Having recently read this excellent book by Emanuel Derman, I would highly recommend it, especially those PhDs and of course, “financial engineers”.
The below are some of the highlights I liked and you may find them interesting. The best, of course, is to read the book itself if you have time. If you are just interested in his academic experience but not so into financial modelling, the first six chapters would be adequate.
We cannot simply look at the world around us and deduce Newton’s Laws or Maxwell’s equations. Data on its own does not speak… His method wasn’t based on observation or empiricism.
Part of the reason for the influx of physicists to other fields was the collapse of their traditional job market: academia.
Quants do not. Like academics trained in research, they prefer to do one thing from beginning to end, deeply and well.
“If you decide you don’t have to get A’s, you can learn an enormous amount in college.”
Finally, fiercely brightest among all the stars in the Columbia firmament was Tsung-Dao Lee, the embodiment and perhaps even the cause of all the good and bad qualities of the department.
In the end, character and chance counted at least as much as talent.
“More is Different!”
At age 16 or 17, I had wanted to be another Einstein; at 21, I would have been happy to be another Feynman; at 24, a future T D. Lee would have sufficed. By 1976, sharing an office with other postdoctoral researchers at Oxford, I realized that I had reached the point where I merely envied the postdoc in the office next door because he had been invited to give a seminar in France.
If you didn’t mind wasting the best years of your youth, graduate student life at Columbia was paradise.
Everything looks simple once you have been taught it.
It was disappointing to learn that even the Nobel Prize and almost eternal fame were not enough to overcome vanity and competition.
It took me seven years in graduate school to get my PhD, an astonishing ten percent of a lifetime.
Most of us grew to hate our stay in the physics department.
When trying to discover something new in any field, one has to spend many years thinking, making false starts, wandering down blind alleys and stumbling into ditches, only to emerge again and keep going. For this, a PhD is a good, if painful, training.
“This coercion had such a deterring effect [upon me] that, after I had passed the final examination, I found the consideration of any scientific problems distasteful to me for an entire year.”
I had imagined postdoctoral life as a sort of priesthood, the blissful apotheosis of a life dedicated to knowledge.
As we got older, we took solace in the stories of people who made great discoveries after the age of thirty.
Postdoc life was an atavism, a relic of a time long past…. Mitchell Feigenbaum, famous for his contributions to chaos theory, described it aptly: “These two-year positions made serious work almost impossible. After one year you had to start worrying about where you could go next”
“publish or perish,”
As an academic, you could work (or not work) wherever you liked. It was freedom, but now, with one year as a postdoc gone and the future looming, it sometimes felt like the freedom to fail.
Such small freedoms, together with the long vacations spent doing physics in interesting places, gave one the sensation of being nonmonetarily rich, and compensated for the low noncorporate salaries.
I was 33 years old and halfway through my third postdoc; where was this peregrination going to end? I concluded I either had to find a position as an assistant professor with a good chance of tenure, or else get out of physics.
If you aren’t Feynman, you’re no one.
My solitary personal life amplified the lonely activities of a theoretical physicist and an academic.
Until I experienced it, I wouldn’t have believed that an investment bank could be more collegial than a college.
“A truth that’s told with bad intent beats all the lies you can invent”
If they expelled me from the monastery, I didn’t intend to worship God in the world. I would rather quit religion forever.
Everything is interesting when you examine it closely enough to be able to reconcile its quality and its quantity; every field is fascinating when you have sufficient familiarity with its nuances and begin to try to bridge the gap between its form and its implementation.
“You can do what you want, but you cannot want what you want,”
In my previous life in physics, talent and skill were everything-you felt sorry for people who ceased creating in order to become administrators. But at the Labs, talent seemed to be a commodity, fodder for managers to buy and redistribute. Supervisors were actually forbidden from doing “technical work” on the grounds that competing with their employees in this way was demoralizing.
It was around this time, seeing Ed write and design code, that I realized how many physicists misperceived the nature of jobs and careers in the nonacademic world. Physicists tended to think they were so smart that, once they descended to a job in the “outside world,” their talent would allow them to work in a 9-to-5 mode and still outperform their colleagues. But, in any nonacademic job, there are people for whom that particular work is not a compromise but a passion and dedication, taken seriously. They, rather than the smart but coasting physicists, set the standards of excellence.
the willingness to do so is an essential part of graduate student and postdoc subculture… All of Stan’s hires came from a culture in which you did your own dirty work – you developed your own theory, did your own mathematics, and then wrote your own programs.
Most quants, then and now, came from abroad because immigrants often see the quickest path to success in hands-on work. It’s the next generation that prefers management and business school.
It was a shock to realize that people whose great experience and knowledge straddled both the quantitative and the trading worlds had, despite their sophistication, brought themselves into such a catastrophic state.
Everyone was so determined to not have his or her own time wasted that they collectively wasted everyone else’s.
Most profitable options strategies I have seen have had the same formula: Buy some simple, less attractive product wholesale, use financial engineering to transform it into something more appealing, and then sell it retail.
Calibration is absolutely critical.
So much of financial modeling is an exercise of the imagination.
I believe that you can summarize the essence of quantitative finance on one leg, too: “If you want to know the value of a security, use the price of another security that’s as similar to it as possible. All the rest is modeling. Go and build.
Financial economists grandiosely refer to this law as the law of one price, which states that securities with identical future payouts, no matter how the future turns out, should have identical current prices.
Many finance academics who should know better also seem to imagine it can be done, but they don’t live in the real world.
People learn from past mistakes and go on to make new ones.
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. They don’t know when they’ve lost, so they keep trying.
Catastrophes strike when people allow theories to take on a life of their own and hubris evolves into idolatry.