Models.Behaving.Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life
Review of:Models. Behaving. Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in LifeEmanuel Derman Free Press 240 pp. $26 (2011)"Ranging wittily across philosophy, literature and the arcane world of  high finance, Derman's argument is a heady mix of physics, economics and memoir" --NATURE, 2011“A readable, even eloquent combination of personal history, philosophical musing and honest confession concerning the dangers of relying on numerical models not only on Wall Street but also in life....it is undeniable thatModels.Behaving.Badly.itself performs splendidly.” —Burton Malkiel,Wall Street Journal"An erudite yet pleasantly readable exploration of why financial models failed during the U.S. mortgage meltdown and why modelers must learn to use them more wisely. Derman has distilled a lifetime of reading, research and thinking into these pages, and I read the book twice to see how he pulled the threads together without losing the reader."—Bloomberg News"Ranging wittily across philosophy, literature, and the arcane world of high finance, Derman's argument is a heady mix of physics, economics, and memoir."—Nature“A fascinating cross-disciplinary exploration of how and why financial and scientific models fail…A unique examination of the limits of models and theories in understanding and predicting human behavior, and a nice rejoinder to the equations-can-solve-or-explain-everything crowd.”—Kirkus Reviews“Emanuel Derman has written my kind of a book, an elegant combination of memoir, confession, and essay on ethics, philosophy of science and professional practice. He convincingly establishes the difference between model and theory and shows why attempts to model financial markets can never be genuinely scientific. It vindicates those of us who hold that financial modeling is neither practical nor scientific. Exceedingly readable.”—Nassim N. Taleb, author ofThe Black Swan"This is a compelling, accessible and provocative piece of work, that forces us to question many of the assumptions that we work with. As Derman explains so clearly, models are not "bad" in themselves; on the contrary, they are crucial for modern society. However, they have been used in a dangerously sloppy and careless way, with sometimes terrible results. Derman explains this clearly, and draws heavily onhis own lifetime experiences - ranging from growing up in appartheid south africa, working in the scientific field and then as a financial engineer on wall street - to provide a moving and fascinating set of illustrations of these principles. The conclusion is unexpectedly otpimistic - if people choose to listen." —GillianTett, author ofFool's Gold"Models. Behaving. Badly.is an engaging and personal meditation on the limitations of our ability to predict the future, especially—but not only—in the context of financial markets. He is not interested in blame or politics, but in the deeper lessons to be drawn from the financial crisis. As a physicist who was also highly placed in the financial world, he explains clearly the difference between prediction and advice, theory and model and knowledge and wisdom."—Lee Smolin, Senior Researcher at Perimeter Institute for Theoretical Physics, author ofThe Trouble with Physics;Life of the Cosmos,andThree Roads to Quantum Gravity"If you don't want your models to behave badly, you should study carefully these words of wisdom on the philosophy of quantitative modeling. Emanuel Derman has always been one of the most respected quants on Wall Street.  Now he has proven that he is also one of the most thoughtful. Though, in the sequel he should tell us what happened to the large man over the Sudan!"—Clifford S. Asness, Ph.D., Managing & Founding Principal AQR Capital Management“I found this book fascinating. Derman has a skill of mixing the personal with the abstract. You will not find another that takes you from the vagaries of the human eye to the vagaries of the stock market with stops at quantum electrodynmics. It is quite a ride.”—Jeremy Bernstein, author ofQuantum Leaps,andPlutonium"This is a thoughtful book for anyone interested in the overlap between the hard sciences and the soft sciences, from physicists to bankers. But finance academics beware, Professor Derman, with an iron fist in a velvet glove, gives them a good slapping."—Paul Wilmott, co-author "Financial Modelers' Manifesto"Praise for Emanuel Derman’sMy Life as a Quant:"There are few "gentlemen bankers" left these days. That is why Emanuel Derman's memoirs are so compelling…Derman's wry humour and sense of irony are apparent throughout the book."—Financial Times"That sense of being an intruder in outlaw territory lends an intriguing mood to Derman'sMy Life as a Quant, a literate and entertaining memoir."—BusinessWeek“Reads like a novel, but tells a lot about brains applied to making money grow.”—Paul A. Samuelson, MIT, Nobel Laureate in Economic Sciences