant are not true quants, and they are honest (or proud) enough to admit it.”2 xv xvi Introduction I am, no doubt, high on the list of poseurs, and I will be the first to admit it.

…

It has links in to all of these references, plus color and animated versions of the black & white screen grabs found in the book. The site will be updated often with new and topical items. Notes 1. A term of respect popularized by Michael Lewis in his 1989 book, Liar’s Poker (W.W. Norton). 2. Emanuel Derman, “Finance by the Numbers,” Wall Street Journal, August 22, 2007. 3. Much of Steven Levy’s 1984 book Hackers: Heroes of the Computer Revolution (Doubleday) takes place in the PDP-1 lab at MIT. Hacking had no criminal connotation at the time. The book is still in print. 4. Start with Herman Kahn’s On Thermonuclear War (Princeton, NJ: Princeton University Press, 1960) for a weighty tome, or “How RAND Invented the Postwar World,” by Virginia Campbell, in Invention & Technology magazine (Summer 2004) for a much more compact read. 5.

…

Steve Snider, who manages multibillion-dollar institutional portfolios at Fidelity, makes the point that “classical methods of data analysis assume that there is a stable process generating the data, so it is valid to attempt to deduce the underlying process from a selection of known observations. These new techniques don’t require that assumption, so they may be useful in especially noisy systems like stock forecasting.”5 That said, the dangers of rampant data mining using many of these approaches cannot be overemphasized (see Chapter 6, “Stupid Data Miner Tricks”). Emanuel Derman, former head of quantitative strategies at Goldman Sachs, described this over eagerness to blindly apply quantitative and computerized methods: The best quantitative finance brings real insight into the relation between value and uncertainty, and it approaches the quality of real science; the worst is a pseudoscientific hodgepodge of complex mathematics used with obscure justification.6 The Crackpot as Billionaire Not everyone who decides to burn CPU cycles on Wall Street ends up writing about lessons learned.

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Sylvain Raines, an experienced quant, joked that quantitative finance was an oxymoron as “finance is quantitative by definition...this is like saying aerial flight or wet swimming.”11 Newly graduated financial experts applied simple “phenomenological toys” to markets. Most financial models are wrong, only the degree of error is in question. Differential equations, positive definite matrices or the desirable statistical properties of an estimator rarely determine the price of traded financial instruments. Goldman Sachs’ Emanuel Derman, a trained physicist, identified the difference: “In physics, a model is correct if it predicts the future trajectories of planets or the existence and properties of new planets.... In finance, you cannot easily prove a model right by such observations.” Derman ruefully concluded: “Trained economists have never seen a really first-class model.”12 Commenting on the required level of quantitative knowledge of people involved in financial markets, Derman once observed that Tour de France bicyclists did not need to know the laws of physics.

…

Ian Kerr referred to them as Chernobyl decay obligations (www.efinancialnews.com/homepage/content/2448260317). Chapter 13—Risk Supermarkets 1. Peter L. Bernstein (1996) Against The Gods: The Remarkable Story of Risk, John Wiley, New York: 1. 2. Jorge Luis Borges (1999) Collected Fiction, Penguin Books, New York: 105. 3. Emanuel Derman (2004) My Life As A Quant: Reflection on Physics and Finance, John Wiley, New Jersey. 4. Berkshire Hathaway Letter to Shareholders (2002). 5. Martin Z. Braun, Darrell Preston and Liz Willen “The banks that fleeced Alabama” (September 2005) Bloomberg Markets; William Selway and Martin Z. Braun “The fleecing of Alabama: the bills come due” (July 2008) Bloomberg Markets. 6.

…

Rahul Bajaj “The privilege of living in extraordinary times” (26 January 2009) Financial Times. 10. Stephen Crittenden “Background briefing, mostly bloody awful” (29 March 2009), ABC Radio, Australia. 11. Sylvain Raynes “The state of financial engineering” (3 December 2008) (www.quantnet.com/forum/showthread.php?t=3978). 12. Emanuel Derman (2004) My Life as a Quant: Reflections on Physics and Finance, John Wiley, New Jersey: 266, 267. 13. “Prophet of climate doom a scientific black sheep” (17 September 2009), AFP (www.terradaily.com/reports/Prophet_of_climate_doom_a_scientific_black_sheep_999.html). 14. Lewis Carroll (1960) The Annotated Alice: Alice’s Adventures in Wonderland, Penguin Books, London: 129. 15.

Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy by Cathy O'Neil

Affordable Care Act / Obamacare, Alan Greenspan, algorithmic bias, Bernie Madoff, big data - Walmart - Pop Tarts, call centre, Cambridge Analytica, carried interest, cloud computing, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, data science, disinformation, electronic logging device, Emanuel Derman, financial engineering, Financial Modelers Manifesto, Glass-Steagall Act, housing crisis, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, Ida Tarbell, illegal immigration, Internet of things, late fees, low interest rates, machine readable, mass incarceration, medical bankruptcy, Moneyball by Michael Lewis explains big data, new economy, obamacare, Occupy movement, offshore financial centre, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price discrimination, quantitative hedge fund, Ralph Nader, RAND corporation, real-name policy, recommendation engine, Rubik’s Cube, Salesforce, Sharpe ratio, statistical model, tech worker, Tim Cook: Apple, too big to fail, Unsafe at Any Speed, Upton Sinclair, Watson beat the top human players on Jeopardy!, working poor

How do we start to regulate the mathematical models that run more and more of our lives? I would suggest that the process begin with the modelers themselves. Like doctors, data scientists should pledge a Hippocratic Oath, one that focuses on the possible misuses and misinterpretations of their models. Following the market crash of 2008, two financial engineers, Emanuel Derman and Paul Wilmott, drew up such an oath. It reads: ~ I will remember that I didn’t make the world, and it doesn’t satisfy my equations. ~ Though I will use models boldly to estimate value, I will not be overly impressed by mathematics. ~ I will never sacrifice reality for elegance without explaining why I have done so

…

Apple, the most valuable company: Verne Kopytoff, “Apple: The First $700 Billion Company,” Fortune, February 10, 2015, http://​fortune.​com/​2015/​02/​10/​apple-​the-​first-​700-​billion-​company/. In 1907 alone, 3,242 miners died: MSHA, “Coal Fatalities for 1900 Through 2014,” US Department of Labor, accessed January 9, 2016, www.​msha.​gov/​stats/​centurystats/​coalstats.​asp. drew up such an oath: Emanuel Derman and Paul Wilmott, “The Financial Modeler’s Manifesto,” January 7, 2009, www.​uio.​no/​studier/​emner/​sv/​oekonomi/​ECON4135/​h09/​under​visning​smateriale/​Financial​ModelersManifesto.​pdf. FindFamilyResources: FindFamilyResources website, accessed January 9, 2016, http://​findfamily​resources.​com/.

