Life experience in physics and finance - book review of ‘My life as a quant’

Basic introduction of the book                

The author, Emanuel Derman, is a co-developer of the short rate model – Black-Derman-Toy model. He is also the director of Columbia’s Financial Engineering program. One special thing worth mentioning is that he switched his career from physics to finance at his 40’s.

I read this book with recommendation from a financial engineering program. It is said to be useful for me to understand and accelerate a career in quantitative finance.

The first half part of this book is about Emanuel’s life in physics, and it is not related to finance.

The second part is about his work and thoughts in wall street. The interesting part is that he had worked with many top quantitative finance researchers and practitioners, so the description of these talented guys (including author) is interesting for me to understand how they worked and thought on quantitative finance. 

Courage to change

Emanuel once had a dream to be a great physicist, and he spent more than ten years in the area. Unluckily, he never got a great achievement in physics according to his own standard and thus felt unhappy.

He changed his career to quantitative finance, and later became a top financial engineer in this area. Although Emanuel might not be a top physicist in the world, he later became a top quantitative researcher and practitioner thanks to his strong background in quantitative research.

                                                                                                           

More communication needed in finance area

                                    

Emanuel described more co-work experience in quantitative finance than his previous work in physics. Communication with traders and researchers is important for him to develop financial models which are usable in real world. In physics, he did research mostly by himself.

Models are wrong

Financial models are less stable than physics models. As Emanuel wrote, “In physics you’re playing against God, and He doesn’t change his laws very often. When you’ve checkmated Him, He’ll concede. In finance, you’re playing against God’s creatures, agents who value assets based on their ephemeral opinions.”

Take Black-Scholes model as example, it has assumptions including constant volatility and risk free rate, divisible asset, lognormal distribution of asset price, etc. The reality is that those assumptions are almost not true. What a practitioner can do is to develop or select a suitable model which can explain most of the price, interest rate or volatility movement under a specific situation. Thanks to this, quantitative analysists keep developing more suitable models and the quantitative financial models are evolving quickly nowadays.