YouSaid · the spoken record

Emanuel Derman

lines on the record: 127
first: 2016-02-26
most recent: 2016-02-26
sittings or episodes: 1
sources: podcast

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“Various factors that seem to predict the market. I care a little bit why, but I care less why than finding the actual pattern. And that's become, so statistics and econometrics have become much more fashionable as a result of high-frequency trading and algorithmic trading.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think if I get a little bit general, there have been sort of two classes of models that people use in finance. One are structural models, where, like for derivatives, where you say an option is really a hybrid of a stock and a bond and I've got to figure out exactly how it works. And that's what Black Shoals does. So it's really saying an option is like a molecule made out of atoms and there's a structure there. And those were always what quants mostly did. But what's happened, as you point out in the last few years, is econometric or statistical models have become much more the rage and students are going in that direction where you just say, can I find a regression between”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I've noticed that. So, a lot of that stuff, some sentiment based, some really objective, like can you figure out in some way how much sales are happening in various places from data you can collect on the internet? What was your question again last night? I have no idea. Oh, so”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes or even things like can you scour the internet to find out whether there were a lot of cars in Walmart parking lots the last year you know to try to get them get SOS advice”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Very broad. If I talk from a sociological point of view, I see from the students at Columbia until a few years ago, they all wanted to take derivatives. And the last year or two, everybody's been tempted, probably by the job market and by excitement to work on high-frequency trading, algorithmic trading. And now for the last year or two, machine learning. Meaning, you kn”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Maybe a little bit, but that's one of them. But I sort of admire him because he's written some, I mean, for that too, but he's written some good textbooks and I like to think like me. He tries to make things simpler rather than complexify them. There's been a tendency for finance academics to do everything in a very formal axiomatic way as though they're teaching math. And Paul and myself both like to use the least amount of math possible.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I mean, sort of about everything in his own way. So I kind of admire him. I kind of admired Steve Ross and Mark Rubinstein. They were more PhD academics, but for their setting out the whole basis of option pricing, which I spent most of my life on. I kind of admire Paul Wilmot, who I once wrote a paper with. We actually wrote based on the financial crisis, we wrote a financial model as manifesto. It was a bit of a joke. I recall.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Right from the start, somebody who was totally unknown could come to him and send him an email about something and he would think about it without any prejudice.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“A think fisher black most of all, I wrote a lot about him in the book that I wrote in my memoir, My Life as a Quant because I think he was kind of an exceptional guy both from a difficult guy but exceptional from a character point of view in that he liked to tackle everything ab initio.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes, and the prediction comes less in predicting what will happen than in saying this is cheap and eventually I think my model says this is cheap and so eventually it will come to what I think is fair value.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“And so you say, what's the cost of canning? What's the cost of buying the apples, pears, and peaches? And this should be the price of fruit salad. And then sometimes you do the reverse. You say, I know the price of fruit salad. I know the price of apples and oranges. So what's the right price for pears? But it's always trying to figure out in the present how to get the liquid thing given the price of the liquid things, how to get the value of the illiquid things. Am I making sense?”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, for example, if you went to buy an option, how do you figure out the option price from the stock and the bond price, which are both liquid? And so the example I like to give in a way, it's also a metaphor, is if a lot of the problems you face with is not what will happen to the price of apples in the future if you're dealing with fruit, but what should I pay for fruit salad given the price of apples, pears, and peaches?”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“You know, I think people who academics or other people haven't worked with trading desks imagine that you're making predictions all the time. I think the truth is, most of the time, certainly in derivatives, you're not making predictions about the future. You're trying to figure out in the present what's cost too much and what's too rich and what's too dear. And your models are much more geared to saying this is more expensive than it should be and this is richer than it should be. And then the prediction is, okay, the rich things will become cheaper and the cheap things will become richer. But most of your time is spent trying to, at least most of my time was spent trying to figure out. How to tell the price of something illiquid from a lot of liquid things.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, because you can pretend Apple and Apple and Walmart have nothing to do with each other and write an option model for each, but you can't pretend a five-year bond and a three-year bond have nothing to do with each other because the five-year bond will become a three-year bond.