Emanuel Derman
@EmanuelDerman
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Books: My Life As A Quant; Models.Behaving.Badly; The Volatility Smile. Forthcoming: Brief Hours and Weeks: My Life as a Capetonian
New York City
Joined April 2011
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To all who argued the financial world would’ve collapsed without the bailouts: The political world is collapsing now because of the bailouts
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A short thread about GameStop and Populism and The Central Dogma of Derivatives.
The “populist” nature of the r/WSB pumping of GameStop that required SAC and Citadel “experts” to rescue Melvin Capital “experts” after the attack by the financial non-elite isn’t completely new.
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In 1980 MBAs I worked with said: If I need a programmer I can always hire one.
Now programmers say: If I need an MBA I can always hire one.
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“All of humanity's problems stem from man's inability to sit quietly in a room alone.”
― Blaise Pascal, Pensées
Esp now
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I know it’s kind of boring already I’m mystified: Why does physics use somewhat freewheeling math (so effectively), and why does economics use such formal axiomatic rigorous math? Is it the nature of economists, or does economics as a field demand this rigor, to much less effect?
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When I was an undergrad physics student we looked down on engineers, who were politically reactionary and only interested in applied physics. Now, when I look at a bridge or plane or old steam engine, I am awed.
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Junior hedge fund guys aren’t allowed to trade stocks. But Fed guys with much more power on the market apparently are.
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A short thread about the Black derivation of Black-Scholes
________________
I first learned the Merton derivation of BS, pretty much the standard one now. You hedge the option with delta shares, find delta to make the portfolio riskless, then it must earn the riskless return
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Phone rang:
Real Estate Agent: Just getting in touch to see if you’re thinking of upgrading your apartment.
Me: Not really.
He: There might be some good opportunities. Why not?
Me: Where are you? On the moon?
He: I’m in my home office. Why, is there an echo or something?
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"When you're a bond investor you have three choices. Duration. Credit. Convexity. Those are the three buttons you can push. Duration is when you get your money back. Credit is if you get it back. Convexity is how."--
Harley Bassman quoted in
@GrantsPub
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I wonder if anyone knows what these mysterious implements are meant for.
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The Central Dogma of Derivatives is that causality flows from Underliers to Derivatives. But that hasn’t been true for a long time.
7///
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@TheStalwart
Just like breast milk has yet unknown good stuff that people making synthetic versions of didn’t know about, so perhaps meat etc has important stuff that $BYND or Soylent has no clue about.
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Drowning man who can’t swim, but insisted against all advice on stumbling out of his depth into rough sea, pulled out of the water and resuscitated by the giant team of people paid to look after him, then tells everyone else: You don’t need to be able to swim. Go in just like me.
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So, this isn’t new. As they say in the Hong Kong Mid-Level escalators, Do not wail against the flow.
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With what turned out to be my usual impeccable timing, I retired from teaching at Columbia a year ago.
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In physics or finance, maybe in econ too, one of the hardest things is to see through the formalism to the actual idea.
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Tradeoffs: The federal government should not be trying to get back to where we were. They should be trying to re-organize the way things work so that deaths are as low as possible. We don’t have to go back to where we were. We can go to someplace different
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“A recent study by economists at the Federal Reserve found that less than half of the published papers they examined could be replicated, even when given help from the original authors.”
from
@TheEconomist
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Friend of mine thinks New York will soon be going to restaurants and bars again because no one can live like this. I think this is a once in five generation cosmic event and nothing is going to be the same until there’s a treatment or a vaccine.
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My theory is that people are using large negative rates to discount future cashflows to come up with current stock prices. Either that, or they’re deluded.
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@nntaleb
gave me a copy of his beautiful new book last night. Though my list doesn’t completely overlap with his, attached, we dislike many of the same things.
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One of the difficult things about working alone at home without interaction on even small math-related problems is that you can go down the wrong path for a long time whereas one brief discussion with someone would set you right.
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@PTetlock
@tylercowen
Is it really ‘manipulation’ to ‘overestimate’ the risk of an unknown virus? You cannot actually KNOW whether you are overestimating. Fakse dichotomy. I would call it healthy common sense if you’re dealing with something contagious and potentially widely fatal.
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Let’s face it, masks are mostly a net positive for people’s appearance. They give a hint and leave much more to the imagination.
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The correct comparison isn’t: “flu already killed 10K people” so why worry about corona.
