What do you think?
Rate this book
Models.Behaving.Badly
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 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.
Hardcover
First published October 13, 2011
64 people are currently reading
1,367 people want to read
About the author
Emanuel Derman
13books62followersEmanuel Derman (born c. 1945) is a Jewish South African-born academic, businessman and writer. He is best known as a quantitative analyst, and author of the book My Life as a Quant: Reflections on Physics and Finance
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 - 30 of 47 reviews
January 17, 2018
This one turned out to be something very different from what I expected. Derman went from a totally unexpected discource on Apartheid to racism to Kabbala followed by discussions on the vagaries of life and a tad about the philosophy and physics, and finally went on to talk about some generalities of finance, including CAPM and EMM. And at this point the book sort of was over. And me, I was sort of not satisfied.
The EMM and CAPM deficiencies are a known and a given, nothing too shocking about them. What I was hoping for, was a glimpse into the mechanics of whatever backfired, how it managed to do so that spectacularly and what could or could not have been done to improve that situation, at least to some extent. I would have been extatic to get some tables with calculations, especially the ones that have proven that notoriously unreliable and I'd love to see this all explained in a simple and clear way. Instead, I read at length about racism and Tetragrammaton (of all things!) and Spinoza and Giuseppe di Lampedusa and even about monocular diplopia! And while I do heartily appreciate the way of thinking of the author, as well as his tendency to approach the world from various points in the best tradicions of polymathic thinking, still, I sort of hoped for something a tad different.
Of course, the problem there lies with me, as is usual, since it was me who had the wrong expectations of this book. Nevertheless, where is the description of whatever went wrong with which exacly of the Wall Street models explained in layman's terms?
Some of the thoughts given here are brilliant, so my harping is not 100% warranted!
Q:
The Modelers� Hippocratic Oath
I will remember that I didn’t make the world, and it doesn’t satisfy my equations.
Though I will use the models I or others create to boldly estimate value, I will always look over my shoulder and never forget that the model is not the world.
I will not be overly impressed by mathematics. I will never sacrifice reality for elegance without explaining to its end users why I have done so.
I will not give the people who use my models false comfort about their accuracy.
I will make the assumptions and oversights explicit to all who use them.
I understand that my work may have enormous effects on society and the economy, many beyond my apprehension. (c)
Q:
AN ETHICAL COROLLARY
I wrote that modelers of financial securities should make visible the dirt they sweep under the rug. Similarly, the designers of financial products should create securities whose purpose, exposure, and risks are clear. Unnecessarily bundled complex products whose risks are obscure are often more profitable than simple ones because their value is hard to estimate. If products were transparent, good modeling would be easier. (c)
Q:
When someone shows you an economic or financial model that involves mathematics, you should understand that, despite the confident appearance of the equations, what lies beneath is a substrate of great simplification and—only sometimes—great imagination, perhaps even intuition. But you should never forget that even the best financial model can never be truly valid because, despite the fancy mathematics, a model is a toy. No wonder it often breaks down and causes havoc....
The greatest conceptual danger is idolatry: believing that someone can write down a theory that encapsulates human behavior and thereby free you of the obligation to think for yourself. A model may be entrancing, but no matter how hard you try, you will not be able to breathe life into it. To confuse a model with a theory is to believe that humans obey mathematical rules, and so to invite future disaster.
Financial modelers must therefore compromise. They must decide what small part of the financial world is of greatest current interest to them, describe its key features, and then mock up those features only. A successful financial model must have limited scope and must work with simple analogies. In the end you are trying to rank complex objects by projecting them onto a scale with only a few dimensions.
In physics there may one day be a Theory of Everything; in finance and the social sciences, you have to work hard to have a usable model of anything. (c)
Q:
Models Facilitate Interpolation
...
Models Transform Intuition into a Dollar Value
...
Models Are Used to Rank Securities by Value
...
Avoid Axiomatization
...
Good Models Are Vulgar in a Sophisticated Way
...
Sweep Dirt Under the Rug, but Let Users Know About It
...
Use Imagination
...
Think of Models as Gedankenexperiments
...
Beware of Idolatry
(c)
Q:
The world of Substance is full of puzzles. Theories offer us the most successful and accurate way to describe the physical world. They are deep and difficult to discover; they require verification but no explanation; they are right when they are right. Models, however, live in the shallows and are easier to find; they require explanation as well as verification. We need both types of understanding.
The most successful theories humans have created are concerned with Extension. There are few genuine theories in the realm of Thought, and none that is quantitatively accurate. There we rely mostly on metaphors and models. Financial value, situated more centrally within Thought than Extension, is therefore less inclined to yield to mathematics or science; there are no isolated social systems on which to carry out the repeated experiments the scientific method requires, and so it is hard to study the regularities that might reveal the putative laws that govern them.
