Models are just the tool

April 17, 2009 in Finance,Risk

I'm a big fan of Emanuel Derman.  His memoir My Life as a Quant tells the story of a young physics Ph.D. who stumbled into finance and eventually became the head of Goldman Sach's Quantitative Risk Strategies group.  He currently oversees the financial engineering program at Columbia University and is the CRO of Prisma Capital.

Today he was quoted by the WSJ on a familiar topic:

Financial engineering and quantitative investing, with their sophisticated spreadsheets, models and algorithms are no better than the people who use them, Mr. Derman said at a recent lecture in New York sponsored by the Columbia’s science department. Those people may make wrong assumptions, disregard flaws or ignore the possibility of rare but catastrophic outcomes. They also are responsible for communicating potential problems with their models and making management decisions based on them.

“I don’t think banks in Iceland went bankrupt because of bad models. They went bankrupt because of over - leverage,” said Mr. Derman. “Models are just the tool.”

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