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, Alan Greenspan, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, Bear Stearns, behavioural economics, Big Tech, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, data science, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, electricity market, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial intermediation, Ford Model T, Frederick Winslow Taylor, George Akerlof, gig economy, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Greenspan put, guns versus butter model, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Bogle, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, low interest rates, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, proprietary trading, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Ronald Reagan, Satyajit Das, Savings and loan crisis, scientific management, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, TED Talk, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, Tragedy of the Commons, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, vertical integration, zero-sum game

Markowitz’s quantitative finance methodology won him the Nobel Prize and became the basis of the first computerized arbitrage-trading program, which would eventually take over the markets. Today 70–80 percent of all trading is done by computers, much of it using flash programs designed to trade on fractional price changes over split-second time intervals, reducing the average holding period of a stock from about eight years in the 1960s to just four months by 2012.55 Emanuel Derman, a quantitative mathematician and physicist who pioneered some of those trading models at Goldman and now teaches financial engineering at Columbia, believes that the focus on mathematical economics in both finance and business education has gone way too far. Indeed, in 2012, he published a mea culpa for his own work in the twentieth-anniversary issue of the Journal of Derivatives.

…

I must also thank the many other important people who gave their valuable time to sit for interviews and share their thoughts—among them are Senator Elizabeth Warren, Senator Sherrod Brown, Gary Gensler, Damon Silvers, Warren Buffett, Jack Bogle, Andy Haldane, Lord Adair Turner, Richard Trumka, William Lazonick, Mike Konczal, Nell Abernathy, Felicia Wong, Anat Admati, Gerald Davis, Stephen Cecchetti, James Galbraith, Edmund Phelps, Wallace Turbeville, Thomas Hoenig, Charles Morris, Joe Nocera, Charles Ferguson, Bob Lutz, Lisa Donner, Rebecca Henderson, Margaret Heffernan, Andrew Lo, Dominic Barton, Nitin Nohria, Rakesh Khurana, Emanuel Derman, Mark Bertolini, Andrew Smithers, Lynn Stout, Sam Palmisano, Greg Smith, Joseph Blasi, David Rothkopf, Ken Miller, Marc Fasteau, Robert R. Locke, Ruchir Sharma, Gautam Mukunda, Saule Omarova, Eileen Appelbaum, and Sherle Schwenninger. Thanks also to the many academics and policy thinkers whose research I relied heavily on, including but not limited to: Greta Krippner, Moritz Schularick, Alan M.

…

Glenn Hubbard, November 2004. 54. Khurana, From Higher Aims to Hired Hands, 346. 55. Jesse Eisinger, “Challenging the Long-Held Belief in ‘Shareholder Value,’ ” New York Times, June 27, 2012. Also see LPL Financial Research, “Weekly Market Commentary,” by Jeffrey Kleintop, CFA, August 6, 2012. 56. Emanuel Derman, “Apologia Pro Vita Sua,” Journal of Derivatives 20, no. 1 (2012). 57. Author interview with Nitin Nohria, dean of Harvard Business School, for this book. 58. “MIT Facts 2016: MIT Students After Graduation,” Massachusetts Institute of Technology, online at http://web.mit.edu/facts/alum.html. 59.

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael J. Mauboussin

Amazon Mechanical Turk, Atul Gawande, Benoit Mandelbrot, Black Swan, Boeing 747, Checklist Manifesto, Clayton Christensen, cognitive bias, commoditize, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, disruptive innovation, Emanuel Derman, fundamental attribution error, Gary Kildall, Gini coefficient, hindsight bias, hiring and firing, income inequality, Innovator's Dilemma, John Bogle, Long Term Capital Management, loss aversion, Menlo Park, mental accounting, moral hazard, Network effects, power law, prisoner's dilemma, random walk, Richard Thaler, risk-adjusted returns, shareholder value, Simon Singh, six sigma, Steven Pinker, transaction costs, winner-take-all economy, zero-sum game, Zipf's Law

Nassim Nicholas Taleb and Mark Blyth, “The Black Swan of Cairo: How Suppressing Volatility Makes the World Less Predictable and More Dangerous,” Foreign Affairs 90, no. 3 (May/June 2011): 33–39; Emanuel Derman distinguishes between models and theories, “Models are analogies; they always describe one thing relative to something else. Models need a defense or explanation. Theories, in contrast, are the real thing. They need confirmation rather than explanation. A theory describes an essence. A successful theory can become a fact.” From Emanuel Derman, Models. Behaving. Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life (New York: Free Press, 2011), 59. 24.

Is the Internet Changing the Way You Think?: The Net's Impact on Our Minds and Future by John Brockman

A Declaration of the Independence of Cyberspace, Albert Einstein, AltaVista, Amazon Mechanical Turk, Asperger Syndrome, availability heuristic, Benoit Mandelbrot, biofilm, Black Swan, bread and circuses, British Empire, conceptual framework, corporate governance, Danny Hillis, disinformation, Douglas Engelbart, Douglas Engelbart, Emanuel Derman, epigenetics, Evgeny Morozov, financial engineering, Flynn Effect, Frank Gehry, Future Shock, Google Earth, hive mind, Howard Rheingold, index card, information retrieval, Internet Archive, invention of writing, Jane Jacobs, Jaron Lanier, John Markoff, John Perry Barlow, Kevin Kelly, Large Hadron Collider, lifelogging, lone genius, loss aversion, mandelbrot fractal, Marc Andreessen, Marshall McLuhan, Menlo Park, meta-analysis, Neal Stephenson, New Journalism, Nicholas Carr, One Laptop per Child (OLPC), out of africa, Paul Samuelson, peer-to-peer, pneumatic tube, Ponzi scheme, power law, pre–internet, Project Xanadu, Richard Feynman, Rodney Brooks, Ronald Reagan, satellite internet, Schrödinger's Cat, search costs, Search for Extraterrestrial Intelligence, SETI@home, Silicon Valley, Skype, slashdot, smart grid, social distancing, social graph, social software, social web, Stephen Hawking, Steve Wozniak, Steven Pinker, Stewart Brand, synthetic biology, Ted Nelson, TED Talk, telepresence, the medium is the message, the scientific method, the strength of weak ties, The Wealth of Nations by Adam Smith, theory of mind, trade route, upwardly mobile, Vernor Vinge, Whole Earth Catalog, X Prize, Yochai Benkler

Bass “If You Have Cancer, Don’t Go on the Internet”: Karl Sabbagh Incomprehensible Visitors from the Technological Future: Alison Gopnik “Go Native”: Howard Gardner The Maximization of Neoteny: Jaron Lanier Wisdom of the Crowd: Keith Devlin Weirdness of the Crowd: Robert Sapolsky The Synchronization of Minds: Jamshed Bharucha My Judgment Enhancer: Geoffrey Miller Speed Plus Mobs: Alan Alda Repetition, Availability, and Truth: Daniel Haun The Armed Truce: Irene M. Pepperberg More Efficient, but to What End?: Emanuel Derman I Have Outsourced My Memory: Charles Seife The New Balance: More Processing, Less Memorization: Fiery Cushman The Enemy of Insight?: Anthony Aguirre The Joy of Just-Enoughness: Judith Rich Harris The Rise of Internet Prosthetic Brains and Soliton Personhood: Clifford Pickover Immortality: Juan Enriquez A Third Replicator: Susan Blackmore Bells and Smoke: Christine Finn Dare, Care, and Share: Tor Nørretranders Getting Close: Stuart Pimm A Miracle and a Curse: Ed Regis “The Plural of Anecdote Is Not Data”: Lisa Randall Collective Action and the Global Commons: Giulio Boccaletti Informed, Tightfisted, and Synthetic: Laurence C.