Given the success of mathematics in dealing with Extension, it has become tempting to treat Thought as though it were a kind of Extension too. Most models in the social sciences give in to what I like to call pragmamorphism,1 by which I mean the naive tendency to attribute the properties of things to human beings. Among the exceptions are Spinoza’s theory of the emotions and Freud’s theory of the psyche. Pragmamorphism characterizes the approach that finance has taken for the past 50 years.
It’s pragmamorphic to equate psychological states with their material correlates, to equate PET scans with emotion. It’s similarly pragmamorphic to assume the existence of a utility function in economics. It is clear that people have preferences. But is it clear that there is a function that describes their preferences? Pragmamorphic models are a valiant try, perhaps the best we can do quantitatively. But we should remember that we are being pragmamorphic when we use them, and that humans will necessarily lie outside the models� boundaries. (c)
The EMM and CAPM deficiencies are a known and a given, nothing too shocking about them. What I was hoping for, was a glimpse into the mechanics of whatever backfired, how it managed to do so that spectacularly and what could or could not have been done to improve that situation, at least to some extent. I would have been extatic to get some tables with calculations, especially the ones that have proven that notoriously unreliable and I'd love to see this all explained in a simple and clear way. Instead, I read at length about racism and Tetragrammaton (of all things!) and Spinoza and Giuseppe di Lampedusa and even about monocular diplopia! And while I do heartily appreciate the way of thinking of the author, as well as his tendency to approach the world from various points in the best tradicions of polymathic thinking, still, I sort of hoped for something a tad different.
Of course, the problem there lies with me, as is usual, since it was me who had the wrong expectations of this book. Nevertheless, where is the description of whatever went wrong with which exacly of the Wall Street models explained in layman's terms?
Some of the thoughts given here are brilliant, so my harping is not 100% warranted!
Q:
The Modelers� Hippocratic Oath
I will remember that I didn’t make the world, and it doesn’t satisfy my equations.
Though I will use the models I or others create to boldly estimate value, I will always look over my shoulder and never forget that the model is not the world.
I will not be overly impressed by mathematics. I will never sacrifice reality for elegance without explaining to its end users why I have done so.
I will not give the people who use my models false comfort about their accuracy.
I will make the assumptions and oversights explicit to all who use them.
I understand that my work may have enormous effects on society and the economy, many beyond my apprehension. (c)
Q:
AN ETHICAL COROLLARY
I wrote that modelers of financial securities should make visible the dirt they sweep under the rug. Similarly, the designers of financial products should create securities whose purpose, exposure, and risks are clear. Unnecessarily bundled complex products whose risks are obscure are often more profitable than simple ones because their value is hard to estimate. If products were transparent, good modeling would be easier. (c)
Q:
When someone shows you an economic or financial model that involves mathematics, you should understand that, despite the confident appearance of the equations, what lies beneath is a substrate of great simplification and—only sometimes—great imagination, perhaps even intuition. But you should never forget that even the best financial model can never be truly valid because, despite the fancy mathematics, a model is a toy. No wonder it often breaks down and causes havoc....
The greatest conceptual danger is idolatry: believing that someone can write down a theory that encapsulates human behavior and thereby free you of the obligation to think for yourself. A model may be entrancing, but no matter how hard you try, you will not be able to breathe life into it. To confuse a model with a theory is to believe that humans obey mathematical rules, and so to invite future disaster.
Financial modelers must therefore compromise. They must decide what small part of the financial world is of greatest current interest to them, describe its key features, and then mock up those features only. A successful financial model must have limited scope and must work with simple analogies. In the end you are trying to rank complex objects by projecting them onto a scale with only a few dimensions.
In physics there may one day be a Theory of Everything; in finance and the social sciences, you have to work hard to have a usable model of anything. (c)
Q:
Models Facilitate Interpolation
...
Models Transform Intuition into a Dollar Value
...
Models Are Used to Rank Securities by Value
...
Avoid Axiomatization
...
Good Models Are Vulgar in a Sophisticated Way
...
Sweep Dirt Under the Rug, but Let Users Know About It
...
Use Imagination
...
Think of Models as Gedankenexperiments
...
Beware of Idolatry
(c)
Q:
The world of Substance is full of puzzles. Theories offer us the most successful and accurate way to describe the physical world. They are deep and difficult to discover; they require verification but no explanation; they are right when they are right. Models, however, live in the shallows and are easier to find; they require explanation as well as verification. We need both types of understanding.