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“It was a model for options on treasury bonds or options on interest rates. Goldman was doing a lot of business. People were beginning to extend. Which is for options on stock. Options on bonds, and it's actually quite a complicated problem to do consistently”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Those days, you couldn't get somebody to do it for you. If you could do it yourself, you could be that much more effective. If you knew the theory and the programming.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I started out on a bun disc, and actually, along the lines of what you're saying, I worked on this model, which you mentioned, the Black Dermant Toy model. But I think one of the things that had almost as much impact was that I could program well in a world where people couldn't. And I built a user interface that let the traders enter, trade, save it, think about it, come back the next day and talk to the salespeople, talk to a client again. user interface makes a lot of difference. So in those days, if you could actually”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, first of all, everybody on trading desks is, as I said several times before, much more numerous now. A lot of them can write their own models. A lot of them studied math, especially in derivatives. You get a lot of French or even American students who have all gotten advanced degrees or PhDs in finance. So that's become much more complicated. The second thing that's changed a lot is electronic price feeds and electronic settlements. So suddenly computers have become much more important.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I like it. I would say it's not as exciting as being on Wall Street. People in universities are sort of siloed in that everybody's there because they want to get on with their research and have students. And so I would say, in a sense, being at Goldman was more collegial than being in a university for me, despite the university being a college, because actually everybody wants to sort of, I'm exaggerating a little bit, but leave me alone. I have work to do. Is it Goldman? You could go to somebody and say, Oh, I'm thinking about this problem. Can you help me? And because you're all paid to pull in the same direction, they sort of helped you more willingly, I would say.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I actually liked about finance was it was a more multi-sided world where you spent part of your time doing theory, but part of your time writing programs and part of your time interacting with clients and with traders. And so there were many more sources of satisfaction. You had long-term projects and short-term projects. And I found that very satisfying. I got quite excited when I went to work at Goldman Smith.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I think there are. There's a much bigger market for risk management now. Some of it is PR. People just want to say they have risk management, but sometimes they have real risk management. What I liked about... If I talk pissy, what I liked about going to Goldman as opposed to being in physics, I like physics. But in physics, you somehow had the feeling like you had to be really superb or otherwise you were wasting your life because you spent all your time, I was doing theoretical physics, singing an office and banging your head against the wall trying to solve something difficult and you could spend half your time sort of depressed. What was nice about being a goldman?”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“It is competitive. I got a job as a particle physicist at Boulder in 1979. It was my last job in physics. And there were like 140 people applying for one job. Wow. It was really rough. I mean, it was after the Vietnam War. There was no money for research anymore. All the physics jobs had filled up when there was still a lot of money before the Hatfield McGovern Amendment, which stopped money going to research. I was maybe number four on the list or something in the first three either had dual career problems or got better jobs and I got the job. But yeah, it was kind of discouraging after a while.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“It was kind of intimidating, or even I sort of wrote in my life as a quant in my memoir, I wrote sort of you see your ambitions slowly getting degraded when you're like 18, you want to be like Einstein, and when you're like 25, you want to be like the professor that you know in your department, and then when you're like 32, you say, gee, the guy at the desk next to me is getting more invitations to give seminars than me. And then you suddenly think, wow, look where I've got to.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Me where I pulled that from other than Wikipedia. That's true. And then they eventually discovered that, although I was, yeah. No, I was a reasonably good physicist, but nevertheless, and maybe in finance too, but less so in physics, you run into people, I heard Feynman talk or people like that. Richard Feynman.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I'm reasonably smart. But finance also, actually physics and finance, there's lots of room for taste, I think, and where people go wrong is when they don't have taste and they start slavishly sort of following the mathematics too much. Physics is really driven by ideas and then mathematics. Implement them, and I think should be that way in finance too.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“No, I don't. I'm very glad I got a background in physics, but I'm also at this point glad I got out of it. It's like a rough life being in physics because there's so many incredibly smart people that you actually run into people and you say to your I can sort of understand what they're doing, but I could never have done that myself. So it's actually a bit of a relief to be had of there.