…

Which brings me to the armed truce—an attempt to appreciate the positives and accept the negatives, to set personal boundaries and refuse to let them be breached. Of course, maybe it is just this dogmatic approach that prevents the Internet from changing the way I think. More Efficient, but to What End? Emanuel Derman Professor of financial engineering, Columbia University; principal, Prisma Capital Partners; former head, Quantitative Strategies Group, Equities Division, Goldman Sachs and Co.; author, My Life as a Quant: Reflections on Physics and Finance An engineer, a physicist, and a computer scientist go for a drive.

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Andrew Wiles, automated trading system, backtesting, Bayesian statistics, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, blockchain, book value, Brownian motion, butter production in bangladesh, buy and hold, buy low sell high, Cambridge Analytica, Carl Icahn, Claude Shannon: information theory, computer age, computerized trading, Credit Default Swap, Daniel Kahneman / Amos Tversky, data science, diversified portfolio, Donald Trump, Edward Thorp, Elon Musk, Emanuel Derman, endowment effect, financial engineering, Flash crash, George Gilder, Gordon Gekko, illegal immigration, index card, index fund, Isaac Newton, Jim Simons, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Loma Prieta earthquake, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, Mark Zuckerberg, Michael Milken, Monty Hall problem, More Guns, Less Crime, Myron Scholes, Naomi Klein, natural language processing, Neil Armstrong, obamacare, off-the-grid, p-value, pattern recognition, Peter Thiel, Ponzi scheme, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, Robert Mercer, Ronald Reagan, self-driving car, Sharpe ratio, Silicon Valley, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, Steve Bannon, Steve Jobs, stochastic process, the scientific method, Thomas Bayes, transaction costs, Turing machine, Two Sigma

They usually were tasked with building models to place values on complicated derivatives and mortgage products, analyze risk, and hedge, or protect, investment positions, activities that became known as forms of financial engineering. It took a little while for the finance industry to come up with a nickname for those designing and implementing these mathematical models. At first, they were called rocket scientists by those who assumed rocketry was the most advanced branch of science, says Emanuel Derman, who received a PhD in theoretical physics at Columbia University before joining a Wall Street firm. Over time, these specialists became known as quants, short for specialists in quantitative finance. For years, Derman recalls, senior managers at banks and investment firms, many of whom prided themselves on maintaining an ignorance of computers, employed the term as a pejorative.

…

Lo and Jasmina Hasanhodzic, The Evolution of Technical Analysis: Financial Prediction from Babylonian Tablets to Bloomberg Terminals (Hoboken, NJ: John Wiley & Sons, 2010). 5. Douglas Bauer, “Prince of the Pit,” New York Times, April 25, 1976, https://www.nytimes.com/1976/04/25/archives/prince-of-the-pit-richard-dennis-knows-how-to-keep-his-head-at-the.html. 6. Emanuel Derman, My Life as a Quant: Reflections on Physics and Finance (Hoboken, NJ: John Wiley & Sons, 2004). 7. Edward O. Thorp, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market (New York: Random House, 2017). 8. Scott Patterson, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It (New York: Crown Business, 2010). 9.

What to Think About Machines That Think: Today's Leading Thinkers on the Age of Machine Intelligence by John Brockman

Adam Curtis, agricultural Revolution, AI winter, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, algorithmic trading, Anthropocene, artificial general intelligence, augmented reality, autism spectrum disorder, autonomous vehicles, backpropagation, basic income, behavioural economics, bitcoin, blockchain, bread and circuses, Charles Babbage, clean water, cognitive dissonance, Colonization of Mars, complexity theory, computer age, computer vision, constrained optimization, corporate personhood, cosmological principle, cryptocurrency, cuban missile crisis, Danny Hillis, dark matter, data science, deep learning, DeepMind, Demis Hassabis, digital capitalism, digital divide, digital rights, discrete time, Douglas Engelbart, driverless car, Elon Musk, Emanuel Derman, endowment effect, epigenetics, Ernest Rutherford, experimental economics, financial engineering, Flash crash, friendly AI, functional fixedness, global pandemic, Google Glasses, Great Leap Forward, Hans Moravec, hive mind, Ian Bogost, income inequality, information trail, Internet of things, invention of writing, iterative process, James Webb Space Telescope, Jaron Lanier, job automation, Johannes Kepler, John Markoff, John von Neumann, Kevin Kelly, knowledge worker, Large Hadron Collider, lolcat, loose coupling, machine translation, microbiome, mirror neurons, Moneyball by Michael Lewis explains big data, Mustafa Suleyman, natural language processing, Network effects, Nick Bostrom, Norbert Wiener, paperclip maximiser, pattern recognition, Peter Singer: altruism, phenotype, planetary scale, Ray Kurzweil, Recombinant DNA, recommendation engine, Republic of Letters, RFID, Richard Thaler, Rory Sutherland, Satyajit Das, Search for Extraterrestrial Intelligence, self-driving car, sharing economy, Silicon Valley, Skype, smart contracts, social intelligence, speech recognition, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, strong AI, Stuxnet, superintelligent machines, supervolcano, synthetic biology, systems thinking, tacit knowledge, TED Talk, the scientific method, The Wisdom of Crowds, theory of mind, Thorstein Veblen, too big to fail, Turing machine, Turing test, Von Neumann architecture, Watson beat the top human players on Jeopardy!, We are as Gods, Y2K

CARR The Control Crisis JON KLEINBERG & SENDHIL MULLAINATHAN We Built Them, but We Don’t Understand Them JAAN TALLINN We Need to Do Our Homework GEORGE CHURCH What Do You Care What Other Machines Think? ARNOLD TREHUB Machines Cannot Think ROY BAUMEISTER No “I” and No Capacity for Malice KEITH DEVLIN Leveraging Human Intelligence EMANUEL DERMAN A Machine Is a “Matter” Thing FREEMAN DYSON I Could Be Wrong DAVID GELERNTER Why Can’t “Being” or “Happiness” Be Computed? LEO M. CHALUPA No Machine Thinks About the Eternal Questions DANIEL C. DENNETT The Singularity—an Urban Legend? W. TECUMSEH FITCH Nano-Intentionality IRENE PEPPERBERG A Beautiful (Visionary) Mind NICHOLAS HUMPHREY The Colossus Is a BFG ROLF DOBELLI Self-Aware AI?