The most successful theories humans have created are concerned with Extension. There are few genuine theories in the realm of Thought, and none that is quantitatively accurate. There we rely mostly on metaphors and models. Financial value, situated more centrally within Thought than Extension, is therefore less inclined to yield to mathematics or science; there are no isolated social systems on which to carry out the repeated experiments the scientific method requires, and so it is hard to study the regularities that might reveal the putative laws that govern them.
Given the success of mathematics in dealing with Extension, it has become tempting to treat Thought as though it were a kind of Extension too. Most models in the social sciences give in to what I like to call pragmamorphism,1 by which I mean the naive tendency to attribute the properties of things to human beings. Among the exceptions are Spinoza’s theory of the emotions and Freud’s theory of the psyche. Pragmamorphism characterizes the approach that finance has taken for the past 50 years.
It’s pragmamorphic to equate psychological states with their material correlates, to equate PET scans with emotion. It’s similarly pragmamorphic to assume the existence of a utility function in economics. It is clear that people have preferences. But is it clear that there is a function that describes their preferences? Pragmamorphic models are a valiant try, perhaps the best we can do quantitatively. But we should remember that we are being pragmamorphic when we use them, and that humans will necessarily lie outside the models� boundaries. (c)
January 25, 2015
Hodpodge of autobiographical notes, pseudo-scholarly philosophy, basic physics, and simple finance. Pretty terrible I think. Why was this book written?
December 10, 2016
I can understand why some people were disappointed with this book. It's not what I expected when I purchased it. There's a good deal of memoir, philosophy, history, and physics in the book before Derman talks about Economics and the Financial Markets. It is worth it. Derman makes the obvious case that the model is not the thing it represents (similar to how Derrida and other Deconstructionists explained that a word is a symbol for a thing, and not the thing itself). He also stresses the importance of theories and how models are very different from theories.
As a dual major in Data Analytics and Applied Mathematics, the math in this book was easy to follow. There's little of it, and it's concentrated at the end of the book. If you're math-phobic it might be difficult to understand what Derman is demonstrating. Basically, he is showing that models build on the Efficient Market hypothesis (he calls it the Efficient Market Model) and the Capital Asset Pricing Model are based on false premises. This is easy to understand when you realize that Economics, despite its adherents claims to the contrary, isn't actually a science. It's a branch of the social sciences and often doesn't stand up to the rigor of actual science. Derman's discussion of Physics earlier in the book provide an interesting contrast to the models used on Wall Street which aren't build on theory, but are simply built on other models.
The markets are unpredictable because the markets are influenced by people. This isn't a matter of just too many variables: it's a fundamental problem of markets. People react to the markets, and the markets react to people. This means that predicting future performance (generally based on present value) isn't possible because you can't predict how people will act/react. This is the fundamental flaw of any model of financial markets. Derman steers clear of the morality of things like swaps and the subprime mortgage crisis. Instead, he demonstrates that our entire financial industry is essentially built on a house of cards. The traders are worshipping at the altar of mathematics, but the mathematics of economics in general, and financial markets in particular, are built of flimsy material.
As a dual major in Data Analytics and Applied Mathematics, the math in this book was easy to follow. There's little of it, and it's concentrated at the end of the book. If you're math-phobic it might be difficult to understand what Derman is demonstrating. Basically, he is showing that models build on the Efficient Market hypothesis (he calls it the Efficient Market Model) and the Capital Asset Pricing Model are based on false premises. This is easy to understand when you realize that Economics, despite its adherents claims to the contrary, isn't actually a science. It's a branch of the social sciences and often doesn't stand up to the rigor of actual science. Derman's discussion of Physics earlier in the book provide an interesting contrast to the models used on Wall Street which aren't build on theory, but are simply built on other models.
The markets are unpredictable because the markets are influenced by people. This isn't a matter of just too many variables: it's a fundamental problem of markets. People react to the markets, and the markets react to people. This means that predicting future performance (generally based on present value) isn't possible because you can't predict how people will act/react. This is the fundamental flaw of any model of financial markets. Derman steers clear of the morality of things like swaps and the subprime mortgage crisis. Instead, he demonstrates that our entire financial industry is essentially built on a house of cards. The traders are worshipping at the altar of mathematics, but the mathematics of economics in general, and financial markets in particular, are built of flimsy material.
June 17, 2013
This book comes across as a self-published work in that the author rambles among his favorite topics rather than delivering a cohesive story/message. No doubt an acquisitions editor would have wielded a cleaver. Perhaps the author felt that he had already covered the failures of financial modeling in his earlier book, so he felt he should only lightly touch upon 'that topic' in this book. If the author had kindly written the book that matched the title, I would have been a happy camper.
