Book review: “My life as a quant”

“My life as a quant” is an amazing book, where Emanuel Derman tells how he went from Particle Physics research to Wall Street. I’m not going to write a real review of the book, because there are some excellent reviews already available on the Internet (Quantitative Finance, Wilmott, Slashdot, Financial Times, Bloomberg Businessweek, …), but instead I will just say a few random comments and put a few quotes of the book.

After studying Physics in his native South Africa, he did his PhD in Particle Physics in Columbia University in 1973. Then he followed the usual academic career and, after three postdocs (Pennsylvania U., Oxford U. and Rockefeller U.) he got a permanent position at Colorado University. In the book Derman spends quite a lot of time talking about this part of his life, and I’ll just say that it’s quite surprising how little things have changed in the last 40 years. I think 90% of what he says is still nowadays perfectly applicable to the life of a postdoc in Particle Physics.

For different reasons, but mainly to go back to New York, where his wife was working, he decided to look for a job out of academia, and he ended up in Bell Labs, where he worked for a few years. The experience was not great at that company, but he improved a lot his knowledge about programming and computing, what would be relevant for his subsequent career.

Then he found a job at Goldman Sachs, where he essentially stayed for more than 15 years doing quantitative finance. He had a very successful career, and in 2000 he was named Financial Engineer of the year. Finally he went back to Columbia U., where he is now a professor of Financial Engineering, and is also the Head of Risk and a partner at Prisma Capital Partners.

If you are a physicist (and especially a PhD in Physics) you will find very very interesting to read about his experience in Finance, because it’s kind of “Wall Street described by a physicist”.

The honesty of Derman describing the pros and cons of Wall Street and the academic world, talking about the salaries, the interviews, the intelectual freedom, etc. is something very difficult to find in books or even in informal conversations, so I totally recommend the book.

Some final comments:

  • Here you have an excerpt of the book.
  • In Derman’s website one can find several articles written by him, interviews, …
  • I find particularly interesting for physicists the last 2 questions of this interview:
  • It’s pretty appropriate for this blog his article “Finding a job in finance”, although it’s a pity that he is too superficial: he is not clear about what a PhD in physics should do to get a job in Finance…

Some interesting quotes of this book:

  • “At age 17 I wanted to be another Einstein, at 21 I’d have been happy to be another Feynman. At 24, another T. D. Lee would have sufficed. By 1976 I realized I had reached the point where I merely envied the postdoc in the office next door because he had been invited to give a seminar in France.”
  • “Grad students are socialized to view other options (teaching, industry, …) with contempt”.
  • “I met corporate lawyers and Wall Street salesman who touted the fringe benefits of their jobs (…). In physics, the life itself was the benefit”.
  • “I was naively shocked at Bell Labs to apprehend that both my time and my office belonged to AT&T, and could be invaded at any moment without apology or warning knock from my boss, [or] my colleagues (…). Wall Street would lay claim to even more of my personal space and time”
  • “Physics is a harsh meritocracy. Most of the merit is concentrated in a small numbers of legendary figures. (…) A competent but not brilliant research physicist had little to feel good about; who needs what you provide?”
  • “I found life as a quant to be richer and less isolated than life as an academic”.
  • “Bell Labs offered me much more money [$42K] than the University of Colorado [was paying me as an assistant professor: $18K]. (…) In the end, I accepted the job with the deepest misgivings and guilt. I was committing treason”.
  • “Wall Street was one of the few places where you could eventually make $150K a year without running your own business”

2 thoughts on “Book review: “My life as a quant””

  1. Derman’s book is a wonderful book provided that you look at it as a historical memoir and keep in mind that the world that he is describing is quite a bit different than today’s world. It’s very useful as a snapshot in time in which you can learn about the psychology and human relation aspects of job hunting which are to some extent timeless. However, Wall Street in 2012 is very different than it was in 2000. Just some of the differences

    1) The problems people are working on are very different. In 2000, we were coming off a period of extreme interest rate volatility and a lot of Derman’s work was on interest rate models. Interest rates haven’t moved much since the crisis, so that everyone is interested now in risk management and counterparty default. Also, the rules changed with the financial crisis, and much of the work of the last few years has been to figure out what the new rules are.

    2) Computers are more important. Computing power has increased dramatically since 2000, and today there are very few problems that are amenable to pure pencil and paper solutions. What this means is that computational skills have become more important.

    3) Things are more bureaucratic and regulated. In the late-1990’s, you could write a new equation and get that into production. Today you can’t do that, and any time you write a new model, you are looking at weeks if not months of reviews. This is not necessarily a bad thing for job hunting because the people reviewing the models are often physicists.

    4) Total compensation has come down, and bonuses have gone *way* down. One of the things is that because the banking industry has come under a lot of scrutiny, there has been a lot of downward pressure on salaries, and also the regulators have tried to get banks to pay less money in bonuses and more in monthly pay. The pay is still good, but it’s not going to make you an instant millionaire.

  2. One other thing is that I agree that banks like physicists over most economics and finance Ph.D.s (with perhaps some exceptions for econometricians) for modelling work because physicists tend to have a better idea of where a model ends and what the limits of modelling are.

    Derman’s interview is particularly interesting because it was written pre-crisis, and the crisis showed that 1) that many of our models were *wrong* and 2) where a model did apply pre-crisis, the rules would often change post-crisis. The problem with people with economics and finance backgrounds is that they will often totally freeze if their models turn out to be wrong or if it turns out that reality has changed, whereas physicists will tend to dust themselves off and figure out what is going on.

    To give you an idea of how the rules changed…. Let’s play a game….

    I give you $1, tomorrow you hand me back that $1 the next day you I give that dollar to you, and we move money back and forth for six months, and at the end you hand me $1 + interest.

    Now I give you $1, and six months later you had me $1 + interest. Now you’d think that those contracts are the same, and before 2007, those two contracts would have the same price. But they aren’t now. What’s the difference? Suppose I sign a contract with you and three months out it looks like you are going to go bust. If we are exchanging money back and forth, I have the ability to keep your $1 if I think you are you about to go bust, whereas I can’t do that if we aren’t moving money back and forth nightly. Before 2007, people assumed that major banks just wouldn’t go under, but that’s not true now.

    Let me describe another contract. I sign a contract with a bank. They loan me $1000, and I put down $200 in collateral. The contract says that if something bad happens to me, I have to put down another $500 in collateral. Now the contract will say either I have to give $500 in cash, or I can give $500 in euros or gold or stocks. What’s the difference?

    Well before 2007, no one really cared, but since 2007 people suddenly cared a lot about these things because it matters a lot whether I have to pay you $500 in US dollar cash or if I have the ability to pay you $500 in either cash or Euros, because if all heck is breaking lose then it’s likely that I’d like to have a choice into how I pay you. So suddenly, the rules changed, and one thing that physicists have been figuring out is what the difference in value between those two contracts are.

    Also there is the world of market microstructure which is fascinating. One way of describing this is that people who are not physicists think of atoms as a tiny billiard balls, when in fact if you know something about quantum mechanics you find that even talking about a “position” of an atom is non-trivial. Same sort of thing happens with market microstructure. If you average over say a day or even an hour in a non-crisis situation, it becomes easy to talk about a “price” of a stock. However, if you look at things over 50 milliseconds or if you are in a crisis situation, things get more interesting since it’s not clear what a “price” of a stock is, and it can change from exchange to exchange which gets even more interesting when you realize that all exchanges are part of one global market. I’ve gotten into conversations where it became obvious that in understanding the behavior of stocks, you have to understand the rules about when traders are allowed to take their lunch breaks.

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