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I'm not sure what I meant by that, to be honest. I think I probably just meant what I said before that in the end you will always be wrong and you will never... You know, it's what you were saying earlier. If you find some law of nature, it kind of holds forever. And if you find a model. Inevitably going to require revamping, changing alteration as people start to change their behavior.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think a lot of models work well related to what you were saying. They work well as long as you're just a ripple on the sea. But when you become the whole C, then.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“On a regular basis. And that's good as long as not everybody does that. You still need somebody out there looking for value. Otherwise, otherwise, yeah.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes, in the long run, more or less. I used to like to say that the efficient market hypothesis or model was a very clever jiu-jitsu trick by economists who couldn't predict what was going to happen. And instead of giving up, decided to make that a principle. So turning sort of weakness into strength.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“No explanation of why it's not funny anymore. The fact is, if you tell a joke 15 times, it's not funny anymore. And that's both a fact and a theory. It's true, and there's no explanation for it. That's just so I was trying to say earlier about Goethe when you describe something that's true, you can say why is it true, you just say it's true. And the words are the theory and the fact is that that's the way it behaves. The efficient market model is not like that. Markets are inefficient. It's a model. It's not a description of the way the world actually is. The world could be that way, but it isn't.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's not a theory because it doesn't describe the way things really behave. If I can give an example of I had a sort of anecdote to tell you of what I meant by theory in a corny sort of way, when my son was very small, I used to put him on my knee and play with him and bounce him up and down. And my sister used to do it to me, say half a pound of tuppney rice, half a pound of treacle, mix him up and make them nice. Pop goes the weasel. It's an old English thing. And then you drop your knees and the kid drops down to the floor. And he chordles with glee. And then he said again, and I did it again. And then he said again and I did it again. And when I did it the 15th time, when I dropped him down, he said to me, why it's not funny anymore. And so...”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I mentioned this earlier, but I found the whole thing really disappointing. I'm sort of disillusioned in that what I said earlier are somehow expected that I sort of like capitalism, but as I said before, I think if you want to benefit from taking risk, you've got to suffer the consequences. And that really hasn't happened.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, you know, I always like to make an analogy that finance is a lot like nutrition in that people take a small amount of information and extrapolate it like crazy. So they will tell you women should or shouldn't get estrogen or you should or shouldn't eat eggs and then they change their mind Basically, they're all aimed at, I don't know, they're all aimed at marketing in some sense.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“And that's partly the Federal Reserve's fault, but whatever. And I think models played a secondary role in that they were used to construct perhaps somewhat deceptively through the rating agencies instruments that purported to give you a high yield with a low risk. And some models were a tool in trying to cater to high risk, but in cater to disaster, but I don't think they were the fundamental cause.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“You know, as part of it definitely was, but I don't think it was a fundamental cause. There were a lot of things happening. My sort of slightly biased view is that really interest rates were very low and everybody was trying to stretch for yield and do anything that would get more yield.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it played out pretty accurately actually, although I was sort of looking, I can't remember too clearly, but I was looking at two kinds of risk. One was implementation risk where you have the idea right, but you've got all sorts of computer problems or inefficiency problems. Then I was looking at what happens when you actually have the idea wrong. And yeah, there was a first paper I think ever written on model risk. And I think it played out kind of accurately. That's sort of what sort of happened.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“pretty big impact on I like to be a little philosophical and say that if you take a model too seriously, it's a kind of idolatry in the sense you're assuming that somebody can write down a formula that's going to mimic the way people behave, but people are too complicated. And if you really believe that you can capture people in a formula or equation, you're looking for trouble in the long run.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“You look at the risk parody people that say you should have, instead of being 60% equities, 40% bonds, along the same philosophy, you're better off having one third of your risk in commodities, one-third of your risk in equities, and one-third of your risk in bonds, which means leveraging up bonds a lot because they have such low volatility. Right. And they also believe that in the long run that will work best, but in fact, they've done badly for the last few months.