…

To guard against those dangers, it helps to be aware that we’re genetically programmed to act in trustful, intelligent-agency-ascribing ways in certain kinds of interactions, be they with people or machines. But sometimes a device that waddles and quacks is just a device. It ain’t no duck. A MACHINE IS A “MATTER” THING EMANUEL DERMAN Professor of financial engineering, Columbia University; senior adviser, KKR Prisma; author, Models.Behaving.Badly and My Life As a Quant A machine is a small part of the physical universe that has been arranged, after some thought by humans or animals, in such a way that when certain initial conditions are set up (by humans or animals) the deterministic laws of nature see to it that that small part of the physical universe automatically evolves in a way that humans or animals think is useful.

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

So I acknowledge here my debt to the dozens of people who provided slices of various characters’ history and attitudes. Many people read part or all of the manuscript and sent useful comments. Brandon Adams, Gustavo Bamberger, Bill Benter, John Bogle, Rick Bookstaber, Reuven Brenner, Eugene Christiansen, Emanuel Derman, Art Duquette, Dylan Evans, Doyne Farmer, Justin Fox, Kenneth French, Lisa Goldberg, James Grosjean, Ian Hacking, Michael Heneberry, Carey Hobbs, Craig Howe, James McManus, Michael Maubossin, Nick Maughan, Perry Mehrling, Robert Merton, Joe Nocera, John O’Brien, Deborah Pastor, Scott Patterson, William Poundstone, Kevin Rosema, Myron Scholes, James Stoner, Nassim Taleb, Edward Thorp, Whitney Tilson, James Ward, Paul Wilmott, and Bruce Zastera were particularly helpful.

…

If you like to study your quantitative finance through people, Espen Haug’s Derivatives Models on Models is an excellent choice. Also consider The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It by Scott Patterson, My Life as a Quant: Reflections on Physics and Finance by Emanuel Derman, Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets by Steven Drobny, and More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby. The Economic Function of Futures Markets by Jeffrey Williams remains after 20 years the only really good account of this subject.

Numbers Rule Your World: The Hidden Influence of Probability and Statistics on Everything You Do by Kaiser Fung

Alan Greenspan, American Society of Civil Engineers: Report Card, Andrew Wiles, behavioural economics, Bernie Madoff, Black Swan, business cycle, call centre, correlation does not imply causation, cross-subsidies, Daniel Kahneman / Amos Tversky, edge city, Emanuel Derman, facts on the ground, financial engineering, fixed income, Gary Taubes, John Snow's cholera map, low interest rates, moral hazard, p-value, pattern recognition, profit motive, Report Card for America’s Infrastructure, statistical model, the scientific method, traveling salesman

Freakonomics is a notable exception, covering the applied research of the economics professor Steven Levitt. Two books in the finance area also fit the bill: in The Black Swan, Nassim Taleb harangues theoreticians of financial mathematics (and other related fields) on their failure in statistical thinking, while in My Life as a Quant, Emanuel Derman offers many valuable lessons for financial engineers, the most important of which is that modelers in the social sciences—unlike physicists—should not seek the truth. Daniel Kahneman summarized his Nobel-prize-winning research on the psychology of judgment, including the distinction between intuition and reasoning, in “Maps of Bounded Rationality: Psychology for Behavioral Economics,” published in American Economic Review.

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

Abraham Wald, Albert Einstein, Bayesian statistics, Bear Stearns, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk tolerance, risk/return, Robert Solow, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, Thales and the olive presses, Thales of Miletus, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

While he had demonstrated that an options price depends on the underlying stock price mean and volatility, and the risk-free interest rate, the overall market for interest rates is much more multi-dimensional. The interest rate yield curve, which graphs rates against maturities, depends on many markets and instruments, each of which is subject to stochastic processes. His interest and collaboration with Emanuel Derman and Bill Toy resulted in a model of interest rates that was first used profitably by Goldman Sachs through the 1980s, but eventually entered the public domain when they published their work in the Financial Analysts Journal in 1990.2 Their model provided reasonable estimates for both the prices and volatilities of treasury bonds, and is still used today.

Swimming With Sharks: My Journey into the World of the Bankers by Joris Luyendijk

activist fund / activist shareholder / activist investor, bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, corporate raider, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, information asymmetry, inventory management, job-hopping, Large Hadron Collider, light touch regulation, London Whale, Money creation, Nick Leeson, offshore financial centre, regulatory arbitrage, Satyajit Das, selection bias, shareholder value, sovereign wealth fund, the payments system, too big to fail

A number of interviewees were struggling with this very question on a daily basis, and our conversations inevitably turned to complexity, and to the profound changes brought to the world of finance over the past decades by ‘quants’. In the middle office, quants build or manage the models their bank uses to calculate and possibly neutralise (‘hedge’) its risks. Drawn from academic backgrounds in maths, physics, chemistry and biology, these wizards invented the products that played a key role in the crash. Renowned quant Emanuel Derman typifies this new breed. After a few years as a physicist in academia and AT&T Bell Laboratories, Derman went to work for Goldman Sachs in 1985. In his bestselling autobiography My Life As a Quant he writes: ‘In physics you’re playing against God. In finance, you’re playing against God’s creatures.’

Data-Ism: The Revolution Transforming Decision Making, Consumer Behavior, and Almost Everything Else by Steve Lohr

"World Economic Forum" Davos, 23andMe, Abraham Maslow, Affordable Care Act / Obamacare, Albert Einstein, Alvin Toffler, Bear Stearns, behavioural economics, big data - Walmart - Pop Tarts, bioinformatics, business cycle, business intelligence, call centre, Carl Icahn, classic study, cloud computing, computer age, conceptual framework, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, Danny Hillis, data is the new oil, data science, David Brooks, driverless car, East Village, Edward Snowden, Emanuel Derman, Erik Brynjolfsson, everywhere but in the productivity statistics, financial engineering, Frederick Winslow Taylor, Future Shock, Google Glasses, Ida Tarbell, impulse control, income inequality, indoor plumbing, industrial robot, informal economy, Internet of things, invention of writing, Johannes Kepler, John Markoff, John von Neumann, lifelogging, machine translation, Mark Zuckerberg, market bubble, meta-analysis, money market fund, natural language processing, obamacare, pattern recognition, payday loans, personalized medicine, planned obsolescence, precision agriculture, pre–internet, Productivity paradox, RAND corporation, rising living standards, Robert Gordon, Robert Solow, Salesforce, scientific management, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, SimCity, six sigma, skunkworks, speech recognition, statistical model, Steve Jobs, Steven Levy, The Design of Experiments, the scientific method, Thomas Kuhn: the structure of scientific revolutions, Tony Fadell, unbanked and underbanked, underbanked, Von Neumann architecture, Watson beat the top human players on Jeopardy!, yottabyte

That is not necessarily a confidence-inspiring statement, given the lessons of the 2008 financial crisis. Quants didn’t cause the crisis, but they played their part. Their risk models proved myopic because they were too simple-minded, unable to take account of the rich, chaotic tapestry of behavior, especially in times of stress. Emanuel Derman, a physicist and former quant at Goldman Sachs, explained the perils of math models in finance, in his 2011 book, Models Behaving Badly. After coming to Wall Street in 1985, Derman soon came to believe that physics models could be successfully applied to finance and economics—a belief he later abandoned.