The correct comparison is: if corona spread as far as flu (for which there IS vaccination and is well understood) how many people would then die, and what would happen to social systems.
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Just innocuously mention
@nntaleb
in a tweet and 1000 people are guaranteed to like it. See?
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Imagine taking chatGPT backwards in time to the early 1600s and training it on all the written information that was available then. Could it have come up with Kepler’s laws? Clearly no.
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Sometimes I look at anything that works properly, even a pair of leather boots that are sewn together and don’t leak and can take a beating, and I wonder how anybody was able to make some thing that doesn’t fall apart
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The enjoyment of life is a skill. The idea that it can be switched on after decades at the grindstone underrates the force of human habit. The wine venture, the competitive sailing, the art-dealing: these are corporate-style projects by another name
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Only for average people
The default math class in high school should be Statistics instead of Calculus
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The implied volatility of an option represents two ideas:
1a. It is the lognormal volatility the underlier would have to have in the future to expiration if the underlier evolved by geometric Brownian motion;
and …
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No it’s not.—————
“It’s like a Greek tragedy,” said John Donohue, a colleague who has attended Sunday dinners at the Bankman-Fried home. “The story of flying too close to the sun, and having your wings singed.”
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Life always looks a little bit better when you’ve had enough sleep
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I actually took a blood test, a very standard test. I aced it, aced the test. I got A+. A Rh positive. I took it in front of doctors and they were very surprised, they said that’s an unbelievable thing, what you just did, rarely does anyone do that well on a blood test.
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Everybody in America, keep some perspective!! People have lived through concentration camps, sieges of cities, years-long wars and famines. Lockdowns and social distancing and masks are not a catastrophe
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To be pedantic: a 200% - 50% equal-probability gamble has an expected payoff of 125% if played once, but if you keep playing the eventual return is 50% x 200% = 100% in long run, no gain. See
@ole_b_peters
ergodicity economics
@tylercowen
, via
@opinion
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Re Clarence Thomas: once, a financial firm I worked for took me with them to meet the manager of a New York pension fund. They told me to give him a copy of “ my life as a quant”. He insisted on immediately giving me a $20 bill because he couldn’t take anything.
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Amazing no nationwide policies abt how to deal with pandemic in the US (except for the economy of course). It’s every person for himself. Should be mobilization for tests, medicines, food delivery, hospital beds, ICUs, etc. “Can’t build a hospital in 10 days so let’s do nothing."
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Forgetting models for a moment
if you overreact against catastrophic exponential scenarios you can take a wait-and-see approach, but if you under/react, it will be too late
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You don’t really need to know what’s happening in the world
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Ever since March, I live fractally. Watch a bit of a movie, read about the pandemic , always Trump, look at twitter, go back to the movie, read a bit of book, read an article, back to book, in increasingly short bursts.And so I recall much less of what I’ve read or seen.
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The cool Alfa Romeo of my youth now looks just like any other car.
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Most of the true problems in finance theory are conceptual not computational
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Derman’s Three Rules of the Lockdown:
1. Interesting people become boring.
2. Boring people become really boring.
3. Really boring people become intolerable.
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Every night when I go to sleep I pray to God to make me wake up as someone who can listen to podcasts and watch youtube documentaries, but he doesn’t listen.
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There was a time 100 years ago when daily newspapers reviewed difficult physics books
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“Fancy math can’t mask the fact that quantitative investing strategies essentially rely on pattern recognition ”
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I gave chat GPT one of my exam problems and it snowed me with confident BS.
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Some people watch GameStop, some people watch interviews with the royal family. Some watch neither.
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In life as in finance, simple precautions are better than complicated ones.
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@nntaleb
By no stretch of the imagination were you free loading. You don’t owe him anything. He’s making money off your presence.
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@CliffordAsness
Just being pedantic but did you know that the way Black originally derived the Black-Scholes formula was by equating the Sharpe ratio of the option and the Sharpe of its underlying stock? In equilibrium each one should produce the same excess return per unit of risk.
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The Linda Problem of Kahneman and Tversky:
In the Linda Problem, one is given characterological info about Linda's feminist liberal history, and then asked: which is more likely: Linda is a bank teller or Linda is a bank teller with an interest in the feminist movement.
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Smart move by the Swiss — just about every computer already has a UBS port. 👏
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When I teach my aim is to demystify the math part of finance. Most models (the good ones) have a simple meaning in terms of ideas and then transfer that meaning into math equations.
Sometimes I try too hard and it may have the opposite effect ...