Moving beyond the criticism of what should have been delivered, given my physics background, I enjoyed the quick historical sweep of the work of famous scientists. My key take away from this book was Derman's argument that these brilliant physicists derived their great theories through an intuitive process which to this day is an enigma, that the final scientific product is what was left when the 'scaffolding' of the discovery process was removed. And that the formalization of the theory is produced after the discovery is made, to prove and validate its correctness, and sheds little to no light on how it was reached.
So this was an interesting read for me, but the book should not be selected on the basis of the title alone.
Moving beyond the criticism of what should have been delivered, given my physics background, I enjoyed the quick historical sweep of the work of famous scientists. My key take away from this book was Derman's argument that these brilliant physicists derived their great theories through an intuitive process which to this day is an enigma, that the final scientific product is what was left when the 'scaffolding' of the discovery process was removed. And that the formalization of the theory is produced after the discovery is made, to prove and validate its correctness, and sheds little to no light on how it was reached.
So this was an interesting read for me, but the book should not be selected on the basis of the title alone.
March 16, 2012
I enjoyed Derman's first book, but this Models.Behaving.Badly. was not what I had expected. My expectation (which may have not been justified) was that the book would delve into financial models, VaR, etc. and break down the errors in the assumptions (Gaussian distributions, for example) that cause the models to misbehave in abnormal market environments. This was not that book. It felt like the subject matter wandered around in a somewhat indulgent way. It's a shame because Dr Derman has considerable experience and expertise in quantitative finance, and can certainly add a great deal to the conversation about models' impacts on modern finance.
November 30, 2012
I had somewhat high hopes for this book, but was pretty disappointed. Derman is all over the map, and makes a lot of superficial connections between things that don't really seem connected. It seemed to me more like he wanted to write a book than like he had a great idea that he decided to write a book about. I have his "Modeler's Hippocratic Oath" tacked up at my desk at work, but I'm afraid this book didn't do much to add to those few sentences.
March 14, 2013
Overall, a good three star book. Interesting ideas, and obviously a very knowledgeable guy, but not very mainstream and so not really a "must read" book.
Chapter 1 - The most annoying chapter. I think he started with grandiose ideas for the book, and he takes us on a meandering tale of his own personal background and how he was the smartest kid on the block. I almost dropped the book at this point, but no, I am the type who has to finish every book I start. And actually, I am glad I did.
Chapter 2 - Metaphores, Models, and Theroies. This is actually the core of the book. To talk about something, you have to compare it to something else. What is key about this chapter (and the book) is how models both help us to deal with the complexity of the world, but also blind us to the reality of it, depending upon how we construct a model. He tells a story about a problem he had with his eye, where he had to see several specialists, and each one interpreted the symptoms in different ways according to their own models about their work. We need to bear in mind how models blind us (literally in this story).
Chapter 3 - The absolute. An odd chapters about the name of god in the bible and the extent that one might go to avoid giving a name to something. Says something about how names distort our perception of reality. And a really nice detailed treatment of Spinoza's analysis of human emotions. The key here is that the entire theory is complete, and requires no analogies. Thus it stands on it's own.
Chapter 4 - The Sublime is a journey through physics: Volta, Ampere, Faraday, Maxwell, Dirac, Schroedinger. Electromagnetism turns out to be just a metaphor for understanding the world. A very precise one, to be sure, but not reality, and it is important to understand the difference. At this point he has set the stage for what he really wants to talk about: Financial models.
Chapter 5 - The Inadequate. This is where the book really gets interesting. Financial models are essentially pure fiction. They are not theories in the way that electomagnetism is a theory. Nor are they laws in the scientific sense. They are just made up constructs. He questions the fundamental assumptions of the Efficient Market Model, which is that a market with find the price of something, and that will be the REAL value. He then takes us through several of the financial instruments and shows how the model relates risk to value, based ona formula based on quantities of drift and volatility. The fundamental question is: "What average return above the riskless rate should you expect to earn for accepting a given amount of risk?"
The way we try to determine the risk for one commodity is to compare it to other commodities. He hows that the CAPM (Commodity Assets Pricing Model) it pretty much useless by comparing the history of Apple stock to the S&P 500. What we see is amble evidence that models can be wrong, very wrong. They serve a purpose, but don't confuse them with reality.
Chapter 6 - Breaking the Cycle - What is to be done? A model is just a model. Much of the problem on wall street is that people do not understand this. He proposes an oath for modelers which I include here in entirety:
* I will remember that I didn't make the world, and it doesn't satisfy my equations.
* Though I will use the models I or others create to boldly estimate value, I will always look over my shoulder and never forget that the model is not the world.
* I will not be overly impressed by mathematics. I will never sacrifice reality for elegance without explaining to its end users why I have done so.
* I will not give the people who use my models false comfort about their accuracy.
