Models. Behaving. Badly.
Models. Behaving. Badly. is a penetrating insider’s look at the recent economic collapse. It explains the collision between mathematical modeling and economics and what makes financial models so dangerous. Though such models imitate the style of physics and employ the language of mathematics, theories in physics aim for a description of reality—but in finance, models can shoot only for a very limited approximation of reality. This book exposes Wall Street’s love affair with models and shows us why nobody will ever be able to write a model that can encapsulate human behavior.
Praise for Models. Behaving. Badly.
"Models. Behaving. Badly. is an engaging and personal meditation on the limitations of our ability to predict the future, especially in the context of financial markets. He is not interested in blame or politics, but in the deeper lessons to be drawn from the financial crisis. As a physicist who was also highly placed in the financial world, he explains clearly the difference between prediction and advice, theory and model, and knowledge and wisdom."
— Lee Smolin, Senior Researcher at Perimeter Institute for Theoretical Physics
"A fascinating cross-disciplinary exploration of how and why financial and scientific models fail...A unique examination of the limits of models and theories in understanding and predicting human behavior, and a nice rejoinder to the equations-can-solve-or-explain-everything crowd."
— Kirkus Reviews
"A readable, even eloquent combination of personal history, philosophical musing, and honest confession concerning the dangers of relying on numerical models not only on Wall Street but also in life. It is undeniable that Models.Behaving.Badly. itself performs splendidly."
— Burton Malkiel, Wall Street Journal
"Emanuel Derman has written my kind of a book, an elegant combination of memoir, confession, and essay on ethics, philosophy of science and professional practice. He convincingly establishes the difference between model and theory and shows why attempts to model financial markets can never be genuinely scientific. It vindicates those of us who hold that financial modeling is neither practical nor scientific. Exceedingly readable."
— Nassim N. Taleb, author of "The Black Swan"
"If you don't want your models to behave badly, you should study carefully these words of wisdom on the philosophy of quantitative modeling. Emanuel Derman has always been one of the most respected quants on Wall Street. Now he has proven that he is also one of the most thoughtful. Though, in the sequel, he should tell us what happened to the large man over Sudan!"
— Clifford S. Asness, Ph.D., Managing & Founding Principal AQR Capital Management