Frequently Asked Questions in Quantitative Finance by Paul Wilmott

Abraham Wald, Albert Einstein, asset allocation, beat the dealer, Black-Scholes formula, Brownian motion, butterfly effect, buy and hold, capital asset pricing model, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discrete time, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, iterative process, lateral thinking, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk free rate, risk/return, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, transaction costs, urban planning, value at risk, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

The resulting volatility structure never matches actual volatility, and even if exotics are priced consistently it is not clear how to best hedge exotics with vanillas so as to minimize any model error. Such concerns seem to carry little weight, since the method is so ubiquitous. As so often happens in finance, once a technique becomes popular it is hard to go against the majority. There is job safety in numbers. See Emanuel Derman and Iraj Kani (1994), Bruno Dupire (1994) and Mark Rubinstein (1994). 1996 Avellaneda and Parás Marco Avellaneda and Antonio Parás were, together with Arnon Levy and Terry Lyons, the creators of the uncertain volatility model for option pricing. It was a great breakthrough for the rigorous, scientific side of finance theory, but the best was yet to come.

A Primer for the Mathematics of Financial Engineering by Dan Stefanica

asset allocation, Black-Scholes formula, capital asset pricing model, constrained optimization, delta neutral, discrete time, Emanuel Derman, financial engineering, implied volatility, law of one price, margin call, quantitative trading / quantitative finance, risk free rate, Sharpe ratio, short selling, time value of money, transaction costs, volatility smile, yield curve, zero-coupon bond

I learned a lot from working alongside my colleagues in the mathematics department and from many conversations with practitioners from the financial industry.. Special thanks are due to Elena Kosygina and Sherman Wong, as well as to my good friends Peter Carr and Salih Neftci. The title of the book was suggested by Emanuel Derman, and is more euphonious than any previously considered alternatives. Many students have looked over ever-changing versions of the book, and their help and encouragement were greatly appreciated. The knowledgeable comments and suggestions of Robert Spruill are reflected in the final version of the book, as are exercises suggested by Sudhanshu Pardasani.

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril by Satyajit Das

"there is no alternative" (TINA), "World Economic Forum" Davos, 9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Alan Greenspan, Albert Einstein, Alfred Russel Wallace, Anthropocene, Anton Chekhov, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, bitcoin, bond market vigilante , Bretton Woods, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, digital divide, disintermediation, disruptive innovation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial engineering, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, geopolitical risk, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, Great Leap Forward, Greenspan put, happiness index / gross national happiness, high-speed rail, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), it is difficult to get a man to understand something, when his salary depends on his not understanding it, It's morning again in America, Jane Jacobs, John Maynard Keynes: technological unemployment, junk bonds, Kenneth Rogoff, Kevin Roose, knowledge economy, knowledge worker, Les Trente Glorieuses, light touch regulation, liquidity trap, Long Term Capital Management, low interest rates, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, middle-income trap, Mikhail Gorbachev, military-industrial complex, Minsky moment, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, PalmPilot, passive income, peak oil, peer-to-peer lending, pension reform, planned obsolescence, plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Robert Solow, Ronald Reagan, Russell Brand, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, Stephen Fry, systems thinking, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, uber lyft, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

Reduced funding for military research, the cancellation of the Superconducting Super Collider project, and the scaling down of Bell Laboratories meant that a large number of scientists, some from Eastern Europe and China, drifted into finance. These POWs—physicists on Wall Street, a term coined by Goldman Sachs's Emanuel Derman—helped drive the trading of complex instruments, which were now an established part of the finance economy. These events and their influences were central to the continuation of postwar expansion. The period commencing in the 1990s became known as the Great Moderation, an era of strong economic growth, high production and employment, low inflation, reduced volatility in the business cycle, and self-adulation among politicians, central bankers, and academic economists.

My Life as a Quant: Reflections on Physics and Finance by Emanuel Derman

Bear Stearns, Berlin Wall, bioinformatics, Black-Scholes formula, book value, Brownian motion, buy and hold, capital asset pricing model, Claude Shannon: information theory, Dennis Ritchie, Donald Knuth, Emanuel Derman, financial engineering, fixed income, Gödel, Escher, Bach, haute couture, hiring and firing, implied volatility, interest rate derivative, Jeff Bezos, John Meriwether, John von Neumann, Ken Thompson, law of one price, linked data, Long Term Capital Management, moral hazard, Murray Gell-Mann, Myron Scholes, PalmPilot, Paul Samuelson, pre–internet, proprietary trading, publish or perish, quantitative trading / quantitative finance, Sharpe ratio, statistical arbitrage, statistical model, Stephen Hawking, Steve Jobs, stochastic volatility, technology bubble, the new new thing, transaction costs, volatility smile, Y2K, yield curve, zero-coupon bond, zero-sum game

Written by perhaps the leading practitioner of his generation, this insightful narrative explores the disparate cultures of physics, finance, and their powerful fusion known as phynance. This book is a mustread for aspiring quants, financial historians, and armchair sociologists interested in the machinations of both academia and industry." -Peter Carr, Head of Quantitative Research, Bloomberg, and Director, Masters in Math Finance, NYU Emanuel Derman To the Memory of My Parents Ambition is a state of permanent dissatisfaction with the present. PROLOGUE THE TWO CULTURES 1 Physics and finance ■ What quants do ■ The Black-Scholes model ■ Quants and traders Pure thought and beautiful mathematics can divine the laws of physics ■ Can they do the same for finance?

This Will Make You Smarter: 150 New Scientific Concepts to Improve Your Thinking by John Brockman

23andMe, adjacent possible, Albert Einstein, Alfred Russel Wallace, Anthropocene, banking crisis, Barry Marshall: ulcers, behavioural economics, Benoit Mandelbrot, Berlin Wall, biofilm, Black Swan, Bletchley Park, butterfly effect, Cass Sunstein, cloud computing, cognitive load, congestion charging, correlation does not imply causation, Daniel Kahneman / Amos Tversky, dark matter, data acquisition, David Brooks, delayed gratification, Emanuel Derman, epigenetics, Evgeny Morozov, Exxon Valdez, Flash crash, Flynn Effect, Garrett Hardin, Higgs boson, hive mind, impulse control, information retrieval, information security, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jaron Lanier, Johannes Kepler, John von Neumann, Kevin Kelly, Large Hadron Collider, lifelogging, machine translation, mandelbrot fractal, market design, Mars Rover, Marshall McLuhan, microbiome, Murray Gell-Mann, Nicholas Carr, Nick Bostrom, ocean acidification, open economy, Pierre-Simon Laplace, place-making, placebo effect, power law, pre–internet, QWERTY keyboard, random walk, randomized controlled trial, rent control, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Satyajit Das, Schrödinger's Cat, scientific management, security theater, selection bias, Silicon Valley, Stanford marshmallow experiment, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, Stuart Kauffman, sugar pill, synthetic biology, the scientific method, Thorstein Veblen, Turing complete, Turing machine, twin studies, Vilfredo Pareto, Walter Mischel, Whole Earth Catalog, WikiLeaks, zero-sum game

Clifford Pickover The Kaleidoscopic Discovery Engine We are reluctant to believe that great discoveries are part of a discovery kaleidoscope and are mirrored in numerous individuals at once. Rebecca Newberger Goldstein Inference to the Best Explanation Not all explanations are created equal. Emanuel Derman Pragmamorphism Being pragmamorphic sounds equivalent to taking a scientific attitude toward the world, but it easily evolves into dull scientism. Nicholas Carr Cognitive Load When our cognitive load exceeds the capacity of our working memory, our intellectual abilities take a hit.

