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Review
“A readable, even eloquent combination of personal history, philosophical musing and honest confession concerning the dangers of relying on numerical models not only on Wall Street but also in life....it is undeniable that Models.Behaving.Badly. itself performs splendidly.” —Burton Malkiel, Wall Street Journal
"An erudite yet pleasantly readable exploration of why financial models failed during the U.S. mortgage meltdown and why modelers must learn to use them more wisely. Derman has distilled a lifetime of reading, research and thinking into these pages, and I read the book twice to see how he pulled the threads together without losing the reader." —Bloomberg News
"Ranging wittily across philosophy, literature, and the arcane world of high finance, Derman's argument is a heady mix of physics, economics, and memoir." —Nature
“A fascinating cross-disciplinary exploration of how and why financial and scientific models fail…A unique examination of the limits of models and theories in understanding and predicting human behavior, and a nice rejoinder to the equations-can-solve-or-explain-everything crowd.” —Kirkus Reviews
“Emanuel Derman has written my kind of a book, an elegant combination of memoir, confession, and essay on ethics, philosophy of science and professional practice. He convincingly establishes the difference between model and theory and shows why attempts to model financial markets can never be genuinely scientific. It vindicates those of us who hold that financial modeling is neither practical nor scientific. Exceedingly readable.” —Nassim N. Taleb, author of The Black Swan
"This is a compelling, accessible and provocative piece of work, that forces us to question many of the assumptions that we work with. As Derman explains so clearly, models are not "bad" in themselves; on the contrary, they are crucial for modern society. However, they have been used in a dangerously sloppy and careless way, with sometimes terrible results. Derman explains this clearly, and draws heavily onhis own lifetime experiences - ranging from growing up in appartheid south africa, working in the scientific field and then as a financial engineer on wall street - to provide a moving and fascinating set of illustrations of these principles. The conclusion is unexpectedly otpimistic - if people choose to listen." —Gillian Tett, author of Fool's Gold
"Models. Behaving. Badly. is an engaging and personal meditation on the limitations of our ability to predict the future, especially—but not only—in the context of financial markets. He is not interested in blame or politics, but in the deeper lessons to be drawn from the financial crisis. As a physicist who was also highly placed in the financial world, he explains clearly the difference between prediction and advice, theory and model and knowledge and wisdom." —Lee Smolin, Senior Researcher at Perimeter Institute for Theoretical Physics, author of The Trouble with Physics; Life of the Cosmos, and Three Roads to Quantum Gravity
"If you don't want your models to behave badly, you should study carefully these words of wisdom on the philosophy of quantitative modeling. Emanuel Derman has always been one of the most respected quants on Wall Street. Now he has proven that he is also one of the most thoughtful. Though, in the sequel he should tell us what happened to the large man over the Sudan!"
"An erudite yet pleasantly readable exploration of why financial models failed during the U.S. mortgage meltdown and why modelers must learn to use them more wisely. Derman has distilled a lifetime of reading, research and thinking into these pages, and I read the book twice to see how he pulled the threads together without losing the reader." —Bloomberg News
"Ranging wittily across philosophy, literature, and the arcane world of high finance, Derman's argument is a heady mix of physics, economics, and memoir." —Nature
“A fascinating cross-disciplinary exploration of how and why financial and scientific models fail…A unique examination of the limits of models and theories in understanding and predicting human behavior, and a nice rejoinder to the equations-can-solve-or-explain-everything crowd.” —Kirkus Reviews
“Emanuel Derman has written my kind of a book, an elegant combination of memoir, confession, and essay on ethics, philosophy of science and professional practice. He convincingly establishes the difference between model and theory and shows why attempts to model financial markets can never be genuinely scientific. It vindicates those of us who hold that financial modeling is neither practical nor scientific. Exceedingly readable.” —Nassim N. Taleb, author of The Black Swan
"This is a compelling, accessible and provocative piece of work, that forces us to question many of the assumptions that we work with. As Derman explains so clearly, models are not "bad" in themselves; on the contrary, they are crucial for modern society. However, they have been used in a dangerously sloppy and careless way, with sometimes terrible results. Derman explains this clearly, and draws heavily onhis own lifetime experiences - ranging from growing up in appartheid south africa, working in the scientific field and then as a financial engineer on wall street - to provide a moving and fascinating set of illustrations of these principles. The conclusion is unexpectedly otpimistic - if people choose to listen." —Gillian Tett, author of Fool's Gold
"Models. Behaving. Badly. is an engaging and personal meditation on the limitations of our ability to predict the future, especially—but not only—in the context of financial markets. He is not interested in blame or politics, but in the deeper lessons to be drawn from the financial crisis. As a physicist who was also highly placed in the financial world, he explains clearly the difference between prediction and advice, theory and model and knowledge and wisdom." —Lee Smolin, Senior Researcher at Perimeter Institute for Theoretical Physics, author of The Trouble with Physics; Life of the Cosmos, and Three Roads to Quantum Gravity
"If you don't want your models to behave badly, you should study carefully these words of wisdom on the philosophy of quantitative modeling. Emanuel Derman has always been one of the most respected quants on Wall Street. Now he has proven that he is also one of the most thoughtful. Though, in the sequel he should tell us what happened to the large man over the Sudan!"
