Models.Behaving.Badly is about the methods people use to understand the world. There are two quite distinct modes of understanding phenomena: models and theories. Models are merely metaphors: “The brain is a computer.” Models are relative; they relate the thus-far incomprehensible by comparing it to things we already partially comprehend, in order to add insight by analogy. Theories are the real thing (Newton’s laws, quantum mechanics). They don’t compare; they describe in absolute terms. Models tell you only what something is more or less like. Theories tell you what something is, the principles that drive it. The book begins with an account of the author’s experiences with models that failed in the personal sphere. Two subsequent chapters analyze modes of understanding: models, theories and intuition, combined with illustrations from the natural and social sciences, and culminating in an account of Spinoza’s theory of emotions. To create a theory requires what Spinoza calls wonder and intuition, the deepest kind of understanding. The next two chapters describe and explain the history of the most profound and exact theory in physics, the theory of the electron and the electromagnetic field, correct to ten decimal places. The book explains the absolute nature of the discoveries made, and the role of intuition. The subsequent chapter explains the most precise model in economics, the efficient market model, stressing, in contrast, its metaphorical and approximate nature. The book concludes with a story that illustrates the failure of both theories and models in the realm of human behavior, where intuition and wonder must overwhelm all theorizing.
Book Details:
- Author: Emanuel Derman
- ISBN: 9781119944683
- Year Published: 2012
- Pages: 240
- BISAC: BUS027000, BUSINESS & ECONOMICS/Finance
About the Book and Topic:
Models.Behaving.Badly is about the methods people use to understand the world. There are two quite distinct modes of understanding phenomena: models and theories. Models are merely metaphors: “The brain is a computer.” Models are relative; they relate the thus-far incomprehensible by comparing it to things we already partially comprehend, in order to add insight by analogy. Theories are the real thing (Newton’s laws, quantum mechanics). They don’t compare; they describe in absolute terms. Models tell you only what something is more or less like. Theories tell you what something is, the principles that drive it. The book begins with an account of the author’s experiences with models that failed in the personal sphere. Two subsequent chapters analyze modes of understanding: models, theories and intuition, combined with illustrations from the natural and social sciences, and culminating in an account of Spinoza’s theory of emotions. To create a theory requires what Spinoza calls wonder and intuition, the deepest kind of understanding. The next two chapters describe and explain the history of the most profound and exact theory in physics, the theory of the electron and the electromagnetic field, correct to ten decimal places. The book explains the absolute nature of the discoveries made, and the role of intuition. The subsequent chapter explains the most precise model in economics, the efficient market model, stressing, in contrast, its metaphorical and approximate nature. The book concludes with a story that illustrates the failure of both theories and models in the realm of human behavior, where intuition and wonder must overwhelm all theorizing.
The similarity of the mathematics behind efficient markets and the mathematics of physics is deeply deceptive, as illustrated by the financial crisis of 2007-2009. Catastrophes strike when people mistake models for theories, metaphor for fact, artifice no matter how beautiful for life. To confuse the model with the world is to embrace a future disaster driven by the belief that humans obey mathematical rules.
AUTHOR REPUTATION Derman is one of the best known Wall Street quants, and is a frequent keynote speaker and industry commentator. TOPICAL financial models and their uses has been a constant in the press in recent years. This book will reflect on the authors experience in the use of models, both in and out of finance. PROVEN AUTHOR Derman is the author of the popular My Life as a Quant, which sold over 24,000 copies globally in cloth.
About the Author
Emanual Derman (New York, USA) is arguably the most well-known quant in the world. He is a professor at Columbia University and Director of their program in financial engineering, and is also the Head of Risk and a principal at Prisma Capital Partners, a fund of funds. Until his retirement in 2002, he spent seventeen years at Goldman Sachs. His book, My Life as A Quant: Reflections on Physics and Finance (Wiley, 2004) was one of Business Week’s top ten books of the year. Dr Derman is a frequent keynote speaker at international academic and practitioner conferences, and the author of many published articles, in scientific journals as well as in the media, on physics, computer science and finance.