* I will make the assumptions and oversights explicit to all who use them.
* I understand that my work may have enormous effects on society and the economy, many beyond my apprehension.
Chapter 1 - The most annoying chapter. I think he started with grandiose ideas for the book, and he takes us on a meandering tale of his own personal background and how he was the smartest kid on the block. I almost dropped the book at this point, but no, I am the type who has to finish every book I start. And actually, I am glad I did.
Chapter 2 - Metaphores, Models, and Theroies. This is actually the core of the book. To talk about something, you have to compare it to something else. What is key about this chapter (and the book) is how models both help us to deal with the complexity of the world, but also blind us to the reality of it, depending upon how we construct a model. He tells a story about a problem he had with his eye, where he had to see several specialists, and each one interpreted the symptoms in different ways according to their own models about their work. We need to bear in mind how models blind us (literally in this story).
Chapter 3 - The absolute. An odd chapters about the name of god in the bible and the extent that one might go to avoid giving a name to something. Says something about how names distort our perception of reality. And a really nice detailed treatment of Spinoza's analysis of human emotions. The key here is that the entire theory is complete, and requires no analogies. Thus it stands on it's own.
Chapter 4 - The Sublime is a journey through physics: Volta, Ampere, Faraday, Maxwell, Dirac, Schroedinger. Electromagnetism turns out to be just a metaphor for understanding the world. A very precise one, to be sure, but not reality, and it is important to understand the difference. At this point he has set the stage for what he really wants to talk about: Financial models.
Chapter 5 - The Inadequate. This is where the book really gets interesting. Financial models are essentially pure fiction. They are not theories in the way that electomagnetism is a theory. Nor are they laws in the scientific sense. They are just made up constructs. He questions the fundamental assumptions of the Efficient Market Model, which is that a market with find the price of something, and that will be the REAL value. He then takes us through several of the financial instruments and shows how the model relates risk to value, based ona formula based on quantities of drift and volatility. The fundamental question is: "What average return above the riskless rate should you expect to earn for accepting a given amount of risk?"
The way we try to determine the risk for one commodity is to compare it to other commodities. He hows that the CAPM (Commodity Assets Pricing Model) it pretty much useless by comparing the history of Apple stock to the S&P 500. What we see is amble evidence that models can be wrong, very wrong. They serve a purpose, but don't confuse them with reality.
Chapter 6 - Breaking the Cycle - What is to be done? A model is just a model. Much of the problem on wall street is that people do not understand this. He proposes an oath for modelers which I include here in entirety:
* I will remember that I didn't make the world, and it doesn't satisfy my equations.
* Though I will use the models I or others create to boldly estimate value, I will always look over my shoulder and never forget that the model is not the world.
* I will not be overly impressed by mathematics. I will never sacrifice reality for elegance without explaining to its end users why I have done so.
* I will not give the people who use my models false comfort about their accuracy.
* I will make the assumptions and oversights explicit to all who use them.
* I understand that my work may have enormous effects on society and the economy, many beyond my apprehension.
August 1, 2014
My first give away that this book would blow should have been the praise granted it by Nassim Nicholas Taleb. When describing a book as a mixture of things it probably means it's a pastiche rather than a narrative and this book had nearly no narrative. The first 140-150 pages made little cohesive sense and seemed to focus on a kind of romance Derman had with physics and specifically QED. His explanation of electrons and holes in a sea of negative energy electrons rubbed me the wrong way as even Dirac eventually discarded this narrative. He calls theories facts, but doesn't properly call Dirac's theory which it is. He engages in a sometimes curious discussion of the map/territory question regarding models mixed with lessons from a Jewish upbringing. While the references to his youth were sometimes interesting, I feel the parallels he tries to make are somewhat indirect and rarely applicable to the rest of us. His long discussion of a vision difficulty he had ultimately being unearthed by someone with no extensive experience was interesting but again failed to leap to finance as there were no compelling comparisons.
The last five pages approach being good but there fail because he seems to engage more in aphorisms than insight. He talks heavily of intuition but never mentions its failures nor does he give intuition anything approaching a thorough treatment. If there is a compelling narrative thread to this book, I failed to pick up on it.
The last five pages approach being good but there fail because he seems to engage more in aphorisms than insight. He talks heavily of intuition but never mentions its failures nor does he give intuition anything approaching a thorough treatment. If there is a compelling narrative thread to this book, I failed to pick up on it.
March 2, 2015
La verdad es que el libro me ha decepcionado bastante, se pasa el 40% del libro hablando que nada tienen que ver con los modelos, por ejemplo, el judaismo. Hace una comparación entre los modelos en la física y en las finanzas, explicando las diferencias... el problema es que para trasmitir la idea del libro hubieran bastado 15 páginas, y no un libro entero, el resto es puro relleno.
