Emanuel Derman is Professor of Industrial Engineering and Operations Research at Columbia University. A native of South Africa, he took a sabbatical from academia to become one of Goldman Sachs’ first quants, collaborating with Fischer Black on the Black-Derman-Toy model of interest rate volatility. This book has thematic elements in common with Kent Osband’s "Pandora’s Risk," which is on my list too. Derman, however is a living testimony to the value of Columbia’s Core Curriculum, since he weaves a penetrating exposition of the CAPM together with insights from authors as diverse as Spinoza, Schopenhauer, and G.K. Chesterton. It is very well written, wry, personal, informative and thought provoking--not just on finance issues, either. Having worked at Goldman Sachs, he has been in the trenches during the Renaissance of quantitative finance and financial engineering. Clearly, he rues what has happened in the most recent financial crisis, both philosophically and from the idolatry shown to models like VaR. He writes, "When models in physics fail, they fail precisely...When models in the social sciences fail, they fail bluntly, with no hint as to what went wrong...With no way forward, people try to restore the status quo ante at any cost." Then, "To confuse a model with a theory is to believe that humans obey mathematical rules, and so to invite future disaster." This is a terrific book.

posted Mar 27, 2012 at 2:20PM

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