Doing Data Science: Straight Talk From the Frontline by Cathy O'Neil, Rachel Schutt

Amazon Mechanical Turk, augmented reality, Augustin-Louis Cauchy, barriers to entry, Bayesian statistics, bike sharing, bioinformatics, computer vision, confounding variable, correlation does not imply causation, crowdsourcing, data science, distributed generation, Dunning–Kruger effect, Edward Snowden, Emanuel Derman, fault tolerance, Filter Bubble, finite state, Firefox, game design, Google Glasses, index card, information retrieval, iterative process, John Harrison: Longitude, Khan Academy, Kickstarter, machine translation, Mars Rover, Nate Silver, natural language processing, Netflix Prize, p-value, pattern recognition, performance metric, personalized medicine, pull request, recommendation engine, rent-seeking, selection bias, Silicon Valley, speech recognition, statistical model, stochastic process, tacit knowledge, text mining, the scientific method, The Wisdom of Crowds, Watson beat the top human players on Jeopardy!, X Prize

The next logical concept then is: models and algorithms are not only capable of predicting the future, but also of causing the future. That’s what we can look forward to, in the best of cases, and what we should fear in the worst. As an introduction to how to approach these issues ethically, let’s start with Emanuel Derman’s Hippocratic Oath of Modeling, which was made for financial modeling but fits perfectly into this framework: I will remember that I didn’t make the world and that it doesn’t satisfy my equations. Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences by Steven G. Mandis

activist fund / activist shareholder / activist investor, algorithmic trading, Bear Stearns, Berlin Wall, Bob Litterman, bonus culture, book value, BRICs, business process, buy and hold, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, commoditize, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, eat what you kill, Emanuel Derman, financial innovation, fixed income, friendly fire, Glass-Steagall Act, Goldman Sachs: Vampire Squid, high net worth, housing crisis, junk bonds, London Whale, Long Term Capital Management, merger arbitrage, Myron Scholes, new economy, passive investing, performance metric, proprietary trading, radical decentralization, risk tolerance, Ronald Reagan, Saturday Night Live, Satyajit Das, shareholder value, short selling, sovereign wealth fund, subprime mortgage crisis, systems thinking, The Nature of the Firm, too big to fail, value at risk

Interviews confirmed the level of dissonance at Goldman, even as a publicly traded firm, in discussing and understanding that the output of the models was and is unique to Goldman, which meant the firm was not as dependent on the models as were other firms, and that, combined with what sociologists call a “heterarchical structure” (less hierarchy in the chain of command than in many firms) and the trading experience of its top executives, gave Goldman an edge.8 The more intense scrutiny of the models and risk factors led Goldman’s top executives to pick up on market signals that other firms’ executives missed.9 As Emanuel Derman, the former head of the quantitative risk strategies group at Goldman and now a professor at Columbia, wrote, at Goldman, “Even if you insist on representing risk with a single number, VaR isn’t the best one … As a result, though we [Goldman] used VaR, we didn’t make it our religion.”10 (Meanwhile, at other firms, measures like “VaR [value at risk] … became institutionalized,” as the New York Times’ Joe Nocera put it.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Black-Scholes formula, book value, Brownian motion, business cycle, buy and hold, buy low sell high, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, currency risk, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, global macro, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, junk bonds, late capitalism, law of one price, Long Term Capital Management, low interest rates, managed futures, margin call, market clearing, market design, market friction, Market Wizards by Jack D. Schwager, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, Phillips curve, price discovery process, price stability, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, short squeeze, SoftBank, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, tail risk, technology bubble, time dilation, time value of money, total factor productivity, transaction costs, two and twenty, value at risk, Vanguard fund, yield curve, zero-coupon bond

For instance, we consider a stock’s price-to-earnings ratio, not its enterprise value-to-earnings ratio because the latter would look bad for a leveraged firm just because the interest payments reduce the earnings. Hence, with enterprise value in the numerator, the denominator should have earnings before interest expenses. ___________________ 1 Quantitative traders are close cousins to, but perform different roles than, the “sell-side quants” described in Emanuel Derman’s interesting autobiography My Life as a Quant (2004). Sell-side quants provide analytical tools that are helpful for hedging, risk management, discretionary traders, clients, and other purposes. In contrast, quantitative traders work on the “buy-side” and build models that are used directly as a tool for systematic trading. 2 See Damodaran (2012) for an extensive description of equity valuation and financial statement analysis. 3 To see this result, first note that Then change index on the first book value and make the appropriate adjustments to arrive at which gives the residual income model.

No One Would Listen: A True Financial Thriller by Harry Markopolos

Alan Greenspan, backtesting, barriers to entry, Bernie Madoff, buy and hold, call centre, centralized clearinghouse, correlation coefficient, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, family office, financial engineering, financial thriller, fixed income, forensic accounting, high net worth, index card, Long Term Capital Management, Louis Bachelier, low interest rates, Market Wizards by Jack D. Schwager, offshore financial centre, payment for order flow, Ponzi scheme, price mechanism, proprietary trading, quantitative trading / quantitative finance, regulatory arbitrage, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, statistical arbitrage, too big to fail, transaction costs, two and twenty, your tax dollars at work

To Leon Gross, thanks for your expert analysis; I wish the SEC had bothered to call you—things might have been different if they had. All of you were helpful at various points during my team’s investigation, proving that plenty of honest people work on Wall Street. I would like to thank the following people at Goldman Sachs for teaching me all about derivatives math: Dr. Joanne Hill, Dr. Emanuel Derman, Rebecca Cheong, Michael Liou, Jack Lehman, Mark Zurack, and Amy Goodfriend. To the late John “Front Page” Wilke of the Wall Street Journal for your courage and inspiration on all those corruption cases you broke. Real investigative journalists are a rare breed, but you were one of the best.