—Clifford S. Asness, Ph.D., Managing & Founding Principal AQR Capital Management
“I found this book fascinating. Derman has a skill of mixing the personal with the abstract. You will not find another that takes you from the vagaries of the human eye to the vagaries of the stock market with stops at quantum electrodynmics. It is quite a ride.” —Jeremy Bernstein, author of Quantum Leaps, and Plutonium
"This is a thoughtful book for anyone interested in the overlap between the hard sciences and the soft sciences, from physicists to bankers. But finance academics beware, Professor Derman, with an iron fist in a velvet glove, gives them a good slapping." —Paul Wilmott, co-author "Financial Modelers' Manifesto"
Book Description
Emanuel Derman was a quantitative analyst (Quant) at Goldman Sachs, one of the financial engineers whose mathematical models usurped traders' intuition on Wall Street. The reliance traders put on such quantitative analysis was catastrophic for the economy, setting off the series of financial crises that began to erupt in 2007 with the mortgage crisis and from which we're still recovering. Here Derman looks at why people--bankers in particular--still put so much faith in these models, and why it's a terrible mistake to do so.
Though financial models imitate the style of physics by using the language of mathematics, ultimately they deal with human beings. Their similarity confuses the fundamental difference between the aims and possible achievements of the phsyics world and that of the financial world. When we make a model involving human beings, we are trying to force the ugly stepsister's foot into Cinderella's pretty glass slipper. It doesn't fit without cutting off some of the essential parts. Physicists and economists have been too enthusiastic to recognize the limits of their equations in the sphere of human behavior--which of course is what economics is all about.
Models.Behaving.Badly includes a personal account Derman's childhood encounter with failed models--the utopia of the kibbutz, his experience as a physicist on Wall Street, and a look at the models quants generated: the benefits they brought and the problems they caused. Derman takes a close look at what a model is, and then he highlights the differences between the success of modeling in physics and its relative failure in economics. Describing the collapse of the subprime mortgage CDO market in 2007, Derman urges us to stop relying on these models where possible, and offers suggestions for mending these models where they might still do some good. This is a fascinating, lyrical, and very human look behind the curtain at the intersection between mathematics and human nature.
Inside This Book
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Most helpful customer reviews
1 of 1 people found the following review helpful
1.0 out of 5 stars
For a very selective audience,
This review is from: Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life (Hardcover)
I expected this book to give some criticisms of financial models and or give indications of how to identify when models are behaving "badly". I expected both some insiders information of what is going on in the upper echelons of investment banks and an overview of how the financial models were really used / not used by traders.Unfortunately, this book tried to address these issues with as little real information / content as possible and whilst using as many words as possible. The entire book revolves around the concept that models are not perfect and don't explain everyone (this is contrasted with theories in physics that explain much more). However, even though comparisons are made, this theme gets tiring over time as the concept gets repeated again and again without any development. No real suggestions on improvement. No real ideas on how to improve the current system other than the obvious "models are models.. they are not perfect". However there were some interesting life examples / some descriptions of physics for those who are interested If you found my writing long winded, that's what a taste of what the book is like. Imagine this but spanned over 300 pages.
3 of 6 people found the following review helpful
1.0 out of 5 stars
Author Behaving Badly,
By J D Jobson (Edmonton, Alberta Canada) - See all my reviews
This review is from: Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life (Hardcover)
I have never felt so ripped off by a book. What this author learned from his time on Wall Street was how to take advantage of others. The musings of an old man did not do it for me. The financial modelling content was minimal and not very informative.I have a PhD in the mathematical sciences and many research publications in finance. Having spent 35 years in the classroom it is difficult for me to imagine what type of reader would find this book informative.