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I don't think it's just random. I think if you have skill that tends to persist. But on the other hand, the whole world is becoming so swept by people trading mechanically, for example. I think if you're a value investor now, then you kind of buy things when they go down. And you think they're cheap, on the other hand, the momentum investors who think momentum is a factor and they sell things that are going down and buy things that are going up. So I think the large number of people that are now acting in this mechanical way with some model like following momentum tends to mess up the people who are looking for value and it's much harder for hedge funds to compete in this world”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“No, I think there are people in hedge funds that really do have some skill that people are just doing indexing, which doesn't take any skill at all, really. I think they do have a skill I've seen studies that show that, especially in very illiquid complex instruments like mortgages, as opposed to equity long short, which is fairly simple, that hedge funds that tend to do better than average one year, there's some persistence. They tend to do better than average the next year.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's my impression, yeah. But at the same time, so there is a lot more of this quantitative stuff, but at the same time, to be And they all like to pretend that they have more secret source than maybe they actually do.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes, and now I think people actually have sort of statistical mathematical models that they fit to the whole surface of stock prices and decide which ones are cheap and which ones are rich. And somebody takes that model somewhere else or maybe finds the inspiration for that model in some finance paper that's buried somewhere. And people actually mine finance papers for these sort of anomalies or behavioral anomalies and start to implement them everywhere. Methods of finding alpha are getting a short run, shorter lifetime.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“The whole hedge fund and asset allocation or asset management world has become much more quantitative. When I started out, nobody knows areas knew a lot of math or used a lot of math. Now they all do As a result, I think they're all in competition with each other, and I think if somebody has a good idea some way, people move around a lot, and these I've literally seen examples of somebody from one firm going somewhere else, bringing an idea there, they use it, they get irritated because somebody else leaves and takes it somewhere else. So I think these models propagate a lot. And become widely used. And that does cut into the so-called alpha of everybody.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I've sort of got a rush of thoughts coming to my head. Go ahead and say that because I think all of the things you said are partially true. I think the first one, it's true that.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“I like the idea that I was going to say this earlier. I sort of think just using mathematics blindly is kind of stupid. And most models get their inspiration out of some economic or financial idea first. And the mathematics is just the implementation. Where you get into trouble is when you think that the mathematics is the thing in itself rather than the idea that's behind it.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“And then the second way, which I also like, is you really ought to have a model, isn't just mathematics, a model has some idea beneath its structural about the way things behave, how people respond, how markets behave, in order to be able to make some sort of judgment as to whether the world is still behaving according to the assumptions that you make.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a really tough question that's especially applicable to people who do statistical arbitrage or people you mentioned like Renaissance or I think that's very difficult. You have to two ways. The first way is statistical. You sort of have to have some idea of. When you're getting results that are statistically unlikely. So, if your model is correct, maybe you'll get some fraction of the time, something that's one or two standard deviations away. But if that persists, you start to say I'm in a different regime or the model is broken down.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“When I worked at Golden, we kind of tried to write the last two years I was there. I was in a group called Firmwide Risk, not in quantitative strategies, where we were trying to look at derivatives risk throughout the firm. And we sort of had a recommendation that every time somebody write a model, they be forced to specify The assumptions and conditions they were making so that Could specify when these things wouldn't hold. So for example, if you build a model to price options on Apple, you're pretending interest rates will be pretty much stable. You're not worried about interest rates. But if you suddenly go to some emerging market country where interest rates can rocket to 100%, somebody should understand that that's not the right model to use.”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I think the right way to use models is to sort of quantify your intuition. Like people can have intuition, but it's hard to translate that intuition into a number. And so, for example, if somebody said to you, what should I pay for an option? I know the price of an option at the money, what should I pay for an out of the money option, you know, it should be less, but it's hard to actually quantify how much less. And if you, but when you look at black shoals or options pricing, they invent the whole notion of volatility and measuring volatility. And just like you can have intuition about interest rates, a human being can have intuition about will volatility go up, how much will it go up by, how much will it go down by? And what the model does is let you take something you can think about in your head like...”
2016-02-26 · Masters in Business · Interview With Emanuel Derman: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source