Emanuel Derman (born 1945) is a South African-born academic, businessman and writer. He is best known as a quantitative analyst, and author of the book ''My Life as a Quant: Reflections on Physics and Finance''. He is a co-author of Black–Derman–Toy model, one of the first interest-rate models, and the Derman–Kani

local volatility A local volatility model, in mathematical finance and financial engineering, is an option pricing model that treats Volatility (finance), volatility as a function of both the current asset level S_t and of time t . As such, it is a generalisati ...

or implied tree model, a model consistent with the volatility smile. Derman, who first came to the U.S. at age 21, in 1966, is currently a

professor Professor (commonly abbreviated as Prof.) is an Academy, academic rank at university, universities and other tertiary education, post-secondary education and research institutions in most countries. Literally, ''professor'' derives from Latin ...

Columbia University Columbia University in the City of New York, commonly referred to as Columbia University, is a Private university, private Ivy League research university in New York City. Established in 1754 as King's College on the grounds of Trinity Churc ...

and Director of its program in

financial engineering Financial engineering is a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of programming. It has also been defined as the application of technical methods, especially from mathe ...

. Until recently he was also the Head of Risk and a partner at KKR Prisma Capital Partners, a fund of funds. His book ''My Life as a Quant: Reflections on Physics and Finance'', published by Wiley in September 2004, was one of Business Week's top ten books of the year for 2004. In 2011, he published ''Models.Behaving.Badly'', a book contrasting financial models with the theories of hard science, and also containing some autobiographical material.

Biography

Born to a South African Jewish family, Derman obtained a B.Sc. (Hons) at the

University of Cape Town The University of Cape Town (UCT) (, ) is a public university, public research university in Cape Town, South Africa. Established in 1829 as the South African College, it was granted full university status in 1918, making it the oldest univer ...

, and received a Ph.D. in

theoretical physics Theoretical physics is a branch of physics that employs mathematical models and abstractions of physical objects and systems to rationalize, explain, and predict List of natural phenomena, natural phenomena. This is in contrast to experimental p ...

from Columbia in 1973, where he wrote a thesis that proposed a test for a weak-neutral current in

electron The electron (, or in nuclear reactions) is a subatomic particle with a negative one elementary charge, elementary electric charge. It is a fundamental particle that comprises the ordinary matter that makes up the universe, along with up qua ...

hadron In particle physics, a hadron is a composite subatomic particle made of two or more quarks held together by the strong nuclear force. Pronounced , the name is derived . They are analogous to molecules, which are held together by the electri ...

scattering. This experiment was carried out at SLAC in 1978 by a team led by Charles Prescott and Richard Taylor, and confirmed the Weinberg–Salam model. Between 1973 and 1980 he did research in theoretical particle physics at the

University of Pennsylvania The University of Pennsylvania (Penn or UPenn) is a Private university, private Ivy League research university in Philadelphia, Pennsylvania, United States. One of nine colonial colleges, it was chartered in 1755 through the efforts of f ...

, the

University of Oxford The University of Oxford is a collegiate university, collegiate research university in Oxford, England. There is evidence of teaching as early as 1096, making it the oldest university in the English-speaking world and the List of oldest un ...

Rockefeller University The Rockefeller University is a Private university, private Medical research, biomedical Research university, research and graduate-only university in New York City, New York. It focuses primarily on the biological and medical sciences and pro ...

and the

University of Colorado at Boulder The University of Colorado Boulder (CU Boulder, CU, or Colorado) is a Public university, public research university in Boulder, Colorado, United States. Founded in 1876, five months before Colorado became a Federated state, state, it is the fla ...

. From 1980 to 1985 he worked at

AT&T Bell Laboratories Nokia Bell Labs, commonly referred to as ''Bell Labs'', is an American industrial research and development company owned by Finnish technology company Nokia. With headquarters located in Murray Hill, New Jersey, Murray Hill, New Jersey, the compa ...

, where he developed computer languages for business modeling applications. In 1985 Derman joined

Goldman Sachs The Goldman Sachs Group, Inc. ( ) is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many internationa ...