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Most Helpful Customer Reviews on Amazon.com (beta) Amazon.com:
3.0 out of 5 stars (26 customer reviews) 43 of 49 people found the following review helpful
1.0 out of 5 stars
belabored,
By Suez "Suez" - Published on Amazon.com
This review is from: Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life (Hardcover)
This book got me excited. Then, just as the economic models I teach,it became a disappointment. It's refreshing to start something that's different -- that isn't Michael Lewis. But this book quickly became tedious -- a self-promoting reflection of pieces of the author's life, a not-detailed-enough (you can't get much out of it if you don't already know it) and yet too-detailed (pages and pages) review of philosophy and physics, and very shallow comments about economic and financial models. It's also unfortunate that no one caught the error in defining a CDO, which is a collateralized debt obligation, not a collateralized "default" obligation. Mistakes such as this compromise the author's credibility. Don't buy this book. Spend your money on Daniel Kahneman's Thinking Fast and Slow -- it's fascinating and gives you the real meat of why economic and financial models behave badly.
14 of 14 people found the following review helpful
3.0 out of 5 stars
Readable but unfocused,
By A. Menon - Published on Amazon.com
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This review is from: Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life (Hardcover)
Emanuel Derman is a very prominent former financial modeller who trained as a physicist. Models Behaving Badly is a combination of personal philosophy, practical reality and ethical retrospective. Each focus is readable and there is much personal experience shared which makes the book very personal, but the contents never really come together particularly well.The book has three sections, Models, Models Behaving, and Models Behaving Badly. The author starts with a description of his childhood, describing how experience affects perspective, how people are not generally not objective about themselves. He discusses his youth in South African apartheid. The author spends a lot of time philosophizing about the nature of reality and the differences between physical theories and theories about human behaviour. He discusses Spinoza and the residualizing of human motivation to Pain, Pleasure and Desire. The author then discusses what I think most readers assumed what the book was about, financial models. In particular the failures of the Efficient Market Hypotheses and the non stationary behaviour of people and the recursiveness that prevents a theory of human behaviour to be possible. The book ends with a dissappointment in the lack of consequence faced by financial services despite the recession we are currently faced with. I unfortunately learned very little from this book other than substance about the author's life. This is not because the book does not offer information, but rather because it only has a very light history of science discussion and shallow analysis of financial modelling failure. Economics has had the nickname of dismal science since the 19th century, its not new or shocking that the precise computations of current mathematical economists dont correspond to reality. On better practices for risk management Rebonato wrote Plight of the Fortune Tellers about the need for more commonsense risk management (in 2007 I might add). The authors comments about the ethical lapse of the industry should be well taken, though I would think the current transition that is currently taking place is not trivial nor shallow. This is a readable account of the author's philosophy, the history of classical and modern physics, and discussion of risk management ideas, it is not particularly insightful if one has knowledge of these fields though. 51 of 65 people found the following review helpful
5.0 out of 5 stars
An instant classic,
By Aaron C. Brown - Published on Amazon.com
This review is from: Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life (Hardcover)
The heart of this book is a discussion of the nature of models, primarily in finance but more generally as well. The author contrasts the best models in physics, which aspire to describe reality, with other models that can be no more than metaphors. Now metaphors are not useless, they can simplify reality to highlight essential features, and thereby lead to great insight. Metaphors are deeply embedded in human thought and can be the basis of productive action (Stephen Pinker in The Stuff of Thought demonstrates that the Declaration of Independence is a string of ancient and powerful metaphors). But metaphors are not reality; they do not even aspire to approximate it, only to provide insight into individual aspects.Many people will see this Cliff's Notes version of the argument in reviews and decide they don't need to read the book. That will be a tremendous mistake. What makes this book an instant classic is not the general thrust of the argument. Lots of people have criticized, and no one defends, blind reliance on models. This book goes well beyond the usual version to embed the ideas in life, politics, human relations and philosophy. This is not academic speculation, the author begins with intensely personal autobiographic details and finishes with some highly practical interpretations of serious philosophers (Spinoza gets an entire chapter). In between, when the author focuses on mathematical modeling, he brings the wisdom from his years as the most respected quant on Wall Street, running the Quantitative Strategies group at Goldman Sachs and now directing the financial engineering program at Columbia University. He has seen and worked with the best modelers in the highest-stakes arena, an arena in which he excelled as much as anyone ever has. This is not a sour-grapes screed from someone who flunked math, or a condescending lecture from a sidelines spectator, it is a clear-eyed appraisal from someone who played the game and learned what works and what doesn't. All of that would make it essential reading for anyone interested in either finance or mathematical modeling. But models.behaving.badly gives one thing more. It is a stunning literary achievement, a book that can be read for pure pleasure of the language and expressions by someone with little interest in the ideas themselves. It is a brilliant jewel of a book, to read and to treasure. |
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