The Social Animal: The Hidden Sources of Love, Character, and Achievement by David Brooks

"World Economic Forum" Davos, Abraham Maslow, Albert Einstein, asset allocation, assortative mating, Atul Gawande, behavioural economics, Bernie Madoff, business process, Cass Sunstein, choice architecture, classic study, clean water, cognitive load, creative destruction, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, deliberate practice, disintermediation, Donald Trump, Douglas Hofstadter, Emanuel Derman, en.wikipedia.org, fake it until you make it, fear of failure, financial deregulation, financial independence, Flynn Effect, George Akerlof, Henri Poincaré, hiring and firing, impulse control, invisible hand, Jeff Hawkins, Joseph Schumpeter, labor-force participation, language acquisition, longitudinal study, loss aversion, medical residency, meta-analysis, mirror neurons, Monroe Doctrine, Paul Samuelson, power law, Richard Thaler, risk tolerance, Robert Shiller, school vouchers, six sigma, social intelligence, Stanford marshmallow experiment, Steve Jobs, Steven Pinker, tacit knowledge, the scientific method, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen, Walter Mischel, young professional

The influential economist Irving Fisher wrote his doctoral dissertation under the supervision of a physicist, and later helped build a machine with levers and pumps to illustrate how an economy works. Paul Samuelson applied the mathematical principles of thermodynamics to economics. On the finance side, Emanuel Derman was a physicist who became a financier and played a central role in developing the models for derivatives. While valuable tools for understanding economic behavior, mathematical models were also like lenses that filtered out certain aspects of human nature. They depended on the notion that people are basically regular and predictable.

Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley by Antonio Garcia Martinez

Airbnb, airport security, always be closing, Amazon Web Services, Big Tech, Burning Man, business logic, Celtic Tiger, centralized clearinghouse, cognitive dissonance, collective bargaining, content marketing, corporate governance, Credit Default Swap, crowdsourcing, data science, deal flow, death of newspapers, disruptive innovation, Dr. Strangelove, drone strike, drop ship, El Camino Real, Elon Musk, Emanuel Derman, Fairchild Semiconductor, fake it until you make it, financial engineering, financial independence, Gary Kildall, global supply chain, Goldman Sachs: Vampire Squid, Hacker News, hive mind, How many piano tuners are there in Chicago?, income inequality, industrial research laboratory, information asymmetry, information security, interest rate swap, intermodal, Jeff Bezos, Kickstarter, Malcom McLean invented shipping containers, Marc Andreessen, Mark Zuckerberg, Maui Hawaii, means of production, Menlo Park, messenger bag, minimum viable product, MITM: man-in-the-middle, move fast and break things, Neal Stephenson, Network effects, orbital mechanics / astrodynamics, Paul Graham, performance metric, Peter Thiel, Ponzi scheme, pre–internet, public intellectual, Ralph Waldo Emerson, random walk, Reminiscences of a Stock Operator, Ruby on Rails, Salesforce, Sam Altman, Sand Hill Road, Scientific racism, second-price auction, self-driving car, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, Skype, Snapchat, social graph, Social Justice Warrior, social web, Socratic dialogue, source of truth, Steve Jobs, tech worker, telemarketer, the long tail, undersea cable, urban renewal, Y Combinator, zero-sum game, éminence grise

These are the financial engineers who recycle the mathematics of fluid mechanics or probability for the world of filthy lucre. They absolutely litter Wall Street now, and some areas of finance, like the hyperfast world of high-frequency trading, couldn’t exist without them. The most authentic view of their world was penned by a founder of the Goldman Strategies team, Emanuel Derman, in his classic My Life as a Quant. † For fans of schadenfreude, life is a never-ending feast. When the Madoff scandal, the largest Ponzi scheme in American history, erupted in late 2008, it would turn out that the Elie Wiesel Foundation for Humanity had invested all of its assets with Madoff.

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

Albert Einstein, Alvin Toffler, Atul Gawande, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, Black Swan, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, Carl Icahn, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, Future Shock, game design, global macro, hindsight bias, housing crisis, index fund, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, managed futures, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, Market Wizards by Jack D. Schwager, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, Teledyne, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, William of Occam, zero-sum game

Barclay Managed Futures Report, Vol. 2, No. 3 (2000). 73. Sir Arthur Conan Doyle, The Sign of Four. London and New York: Pitman and Sons, 1890. 74. Christopher L. Culp, Media Nomics (April 1995), 4. 75. The Coming Storm, The Economist (February 17, 2004), see www.economist.com/buttonwood. 76. Emanuel Derman, The Journal of Derivatives (Winter, 2000), 64. 77. Frederic Townsend, Futures (December 2000), 75. 78. Another Two Bites the Dust. Derivative Strategies (May 16, 1994), 7. Chapter 5 1. Michael J. Mauboussin and Kristen Bartholdson, The Babe Ruth Effect: Frequency versus Magnitude The Consilient Observer.

Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb

"World Economic Forum" Davos, Air France Flight 447, Alan Greenspan, Andrei Shleifer, anti-fragile, banking crisis, Benoit Mandelbrot, Berlin Wall, biodiversity loss, Black Swan, business cycle, caloric restriction, caloric restriction, Chuck Templeton: OpenTable:, commoditize, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discrete time, double entry bookkeeping, Emanuel Derman, epigenetics, fail fast, financial engineering, financial independence, Flash crash, flying shuttle, Gary Taubes, George Santayana, Gini coefficient, Helicobacter pylori, Henri Poincaré, Higgs boson, high net worth, hygiene hypothesis, Ignaz Semmelweis: hand washing, informal economy, invention of the wheel, invisible hand, Isaac Newton, James Hargreaves, Jane Jacobs, Jim Simons, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, knowledge economy, language acquisition, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, Marc Andreessen, Mark Spitznagel, meta-analysis, microbiome, money market fund, moral hazard, mouse model, Myron Scholes, Norbert Wiener, pattern recognition, Paul Samuelson, placebo effect, Ponzi scheme, Post-Keynesian economics, power law, principal–agent problem, purchasing power parity, quantitative trading / quantitative finance, Ralph Nader, random walk, Ray Kurzweil, rent control, Republic of Letters, Ronald Reagan, Rory Sutherland, Rupert Read, selection bias, Silicon Valley, six sigma, spinning jenny, statistical model, Steve Jobs, Steven Pinker, Stewart Brand, stochastic process, stochastic volatility, synthetic biology, tacit knowledge, tail risk, Thales and the olive presses, Thales of Miletus, The Great Moderation, the new new thing, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Malthus, too big to fail, transaction costs, urban planning, Vilfredo Pareto, Yogi Berra, Zipf's Law