' fixed income division where he was one of the co-developers of the Black–Derman–Toy interest-rate model. He left Goldman Sachs at the end of 1988 to take a position at

Salomon Brothers Salomon Brothers, Inc., was an American multinational bulge bracket investment bank headquartered in New York City. It was one of the five List of investment banks, largest investment banking enterprises in the United States and a very profitabl ...

Inc. as head of Adjustable Rate Mortgage Research in the Bond Portfolio Analysis group. Rehired by

, from 1990 to 2000 he led the Quantitative Strategies group in the Equities division, which pioneered the study of

models and the volatility smile. He was appointed a managing director of Goldman Sachs in 1997. In 2000, he became head of the firm’s Quantitative Risk Strategies group. He retired from Goldman Sachs in 2002 and took a position at Columbia University and Prisma Capital Partners (acquired by KKR). Derman was named the IAFE/SunGard Financial Engineer of the Year 2000, and was elected to the Risk Hall of Fame in 2002. He is the author of numerous articles on quantitative finance on the topics of volatility and the nature of

financial modeling Financial modeling is the task of building an abstract representation (a model) of a real world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio o ...

. Since 1995, Derman has written many articles pointing out the essential difference between models in physics and models in finance. Good models in physics aim to predict the future accurately from the present, or to predict new previously unobserved phenomena; models in finance are used mostly to estimate the values of illiquid securities from liquid ones. Models in physics deal with objective variables; models in finance deal with subjective ones. "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." Derman together with

Paul Wilmott Paul Wilmott (born 8 November 1959) is an English people, English researcher, consultant and lecturer in quantitative finance.Financial Modelers' Manifesto The Financial Modelers' Manifesto was a proposal for more responsibility in risk management and quantitative finance written by quantitative finance, financial engineers Emanuel Derman and Paul Wilmott. The manifesto includes a Modelers' Hippocratic ...

, a set of principles for doing responsible financial modeling. From February 2011 to July 2012, Derman wrote a financial blog for Reuters. Beginning in September 2012, for one year, Derman wrote a regular column for the

Frankfurter Allgemeine Zeitung The (; ''FAZ''; "Frankfurt General Newspaper") is a German newspaper founded in 1949. It is published daily in Frankfurt and is considered a newspaper of record for Germany. Its Sunday edition is the ''Frankfurter Allgemeine Sonntagszeitung'' ( ...

''Models.Behaving.Badly''

In 2011, Derman published a new book titled ''Models.Behaving.Badly: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life''. In that work he decries the breakdown of capitalism as a model during the bailouts characterizing the

2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...

and calls for a return to principles, to the notion that if you want to take a chance on the upside, you have also taken a chance on the downside. More generally, he analyzes three ways of understanding the behavior of the world: models, theory and intuition. Models, he argues, are merely metaphors that compare something you would like to understand with something you already do. Models provide relative knowledge. Theories, in contrast, are attempts to understand the world on absolute terms; while models stand on someone else's legs, theories, like Newton's or Maxwell's or Spinoza's, stand on their own. Intuition, the deepest kind of knowledge, comes only occasionally, after long and hard work, and is a merging of the understander with the understood. His book elaborates on these ideas with examples from the theories of physics and philosophy, and the models of finance.

''The Volatility Smile''

In 2016, Derman and Michael Miller published a textbook titled ''The Volatility Smile'', a textbook about the principles of financial modeling, option valuation, and the variety of models that can account for the volatility smile.

''Brief Hours and Weeks: My Life as a Capetonian''

In 2025 Derman published ''Brief Hours and Weeks'', a memoir about youth in the 1940s, 50s, and 60s in a Polish-Jewish off-the-boat immigrant community in Cape Town, South Africa. JM Coetzee wrote about it:

"Brief Hours and Weeks awakes many memories of Cape Town, the city of Emanuel Derman's youth and mine, as it was half a century ago. The chapter on the lonely Mrs Gold is a triumph." - J M Coetzee, Nobel Laureate

References

External links

Emanuel Derman: Writings on Quantitative Finance
– Personal website

at Department of Industrial Engineering and Operations Research,

Derman's Blogearlier Blogs
on wilmott.com) * *
The Volatility Smile

Emanuel Derman's research papers
at the

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