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That’s why when you say an army is decimated, it means actually only 10% got killed. It’s what happened to the other 90% implied by the 10% death rate that finishes the army off
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Pro Tip: Put this chess timer on the table between you and your friend or family member when you have a conversation. Whoever is about to talk or interrupt clicks it. The minutes spoken/interrupted accumulate. Easy way to refute accusations of listening less than your opponent.
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Predictable
@CassSunstein
. Blame "probability neglect" for producing panic over a pandemic. But his contrived examples all have perfectly known frequentist probabilities and for corona those are unknown. via
@bopinion
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So here's the story: my son and I went to see Oppenheimer and were distinctly underwhelmed. (And IMO there was much too much dramatic music)
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Please, not Larry Summers. There must be other professionals out there.
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Most of the things that matter for daily living don’t have stationary statistical distributions, unlike games of chance.
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Options valuation question for you: show that the time value of a European call peaks exactly at stock price = strike.
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It’s all part of the trend of using derivatives that make it apparently easy to do difficult things which, which, when a few people do them, isn’t too bad, but which fail when everyone does them.
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The older I get the more previous apparently simple things look complicated to me.
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Fact not gloat: If he had not minimized the pandemic he would have won.
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I went to a reunion of people I worked with 20 years ago. I can’t understand it: almost everybody looked a lot older, except me.
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Economics is really hard. When I see economists blithely comparing some thing in their field to Newton’s laws I realize they don’t understand how hard it is.
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Some economists, still justifying the 2008 bailouts of AIG etc. by the ultimate profit the Government made, think only about the first order financial consequences but ignore the second and third order political and societal impacts.
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Only people who weren’t around in the 60s think this is like the 60s.
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‘What is artificial intelligence?’ And someone else said, ‘A poor choice of words in 1954’
And, you know, they’re right.
So if he had to invent a term, what would it be? His answer is instant: applied statistics.
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Comments on financial models in 2004 but I think it applies equally well to contagion models.
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“I didn't have time to write a short letter, so I wrote a long one instead.”
Mark Twain
Current version: we didn’t have time for a short lockdown so we have a long lockdown instead
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People who thought they were always in the good quadrant of the public moral plane are discovering the plane has other orthogonal dimensions they never apprehended, in which their hyper cube may not be so well situated
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Slavoj Zizek: how come it is easier for us to imagine the end of all life on earth than to imagine a modest change in our economic order?
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“Japan loves hard cash because it loves everything it stands for: anonymity, portability, resilience to earthquakes, distrust of banks and a sensation of ownership.”
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I’m getting a bit irritated by fintwit on the Coronavirus because too many of them think only in economic and financial terms.
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Amazonesia:
When you’ve ordered so many things from Amazon that you cannot remember what might be in the package that just arrived
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Interview with Ariel Rubinstein on Game Theory is a model of groundedness, humility and sense abt real world
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The consequences of all of this supposed ease of doing complicated powerful things with derivatives reminds me of the Central Dogma of Molecular Biology which states that information is supposed to flow only from nucleic acids to proteins. Sometimes the reverse happens.
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Can Bayesians use the Bayesian approach to update their belief in the appropriateness of the Bayesian vs the frequentist approach?
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And, hedging long term bonds is about the first thing you learn in any introductory fixed income course.
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“I’m really, really, really trying not to sound like a combative jerk in the book.” says Sapolsky.
What does it mean to say you’re trying if you also believe have no free will??
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Everyone is finally noticing the flaws of the behavioral scientists (e.g.remarks by ) but I am pleased that I was early to point out the theoretical flaws, the lemming publishing, and its use for paternalistic control. December 2012:
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One of the fundamental principles of finance (Yes I know it’s theory) is that you don’t earn return for taking avoidable risks.
It’s similar with the pandemic.
Why take a chance doing things like before if you can do it another way without the same danger?
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I want to live somewhere where I’m shielded from the indignities of modern life but can still have culture and good company when I want it
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A present I got from my daughter. It tells you what’s happening, plays music, and you don’t need your hands on a mouse and you don’t need to look at a screen. Can eat while listening. V recent invention I guess. Will try to invest.
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What we should have been taught was not statistical analysis but scenario analysis. Good financial risk managers look at probabilistic models but know that there are certain scenarios where you ignore probability and make sure you’re not exposed to them.
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It took Romer (insider) to make economists pay attention to what is obvious to many. This is from one of my books.
http://t.co/cMn1DN7lFp
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