January 20, 2016
A real slog: too much personal content, too many digressions, and a ponderous writing style get in the way of what should have been an enlightening read about the downside of modeling.
November 29, 2012
I read this book because I had seen a reference to a chapter on Spinoza's theory of emotions. As outlined by Derman, Spinoza's primitive sensations are desire, pain and pleasure. Desire involves all our "'strivings, impulses, appetites and volitions.'" The consequences of desire are pleasure and pain, which we evaluate as good and bad. Pleasure and pain are transitions between greater and lesser perfection, but are not states themselves. These "primitives" constitute our essence and underlie "all the other emotions." The emotions proper are called derivative as they depend on the three underlying primitive sensations. Thus, love is pleasure associated with an external object and hate is the pain associated with an object. Hope is the expectation of future pleasure. Disappointment is the pain that comes when the expectation of pleasure is not fulfilled. In Figure 3.1 of this book, Derman describes Spinoza's theory of emotions but, as compared to his description above on the relationship between primitives and derivatives, this is more or less obscure.
While Derman is a fan of Schopenhauer, he is not on the subject of emotions when compared to Spinoza. Schopenhauer, Derman states, saw pain as positive and primary, and pleasure as the absence of the bad (pain). In contrast to Schopenhauer, Derman writes that Spinoza "is more even-handed." His theory of emotions "regards both pleasure and pain as independent qualities of human experience, neither one being either the reflection or the absence of the other."
It's possible that Derman misreads Schopenhauer's perspective on emotions. Schopenhauer has us, and all of life, filled with Will, which can be understood in biological terms as the need to survive. That need and Spinoza's "strivings, impulses, appetites and volitions" constitute pain. Need is a deficit that prompts seeking action (to get what is needed) and defending actions (against threats to what is needed). When seeking or defending are successful, a pleasure state results as need is satisfied. Interestingly, if Spinoza's "desire" is understood as having two active prongs (seeking, defending), then pleasure and pain can be understood as end states. When action is successful, there is pleasure; when not successful, there is pain. As end states, pain and pleasure are brought back into ourselves rather than being lodged in the (good or bad) object. Emotions proper, the derivative emotions of Spinoza are the internal needs expressed outward to specific objects (need to love someone, need to belong to a group, need a mate), and the internal need to defend against incoming threats (fear, anger, disgust). When pain cannot be remedied with action, as in the death of a loved one, one is left with grief.
The beauty of Schopenhauer's perspective is that it involves a circuit of energy between the self and the outside world that operates dialectically and, when action is successful, brings about a state of equilibrium (adjustment, adaptation) between self and the outside world. In contrast, Derman has the self more or less as a passive responder as opposed to an active seeker and defender. In his appendix, "Of human bondage, of human freedom," Derman states that "the external world produces emotions." This is an interesting perspective as it removes the dialectical interaction between the self and the environment. How does another person generate love if the self doesn't need love? How are the various social emotions activated by outside forces if the self doesn't need to be part of the group? Even when threats come from the outside and seem to "produce" emotion, how does that happen if the self does not care about such things? In short, Schopenhauer sees an integral connection between self and the outside world in a way that Derman does not.
I ended up reading all of Derman's book to pick up his various insights about physics, which were educational, but didn't understand much about the main theme to this book - why models of the world don't work all that well as compared to theories or intuition. Derman defines it graphically by saying that intuition unites the archer with his bow. The problem with passions is that if they are not recognized and understood, they control us. When we understand them, we control them and we are free. This may be what Derman means by intuition and his reference to Spinoza's perfection. Here, Derman goes way out there in some Hegelian sense that unites internal idea and external object. On this point, I don't understand Derman well enough to comment.
While Derman is a fan of Schopenhauer, he is not on the subject of emotions when compared to Spinoza. Schopenhauer, Derman states, saw pain as positive and primary, and pleasure as the absence of the bad (pain). In contrast to Schopenhauer, Derman writes that Spinoza "is more even-handed." His theory of emotions "regards both pleasure and pain as independent qualities of human experience, neither one being either the reflection or the absence of the other."
It's possible that Derman misreads Schopenhauer's perspective on emotions. Schopenhauer has us, and all of life, filled with Will, which can be understood in biological terms as the need to survive. That need and Spinoza's "strivings, impulses, appetites and volitions" constitute pain. Need is a deficit that prompts seeking action (to get what is needed) and defending actions (against threats to what is needed). When seeking or defending are successful, a pleasure state results as need is satisfied. Interestingly, if Spinoza's "desire" is understood as having two active prongs (seeking, defending), then pleasure and pain can be understood as end states. When action is successful, there is pleasure; when not successful, there is pain. As end states, pain and pleasure are brought back into ourselves rather than being lodged in the (good or bad) object. Emotions proper, the derivative emotions of Spinoza are the internal needs expressed outward to specific objects (need to love someone, need to belong to a group, need a mate), and the internal need to defend against incoming threats (fear, anger, disgust). When pain cannot be remedied with action, as in the death of a loved one, one is left with grief.
