Quants on Wall Street: The Emanuel Derman Interview
Editor’s Note:
The following is an interview done by Dave Goodboy in conjunction with
RealWorldTrading.com.
After you read the interview, talk about it
here.
Brice
I am pleased to be joined today by Dr. Emanuel Derman.  He is
one of the first high-energy particle physicists to apply his knowledge to the
financial realm. He specializes in quantitative trading which is the designing
of mathematical models for the purpose of making buy/sell decisions. The
scientists who build these models are known as “Quants†in popular parlance.Â
Dr. Derman: is the best-known Quant on Wall Street and is credited with
co-authoring some of today’s most widely used and influential financial models.Â
He spent 17 years on the Street and was managing director/head of The
Quantitative Strategies Group at Goldman, Sachs, and Co.  Recently, he authored
the popular book My Life as a Quant: Reflections on Physics and Finance
, which documents his growth from
academia to the rough and tumble world of Wall Street. I am looking forward to
this interview, let’s get started!
Dave: Thank you for joining me today, Dr. Derman.
Dr. Derman:Â
I’m very pleased to be here.
Dave: Let’s start by talking a little about your
background. What was the impetus that moved you, a physicist, from academia to
Wall Street?
Dr. Derman:
To tell the truth, it was entirely unplanned. I started out as a very ambitious
theoretical physics student in the late 1960s, when I came to graduate school at
Columbia University in New York, from Cape Town, South Africa; I wanted to
devote my life to great things, like Einstein or Schrodinger, Gell-Mann or
Feynman, all famous physicists who uncovered deep and transcendental truths
about the universe. But physics is very tough, a very meritocratic field. I got
my Ph.DÂ in particle physics, published a fair number of papers, worked as a
post-doctoral researcher and then an assistant professor in good schools for a
number of years, and slowly found out I wasn’t as smart or creative or lucky as
I had hoped. Plus, by the early 1970s there was a severe shortage of academic
jobs.
My wife was
in academic life too, and we kept moving around the world trying to find
positions in the same cities, but only succeeding half the time. Finally, it
grew too much for me. In 1980 I was a professor in Boulder Colorado with a wife
and two-year-old son in New York, and after one year I decided I’d had enough. I
quit Boulder and particle physics and took a job at AT&T Bell Labs in Murray
Hill NJ to be with my family in New York.
I spent
five years there working in a big corporation and didn’t like it too much after
the freedom of academic life, and then I moved to Wall Street and Goldman
Sachs, which was beginning to hire physicists to work on financial problems.
Dave: What exactly is “particle physics�
Dr. Derman:Â
Particle physics is the study of the smallest subatomic particles in the
universe, and the attempt to discover the laws and concepts that describe and
govern them. Particle physicists tend to think it’s the most fundamental area
you can study, though other kinds of physicists or scientists might be willing
to argue about that.
Dave: The transition from academia to Wall Street
must have been difficult. Can you share several of your first experiences?
Dr. Derman:Â
People are impatient on Wall Street and don’t respect age, which may be good. I
was close to 40 when I moved to work there, and the first guy IÂ worked for on
Wall Street asked me to enhance a Black-Scholes-style bond options model he had
built. I started out slowly and carefully, tackling the problem the way I used
to in physics, with care. After about a week, he got impatient. “You know,†he
said sharply, “In this job you really need to know only four things: addition,
subtraction, multiplication and division —