Emanuel Derman
Emanuel Derman | |
|---|---|
| Born | 1945 South Africa |
| Occupation(s) | Academic, entrepreneur, author |
| Years active | 1973–present |
| Known for | Black–Derman–Toy model, Derman–Kani local volatility model, Financial Modelers' Manifesto |
| Notable work | My Life as a Quant: Reflections on Physics and Finance; Models.Behaving.Badly; The Volatility Smile; Brief Hours and Weeks: My Life as a Capetonian |
Emanuel Derman (born 1945) is an academic, entrepreneur, and author originally from South Africa, widely acknowledged as a prominent figure in quantitative analysis. He is the author of My Life as a Quant: Reflections on Physics and Finance and played a key role in creating the Black–Derman–Toy model, one of the pioneering interest-rate models. Additionally, he co-developed the Derman–Kani local volatility or implied tree model, which provides an explanation for the volatility smile effect.
At 21, Derman relocated to the United States in 1966. He currently holds a professorship at Columbia University and directs its financial engineering program. His previous experience includes serving as Head of Risk and partner at KKR Prisma Capital Partners, a fund of funds. His 2004 publication with Wiley was recognized by Business Week as one of the top ten business books of that year. In 2011, he published Models.Behaving.Badly, which contrasts financial modeling with principles from hard sciences and incorporates personal reflections.
Biography
Derman was born into a South African Jewish family and completed his B.Sc. (Hons) at the University of Cape Town. He earned his Ph.D. in theoretical physics from Columbia University in 1973, where he proposed an experimental test for weak-neutral currents in electron-hadron scattering. This test was carried out at SLAC in 1978 and confirmed the validity of the Weinberg–Salam model. Between 1973 and 1980, he pursued theoretical particle physics research at institutions including the University of Pennsylvania, University of Oxford, Rockefeller University, and University of Colorado at Boulder. From 1980 to 1985, he contributed to business modeling by developing computer languages while working at AT&T Bell Laboratories.
In 1985, Derman joined the fixed income division of Goldman Sachs, where he co-created the Black–Derman–Toy interest-rate model. After departing Goldman Sachs in 1988 to lead Adjustable Rate Mortgage Research at Salomon Brothers Inc., he returned to Goldman Sachs in 1990 to head the Quantitative Strategies group within Equities. There, he advanced research on local volatility models and explored the complexities behind the volatility smile. Promoted to managing director in 1997, he took charge of Quantitative Risk Strategies in 2000. Derman retired from Goldman Sachs in 2002 and subsequently joined both Columbia University and Prisma Capital Partners (later acquired by KKR).
He received the IAFE/SunGard Financial Engineer of the Year award in 2000 and was inducted into the Risk Hall of Fame two years later. Derman has published extensively on topics related to quantitative finance, with a particular emphasis on volatility and financial modeling techniques.
Since 1995, Derman has highlighted fundamental distinctions between models used in physics and those applied in finance: whereas physics models strive for objective predictions about future events, financial models focus on estimating values for illiquid assets that depend heavily on subjective inputs. He observed, "In physics there may one day be a Theory of Everything; in finance and the social sciences, you’re lucky if there is a usable theory of anything."
Together with Paul Wilmott, Derman co-authored the Financial Modelers' Manifesto, advocating for ethical and responsible practices in financial modeling.
Between February 2011 and July 2012, he maintained a financial blog for Reuters and contributed a regular column to the Frankfurter Allgemeine Zeitung from September 2012 for one year.
Models.Behaving.Badly
In 2011, Derman authored Models.Behaving.Badly: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life, offering a critical examination of capitalism’s failure highlighted by the 2008 financial crisis bailouts. He emphasizes the necessity of returning to fundamental principles, recognizing that potential gains inherently involve corresponding risks.
Derman identifies three distinct approaches to comprehending the world: models, theory, and intuition. Models function as analogies that provide relative insight by relating new ideas to known ones. Theories seek absolute comprehension and stand on their own merits, exemplified by the works of Newton or Maxwell. Intuition represents the most profound understanding, emerging infrequently through rigorous effort, where the observer and the observed become one. The book uses examples from physics, philosophy, and financial modeling to illustrate these distinctions.
The Volatility Smile
Co-authored with Michael Miller in 2016, The Volatility Smile serves as a comprehensive textbook covering foundational financial modeling techniques, option pricing methods, and the explanation of the volatility smile, an essential phenomenon in derivatives trading.
Brief Hours and Weeks: My Life as a Capetonian
Derman’s 2025 memoir, Brief Hours and Weeks, reflects on his upbringing within a Polish-Jewish immigrant community in Cape Town during the mid-1900s. The work received acclaim from Nobel Prize winner JM Coetzee for its vivid depiction of that historical period.
See also
External links
- Emanuel Derman: Writings on Quantitative Finance – Official personal website
- Faculty profile at Columbia University’s Department of Industrial Engineering and Operations Research
- Derman’s Blog (including earlier posts on wilmott.com)
- The Volatility Smile
- Research papers by Emanuel Derman hosted at the Social Science Research Network