The beauty of Schopenhauer's perspective is that it involves a circuit of energy between the self and the outside world that operates dialectically and, when action is successful, brings about a state of equilibrium (adjustment, adaptation) between self and the outside world. In contrast, Derman has the self more or less as a passive responder as opposed to an active seeker and defender. In his appendix, "Of human bondage, of human freedom," Derman states that "the external world produces emotions." This is an interesting perspective as it removes the dialectical interaction between the self and the environment. How does another person generate love if the self doesn't need love? How are the various social emotions activated by outside forces if the self doesn't need to be part of the group? Even when threats come from the outside and seem to "produce" emotion, how does that happen if the self does not care about such things? In short, Schopenhauer sees an integral connection between self and the outside world in a way that Derman does not.
I ended up reading all of Derman's book to pick up his various insights about physics, which were educational, but didn't understand much about the main theme to this book - why models of the world don't work all that well as compared to theories or intuition. Derman defines it graphically by saying that intuition unites the archer with his bow. The problem with passions is that if they are not recognized and understood, they control us. When we understand them, we control them and we are free. This may be what Derman means by intuition and his reference to Spinoza's perfection. Here, Derman goes way out there in some Hegelian sense that unites internal idea and external object. On this point, I don't understand Derman well enough to comment.
February 27, 2013
Models Behaving Badly is part memoir, part history, and part science -- Emanuel Derman does a nice job of explaining the difference between a model and a theory, and overall it's great book that I highly recommend reading.
Derman points out that financial models use the mathematics and style of physics; however, they are fundamentally different from the models used in the physical sciences. Financial models, even at their best, provide a gross oversimplification of reality.
In his "Financial Modeler's Manifesto" (written with Paul Wilmott), Derman wrote: "I will always look over my shoulder and never forget that the model is not the world"; "I will not be overly impressed with mathematics"; "I will never sacrifice reality for elegance"; "I will not give the people who use my models false comfort about their accuracy"; "I understand that my work may have enormous effects on society and the economy, many beyond my apprehension."
If only more economists were as humble about the limits of their models as Derman is.
Derman points out that financial models use the mathematics and style of physics; however, they are fundamentally different from the models used in the physical sciences. Financial models, even at their best, provide a gross oversimplification of reality.
In his "Financial Modeler's Manifesto" (written with Paul Wilmott), Derman wrote: "I will always look over my shoulder and never forget that the model is not the world"; "I will not be overly impressed with mathematics"; "I will never sacrifice reality for elegance"; "I will not give the people who use my models false comfort about their accuracy"; "I understand that my work may have enormous effects on society and the economy, many beyond my apprehension."
If only more economists were as humble about the limits of their models as Derman is.
July 16, 2016
The difference between theory and models are vast. Theory expounds an idea that is or is close to exact reality. Models tries to mimic reality but being like reality in not reality. Theories are unconditional, reactions that happen no matter the environment. Models are conditional based on circumstances. If a theory is good, it becomes fact which is why all facts are already theories. Confusing theory and models creates problems in reality and make it harder to learn from them. The author has great prose in explaining the difference using philosophy, religion, physics, and finance. The minor setback of the book is that sometimes the author takes a very long winding pass to get to the point of the explanation, and at times needs a bit more space to explain something in greater depth.
May 19, 2012
Awesome book. Took me three sittings to get through it, I hate Spinoza but his philosophy was a great addition to this book to clear up some fundamental distinctions between what we do in science and what the wackjobs in economics do when they "model."
This book is a perfect addition to N.N. Taleb's "Black Swan" and a perfect rejoinder to these silly bankers who can't model their way out of a darkened room and who are constantly proclaiming that what they do is good for themselves and (LOL) even better for the taxpayers who have been forced to bail them out again and again since G.W. Bush was in office.
This book is a perfect addition to N.N. Taleb's "Black Swan" and a perfect rejoinder to these silly bankers who can't model their way out of a darkened room and who are constantly proclaiming that what they do is good for themselves and (LOL) even better for the taxpayers who have been forced to bail them out again and again since G.W. Bush was in office.