Generous comments and help: Peter Nielsen, Rory Sutherland, Saifedean Ammous, Max Brockman, John Brockman, Marcos Carreira, Nathan Myhrvold, Aaron Brown, Terry Burnham, Peter Boettke, Russ Roberts, Kevin Horgan, Farid Karkaby, Michael Schrague, Dan Goldstein, Marie-Christine Riachi, Ed Frankel, Mika Kasuga, Eric Weinstein, Emanuel Derman, Alberto Mingardi, Constantine Sandis, Guy Deutscher, Bruno Dupire, George Martin, Joelle Weiss, Rohan Silva, Janan Ganesh, Dan Ariely, Gur Huberman, Cameron Williams, Jacques Merab, Lorenzo Savorelli, Andres Velasco, Eleni Panagiotarakou, Conrad Young, Melik Keylan, Seth Roberts, John McDonald, Yaneer Bar-Yam, David Shaywitz, Nouriel Roubini, Philippe Asseily, Ghassan Bejjani, Alexis Grégoire Saint-Marie, Charles Tapiero, Barry Blecherman, Art De Vany, Guy Riviere, Bernard Oppetit, Brendon Yarkin, and Mark Spitznagel; and my online helpers Jean-Louis Reault, Ben Lambert, Marko Costa, Satiyaki Den, Kenneth Lamont, Vergil Den, Karen Brennan, Ban Kanj, Lea McKay, Ricardo Medina, Marco Alves, Pierre Madani, Greg Linster, Oliver Mayor, Satyaki Roy, Daniel Hogendoorn, Phillip Crenshaw, Walter Marsh, John Aziz, Graeme Blake, Greg Linster, Sujit Kapadia, Alvaro De La Paz, Apoorv Bajpai, Louis Shickle, Ben Brady, Alfonso Payno de las Cuevas, “Guru Anaerobic,” Alexander Boland, David Boxenhorn, Dru Stevenson, and Michal Kolano.

The Concepts and Practice of Mathematical Finance by Mark S. Joshi

Black-Scholes formula, Brownian motion, correlation coefficient, Credit Default Swap, currency risk, delta neutral, discrete time, Emanuel Derman, financial engineering, fixed income, implied volatility, incomplete markets, interest rate derivative, interest rate swap, London Interbank Offered Rate, martingale, millennium bug, power law, quantitative trading / quantitative finance, risk free rate, short selling, stochastic process, stochastic volatility, the market place, time value of money, transaction costs, value at risk, volatility smile, yield curve, zero-coupon bond

When pricing an exotic option we should be careful to examine what features of the model it is particularly sensitive to. 18.8 Further reading Jim Gatheral's book, [58], is the best reference currently available on the dynamics of the volatility surface. Cont and Fonseca, [40], carried out a principal components analysis of the volatility surface for index options in S&P and FTSE. They have many interesting results including that relative movements of implied volatilities have little correlation with the underlying. Emanuel Derman carried out an analysis of how changes in spot related to changes in skew for the S&P 500 and identified differing regimes over time, [46]. Other papers applying the same methodologies in different contexts are [1] and [117]. See also [12], [83] and [84] for further discussion of how option price movements are affected by spot movements in the real world.

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves by Andrew Ross Sorkin

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Andy Kessler, Asian financial crisis, Bear Stearns, Berlin Wall, book value, break the buck, BRICs, business cycle, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, Dr. Strangelove, Emanuel Derman, Fall of the Berlin Wall, fear of failure, financial engineering, fixed income, Glass-Steagall Act, Goldman Sachs: Vampire Squid, housing crisis, indoor plumbing, invisible hand, junk bonds, Ken Thompson, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Michael Milken, Mikhail Gorbachev, money market fund, moral hazard, naked short selling, NetJets, Northern Rock, oil shock, paper trading, proprietary trading, risk tolerance, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, uptick rule, value at risk, éminence grise

Christine Harper, “Wall Street Bonuses Hit Record $39 Billion for 2007,” Bloomberg, January 17, 2008; Susanne Craig, Kate Kelly, and Deborah Solomon, “Goldman Sets Plan to Escape U.S. Grip,” Wall Street Journal, April 14, 2009. “The whole world is moving”: Louis Uchitelle, “The Richest of the Rich, Proud of a New Gilded Age,” New York Times, July 15, 2007. “ate their own cooking”: As Emanuel Derman, of hedge fund Prisma Capital Partners, noted: “These guys ate their own cooking; they didn’t just pass it on to clients.” Paul Barrett, “What Brought Down Wall Street?” BusinessWeek, September 19, 2008. “The sudden failure or abrupt withdrawal”: Charles A. Bowsher, comptroller general of the United States, said this on May 18, 1994, before the Senate Committee on Banking, Housing, and Urban Affairs. http://www.gao.gov/products/GGD-94–133.

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite by Daniel Markovits

8-hour work day, activist fund / activist shareholder / activist investor, affirmative action, algorithmic management, Amazon Robotics, Anton Chekhov, asset-backed security, assortative mating, basic income, Bernie Sanders, big-box store, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, compensation consultant, computer age, corporate governance, corporate raider, crony capitalism, David Brooks, deskilling, Detroit bankruptcy, disruptive innovation, Donald Trump, Edward Glaeser, Emanuel Derman, equity premium, European colonialism, everywhere but in the productivity statistics, fear of failure, financial engineering, financial innovation, financial intermediation, fixed income, Ford paid five dollars a day, Frederick Winslow Taylor, fulfillment center, full employment, future of work, gender pay gap, gentrification, George Akerlof, Gini coefficient, glass ceiling, Glass-Steagall Act, Greenspan put, helicopter parent, Herbert Marcuse, high net worth, hiring and firing, income inequality, industrial robot, interchangeable parts, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kevin Roose, Kiva Systems, knowledge economy, knowledge worker, Kodak vs Instagram, labor-force participation, Larry Ellison, longitudinal study, low interest rates, low skilled workers, machine readable, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass incarceration, medical residency, meritocracy, minimum wage unemployment, Myron Scholes, Nate Silver, New Economic Geography, new economy, offshore financial centre, opioid epidemic / opioid crisis, Paul Samuelson, payday loans, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, purchasing power parity, rent-seeking, Richard Florida, Robert Gordon, Robert Shiller, Robert Solow, Ronald Reagan, Rutger Bregman, savings glut, school choice, shareholder value, Silicon Valley, Simon Kuznets, six sigma, Skype, stakhanovite, stem cell, Stephen Fry, Steve Jobs, stock buybacks, supply-chain management, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Theory of the Leisure Class by Thorstein Veblen, Thomas Davenport, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, traveling salesman, universal basic income, unpaid internship, Vanguard fund, War on Poverty, warehouse robotics, Winter of Discontent, women in the workforce, work culture , working poor, Yochai Benkler, young professional, zero-sum game

Whalen, “Financialization and Economic Inequality,” Journal of Economic Issues 44, no. 3 (2010): 764–75. through the 1950s and 1960s: See David Kaiser, American Physics and the Cold War Bubble (Chicago: University of Chicago Press, in preparation). See more at http://web.mit.edu/dikaiser/www/CWB.html#CWBChapters. “science in the service of war”: Emanuel Derman, My Life as a Quant: Reflections on Physics and Finance (Hoboken, NJ: John Wiley & Sons, 2004), 4. Hereafter cited as Derman, My Life as a Quant. research dried up: Derman, My Life as a Quant, 4. found themselves without academic jobs: The number of physics PhDs produced by American universities, for example, surged in the 1950s and 1960s, peaked in 1970, and then collapsed, falling by over 40 percent by the early 1980s.