Emanuel Derman

I am in Santa Fe, NM, about to spend a few weeks at the Santa Fe Institute where I hope to learn something about market microstructure and agent-based models.

Everyone in Santa Fe (i.e. the few people I’ve met thru work here in the past — I wrote a chapter of Models.Behaving.Badly here in 2009, using their excellent library) seems to think Santa Fe is paradise on earth, and maybe it is, though I prefer paradise on the seashore. I  have this atavistic urge to find a place that is easygoing but has access to culture, and yet lets you back off from the discontents and irritations of politics and corporations. People here seem to think this is it. But, I should add, people here seem to be close to retirement.

One of the points I tried to make in Models.Behaving.Badly was that models were analogies, comparing something you don’t understand to something you do, e.g. a nucleus to a liquid drop, or stock returns to smoke diffusion, whereas theories were (attempts to discover) absolute (rather than relative) descriptions of phenomena (e.g. Newton’s laws or relativity). I spent an evening with an accomplished physicist here, and was pleased to see that he agreed. When I was here last I read Maxwell’s papers from the 1860s; he called his final description of the electromagnetic field a theory, having first tried a bunch of metaphorical models to warm up his intuition and understanding.

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En route here, Aaron Brown emailed to ask how I came up with the title My Life as a Quant, as background to an article he’s writing. This led me to the following recollection:

When my kids were really small, no more than three or four years old, I used to love to take them to entertainment that was simultaneously enjoyable for adults and children, eve if on different level. On TV you could find Sesame Street and The Muppet Show. For live performances, among others I had lucky strikes with Joseph and the Amazing Technicolor Dreamcoat at a theater on 2nd Ave, The Paper Bag Players at Symphony Space, a show of Randy Newman songs in the East Village. I remember my son becoming mesmerized by the latter.

We also saw some terrific movies — a Japanese one about dogs accidentally marooned in the Antarctic through the winter, and then, My Life as a Dog, a Swedish film about a young boy whose mother is ill and sends him away to live with relatives. It’s a complicated story, but the boy often reflectively compares his plight to others worse off, for example Laika, the Russian space dog, sent up alone into orbit on Sputnik 2 when I was in high school.

I never liked the word ‘quant’ very much when I first started on Wall Street some years after that movie, and realized that people who used the word used it somewhat derogatorily. In those days, I never heard anyone self-describe themself as a quant. I had this impression confirmed in the Nineties when I read Mark Kritzman’s and Gary Gastineau’s Dictionary of Financial Risk Management, where they commented, at the end of the definition of the word quant: ‘often pejorative.’

When I came to write my memoir, the perception of having been a second-class citizen in the early days of quantitative strategies led me to think of the movie My Life as a Dog, and modify Dog to Quant for the title. The subtext was meant to be dogs.

Nowadays quant is a hotter word (quant fund, battle of the quants, etc etc) and many people who call themselves quants wouldn’t have passed for what we considered quants in the old days.

You can read the truly sad story of what actually happened to Laika here: http://en.wikipedia.org/wiki/Laika. I hadn’t known this until today.

I grew up in a post-WWII world where, temporarily, because of their capacity to create devices that wreak destruction, physicists had lots of influence in government. Think Einstein, Oppenheimer, Teller. By the time I went to graduate school at Columbia, the U.S. was involved in Vietnam, and a new bunch of much younger physicists were active in JASON, a Government advisory group. There were many protests against JASON at Columbia in the Sixties, as a result of mild-mannered physicists writing reports with titles (I recall)  like “Interdiction of Trucks By Night,” apparently to do with bombing the Ho Chi Minh Trail. Recently someone claimed that JASON stood for “Junior Achiever, Somewhat Older Now” which captured the hubris of scientists at the time. Influence and power is seductive.

Those days are over. The Cold War is faded, and the Superconducting Collider is dead.  No one cares too much about physicists any more, and won’t, unless the string theorists can come up with a doomsday weapon. (Actually, there’s a 2005 Herman Wouk novel about the political consequences of a Higgs boson gap between the U.S. and China.)

Physicists had only  indirect political  influence; their ability to accurately harness nature’s powers via pure science and accurate engineering based on that science gave them power over presidents, and made people think they might be smart about other things too. Biologists are the real 21st Century physicists in that sense, and, like them, in the long run have the larger influence on the future. As Feynman wrote about Maxwell, “From a long view of the history of mankind — seen from, say, ten thousand years from now, there can be little doubt that the most significant event of the 19th century will be judged as Maxwell’s discovery of the laws of electrodynamics. The American Civil War will pale into provincial insignificance in comparison with this important scientific event of the same decade.” There are biologists like Darwin and Watson and Crick for whom the same is true.

Meanwhile, day to day, administrations are filled with economists of all stripes who have direct influence and the power to do good and harm in the short run.  But economics is not a pure science; it’s closely linked with philosophy and politics. As Keynes wrote:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

The consequences of errors are severe.

My son, who did his PhD thesis on Max Weber, soon to be published as a book, showed me Weber’s essay on Politics as a Vocation. Weber has many interesting remarks about the responsibilities of people who get involved in politics, among them this:

Well, first of all the career of politics grants a feeling of power. The knowledge of influencing men, of participating in power over them, and above all, the feeling of holding in one’s hands a nerve fiber of historically important events can elevate the professional politician above everyday routine even when he is placed in formally modest positions. But now the question for him is: Through what qualities can I hope to do justice to this power (however narrowly circumscribed it may be in the individual case) ? How can he hope to do justice to the responsibility that power imposes upon him? With this we enter the field of ethical questions, for that is where the problem belongs: What kind of a man must one be if he is to be allowed to put his hand on the wheel of history?

One can say that three pre-eminent qualities are decisive for the politician: passion, a feeling of responsibility, and a sense of proportion.

The last two are especially important when you can’t be sure of the consequences of your theories.

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Addendum: One interestingly relevant paragraph from the same essay, my italics:

In America, the spoils system, supported in this fashion, has been technically possible because American culture with its youth could afford purely dilettante management. With 300,000 to 400,000 such party men who have no qualifications to their credit other than the fact of having performed good services for their party, this state of affairs of course could not exist without enormous evils. A corruption and wastefulness second to none could be tolerated only by a country with as yet unlimited economic opportunities.