very punchy talk by emanuel derman

Dermans autobiography ‘My Life as a Quant‘ is a lovely nontechnical read.  It follows from his childhood in South Africa, his desire to study physics and later disillusionment with postdoc study, through developing symbolic math software at Bell Labs, to his career as a rocket scientist on Wall St and top quant at Goldman Sachs.  He comes across as a refined and honest intellectual with a real passion for his craft and the journey makes for a good story.

I just discovered an online video of a very punchy talk he gave at NYU on whats wrong with models [.mov format ~90Mb ~10mins].

This is awesome and he doesnt hold back.  His main point is that although Black Scholes is a great advance, an elegant useful model, its only gonna give you a ballpark figure…

Unlike QED or other physics theories which are deeply descriptive of nature and can be accurate to 8 decimal places in predictive power, quantitative models interpolate.  He makes an analogy with models like Black Scholes – Imagine you need to approximate the value of a manhattan apartment if you only have the square foot market value of a lower east side apartment for comparison… ok, I got the NY areas mixed up, but its clear we value one instrument in terms of another, making all sorts of reasonable ad hoc adjustments, such as higher comparative building maintenance service charges etc..  and factor all that into an ‘implied’ price per square foot price.