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Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life
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Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life

3.31 of 5 stars 3.31  ·  rating details  ·  173 ratings  ·  22 reviews
Emanuel Derman was a quantitative analyst (Quant) at Goldman Sachs, one of the financial engineers whose mathematical models usurped traders' intuition on Wall Street. Thereliance traders put on such quantitative analysiswas catastrophic for the economy, setting off the series of financialcrises that began to erupt in 2007 with the mortgage crisis and from which we're stil ...more
Hardcover, 240 pages
Published October 25th 2011 by Free Press (first published October 13th 2011)
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My first give away that this book would blow should have been the praise granted it by Nassim Nicholas Taleb. When describing a book as a mixture of things it probably means it's a pastiche rather than a narrative and this book had nearly no narrative. The first 140-150 pages made little cohesive sense and seemed to focus on a kind of romance Derman had with physics and specifically QED. His explanation of electrons and holes in a sea of negative energy electrons rubbed me the wrong way as even ...more
Keith Swenson
Overall, a good three star book. Interesting ideas, and obviously a very knowledgeable guy, but not very mainstream and so not really a "must read" book.

Chapter 1 - The most annoying chapter. I think he started with grandiose ideas for the book, and he takes us on a meandering tale of his own personal background and how he was the smartest kid on the block. I almost dropped the book at this point, but no, I am the type who has to finish every book I start. And actually, I am glad I did.

Chapter 2
Greg Linster
Models Behaving Badly is part memoir, part history, and part science -- Emanuel Derman does a nice job of explaining the difference between a model and a theory, and overall it's great book that I highly recommend reading.

Derman points out that financial models use the mathematics and style of physics; however, they are fundamentally different from the models used in the physical sciences. Financial models, even at their best, provide a gross oversimplification of reality.

In his "Financial Model
Bob Nichols
I read this book because I had seen a reference to a chapter on Spinoza's theory of emotions. As outlined by Derman, Spinoza's primitive sensations are desire, pain and pleasure. Desire involves all our "'strivings, impulses, appetites and volitions.'" The consequences of desire are pleasure and pain, which we evaluate as good and bad. Pleasure and pain are transitions between greater and lesser perfection, but are not states themselves. These "primitives" constitute our essence and underlie "al ...more
This book comes across as a self-published work in that the author rambles among his favorite topics rather than delivering a cohesive story/message. No doubt an acquisitions editor would have wielded a cleaver. Perhaps the author felt that he had already covered the failures of financial modeling in his earlier book, so he felt he should only lightly touch upon 'that topic' in this book. If the author had kindly written the book that matched the title, I would have been a happy camper.

Moving be
"No model is correct, but models can provide immensely helpful ways to estimate value. I like to think of financial models as gedankenexperiments, like those Einstein carried out when he pictured himself surfing a light wave, or Schrodinger when he pictured a macroscopic cat subject to quantum interference. I believe that's the right way to use mathematical models in finance, and the way experienced practitioners do use them."
As he tells in his book My Life as a Quant, Derman is an elementary particle physicist turned quantitative financial analyst. He wrote a short book to distinguish between theories and models. Physics has theories, which describe the nature of the universe, and apply beyond the domains in which they were formulated, as Maxwell's theory of electricity and magnetism turned out to also apply to light. Finance has models, which describe humans behaving in a particular way under certain circumstances, ...more
Kevin Hollins
I enjoyed Derman's first book, but this Models.Behaving.Badly. was not what I had expected. My expectation (which may have not been justified) was that the book would delve into financial models, VaR, etc. and break down the errors in the assumptions (Gaussian distributions, for example) that cause the models to misbehave in abnormal market environments. This was not that book. It felt like the subject matter wandered around in a somewhat indulgent way. It's a shame because Dr Derman has conside ...more
If you just want to know about models in the financial world like me. Read only page 140 onwards. Ignore the rest.
Awesome book. Took me three sittings to get through it, I hate Spinoza but his philosophy was a great addition to this book to clear up some fundamental distinctions between what we do in science and what the wackjobs in economics do when they "model."
This book is a perfect addition to N.N. Taleb's "Black Swan" and a perfect rejoinder to these silly bankers who can't model their way out of a darkened room and who are constantly proclaiming that what they do is good for themselves and (LOL) even
Katherine Collins
I first saw Professor Derman present at the Grant’s conference in New York. That was my first introduction to his work, and I like his mindset – he’s not dismissive of models’ usefulness, but rather conscious of their limitations. In addition, Derman has a refreshing liberal arts sort of approach to modeling that makes his commentary accessible even to the non-quant.
Kim Mathew
have to be a bit of a geek to like...i guess i am a geek
I wanted to like this book more than I did. I was hoping for a long discussion of the authors experiences with the various financial models he worked with on Wall Street (and their limitations). Instead I got a lot of philosophy and light-weight physics (in fairness to him, I had just finished a Brian Greene book, so pretty much anything would have looked lightweight), and only about 50 pages of financial models. Those 50 pages were good, but I wanted 200 pages of it, not just 50.
Dec 01, 2011 Katie added it
Shelves: first-reads
I won this book through Goodreads First Reads giveaways. This book has a fascinating concept and has a real potential to shed some light on the use of faulty economic models in our economy. However, the author gets hung up sometimes on explaining the models in a way which is not overly accessable or interesting to the average reader, making it difficult to get through. A book with interesting ideas and good potential, but sometimes it gets hung up on technical details.
Nick Klagge
I had somewhat high hopes for this book, but was pretty disappointed. Derman is all over the map, and makes a lot of superficial connections between things that don't really seem connected. It seemed to me more like he wanted to write a book than like he had a great idea that he decided to write a book about. I have his "Modeler's Hippocratic Oath" tacked up at my desk at work, but I'm afraid this book didn't do much to add to those few sentences.
Mike Ratner
One third autobiography, one third philosophical essay and one third a treatise on the nature of financial markets, this books defies expectations. It is full of insights, some on the surface and some buried in what is perhaps an unnecessarily complex and meandering landscape of ideas. A type of book you need to go back to and re-read, perhaps several times, in order to feel like you comprehend it.
A book where only the last third is interesting. The author tries to connect to philosophy to models and that is what indeed expected and wanted but he ends up spending too much time there. Two thirds of the book devoted to philosophy is too much. Ultimately that part becomes uninteresting and boring leading to disillusionment. it also makes one wonder "What did i learn ?"
The Good:
* a few great quotes

The ugly:
* too much rant
* unstructured
* not very practical
* too much jewish and spinoza talk that doesn't add practical value

The Truth:
* don't bother
* the author is well read

There are nuggets of brilliance in this book, and I agree with the author's thesis. The passages relevant to the author's argument were too few, as quoted Goethe and Spinoza as much as compose his own work.
This was a good read and reminder never to fall in love with our models of reality; to not confuse the moon with the finger that points to it.
Very disappointing. Some interesting insights in the first half of the book. The second half is shockingly simplistic and obvious.
Not what I expected. I am sure it was well written but I wasn't fully engaged. I much preferred his earlier book about his life as a quant.
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