July 28, 2012
As he tells in his book My Life as a Quant, Derman is an elementary particle physicist turned quantitative financial analyst. He wrote a short book to distinguish between theories and models. Physics has theories, which describe the nature of the universe, and apply beyond the domains in which they were formulated, as Maxwell's theory of electricity and magnetism turned out to also apply to light. Finance has models, which describe humans behaving in a particular way under certain circumstances, and which may or may not apply when the circumstances change. I think that Peter Norvig's essay on Noam Chomsky and Bill O'Reilly shows that the distinction is not at all clear.
May 18, 2017
wtf is wrong with this guy..first starting talking about his "welcome to the neighborhood life long story, gibberish this and that and his Jewish bring about.." then few chapters about universe..and I would have picked up Greene or Michio Kaku or Susskind or Guth books about Higgs, M theory, Kaluza-Klein, Calbi-Yau book to read...I cannot even give any stars because I do not see you are focusing on your subject title..but all personal philosophy??..and you know what you should not be even proud of calling yourself a quant..because you are a criminal helping GS to sell CDO, CLO, MBS, AMBS, NINJIA, etc...save you money
Read
December 1, 2011I won this book through ŷ First Reads giveaways. This book has a fascinating concept and has a real potential to shed some light on the use of faulty economic models in our economy. However, the author gets hung up sometimes on explaining the models in a way which is not overly accessable or interesting to the average reader, making it difficult to get through. A book with interesting ideas and good potential, but sometimes it gets hung up on technical details.
October 30, 2016
I wanted to like this book more than I did. I was hoping for a long discussion of the authors experiences with the various financial models he worked with on Wall Street (and their limitations). Instead I got a lot of philosophy and light-weight physics (in fairness to him, I had just finished a Brian Greene book, so pretty much anything would have looked lightweight), and only about 50 pages of financial models. Those 50 pages were good, but I wanted 200 pages of it, not just 50.
February 5, 2012
One third autobiography, one third philosophical essay and one third a treatise on the nature of financial markets, this books defies expectations. It is full of insights, some on the surface and some buried in what is perhaps an unnecessarily complex and meandering landscape of ideas. A type of book you need to go back to and re-read, perhaps several times, in order to feel like you comprehend it.
January 17, 2014
"No model is correct, but models can provide immensely helpful ways to estimate value. I like to think of financial models as gedankenexperiments, like those Einstein carried out when he pictured himself surfing a light wave, or Schrodinger when he pictured a macroscopic cat subject to quantum interference. I believe that's the right way to use mathematical models in finance, and the way experienced practitioners do use them."
September 25, 2012
A book where only the last third is interesting. The author tries to connect to philosophy to models and that is what indeed expected and wanted but he ends up spending too much time there. Two thirds of the book devoted to philosophy is too much. Ultimately that part becomes uninteresting and boring leading to disillusionment. it also makes one wonder "What did i learn ?"
June 2, 2014
I first saw Professor Derman present at the Grant’s conference in New York. That was my first introduction to his work, and I like his mindset � he’s not dismissive of models� usefulness, but rather conscious of their limitations. In addition, Derman has a refreshing liberal arts sort of approach to modeling that makes his commentary accessible even to the non-quant.
January 1, 2015
Amazing book and a must read for modelers. Emanuel takes the time to lay the understanding of theory and models and concludes with issues in the financial markets. His conclusion that the West supports capitalism only in good times while it abandons capitalism for quick fixes in bad times is remarkably accurate.
February 13, 2016
"When models in physics fail, they fail precisely, and often expose a paradox that opens a door. When models in the social sciences fail, they fail bluntly, with no hint as to what went wrong and no clue as to what to do next. With no way forward, people try to restore the status quo at any cost.
- page 192
- page 192
September 9, 2021
A marvelous entertaining and educational read about the folly of using wrong mental models and the necessity of being open to being corrected . One of the most telling lines in the book was "Fortunate are those who go through life without having their models of self, shattered upon the altar of reality".
January 31, 2012
There are nuggets of brilliance in this book, and I agree with the author's thesis. The passages relevant to the author's argument were too few, as quoted Goethe and Spinoza as much as compose his own work.
August 27, 2024
The limitations of mathematical and other models; why models don’t match reality and the dangers of treating them like they do. Relates this fact to his personal and professional life (religion, South Africa, physics, Goldman strats)
January 6, 2012
Very disappointing. Some interesting insights in the first half of the book. The second half is shockingly simplistic and obvious.
December 14, 2015
Great book. Very even handed about the financial crisis and a way to understand the math and ideas behind economic modeling and the people behind them.
May 9, 2014
If you just want to know about models in the financial world like me. Read only page 140 onwards. Ignore the rest.
Displaying 1 - 30 of 47 reviews
Can't find what you're looking for?
Get help and learn more about the design.