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Models.behaving.badly : why confusing illusion with reality can lead to disaster
Derman, Emanuel.
Adult Nonfiction QA401 .D37 2011

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Summary: Emanuel Derman was a quantitative analyst (Quant) at Goldman Sachs, one of the financial engineers whose mathematical models usurped traders' intuition on Wall Street. Thenbsp;reliance traders put on such quantitative analysisnbsp;was catastrophic for the economy, setting off the series of financialnbsp;crises that began to erupt in 2007 with the mortgage crisis and from which we're still recovering.nbsp;Here Derman looks at why people--bankers in particular--still put so much faith in these models, and why it's a terrible mistake to do so. Though financial models imitate the style of physics by using the language of mathematics, ultimately they deal with human beings.nbsp;Their similarity confuses the fundamental differencenbsp;between the aims and possible achievements of the phsyics world and that of the financial world.nbsp;When we make a model involving human beings, we are trying to force the ugly stepsister's foot into Cinderella's pretty glass slipper.nbsp; It doesn't fit without cutting off some of the essential parts. Physicists and economists have been too enthusiastic to recognize the limits of their equations in the sphere of human behavior--which of course is what economics is all about.nbsp; Models.Behaving.Badly includes a personal account Derman's childhood encounter with failed models--the utopia of the kibbutz,nbsp;his experience as a physicist on Wall Street, and a look at the models quants generated: the benefits they brought and the problems they caused.nbsp;Derman takes a close look at what a model is, and then he highlights the differences between the success of modeling in physics and its relative failure in economics.nbsp; Describing the collapse of the subprime mortgage CDO market in 2007, Derman urges us tonbsp;stop relying on these modelsnbsp;where possible, and offers suggestions for mending these models where they might still do some good.nbsp; This is a fascinating, lyrical, and very human look behind the curtain at the intersection between mathematics and human nature.


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