My Life as a Quant: Reflections on Physics and Finance

Abstract

Prologue: The Two Cultures. Physics and finance. What quants do. The Black-Scholes model. Quants and traders. Pure thought and beautiful mathematics can divine the laws of physics. Can they do the same for finance? Chapter 1. Elective Affinities. The attractions of science. The glory days of particle physics. Driven by ambitious dreams to Co-lumbia. Legendary physicists and budding wunderkinder. Talent vs. character, plans vs. luck. Chapter 2. Dog Years. Life as a graduate student. Wonderful lectures. T.D. Lee, the brightest star in the firmament. Seven lean years. Getting out of graduate school, only half-alive. Chapter 3. A Sort of Life. The priesthood of itinerant postdocs. Research isn't easy. Almost perishing, then publishing. The delirious thrill of collaboration and discovery. Chapter 4. A Sentimental Education Oxford's civilized charms. One physics paper leads to another. English idiosyncrasies. The anthro-posophists. Chapter 5. The Mandarins. Research and parenthood on New York's Upper East Side. A good life, but ... the difficulties of a two-career family. Chapter 6. Knowledge of the Higher Worlds. A two-city family. New age meditations. Karma. Goodbye to physics. Chapter 7. In the Penal Colony. The world of industry - working for money rather than love. The Business Analysis Systems Cen-ter at Bell Labs. A small part of a giant hierarchy. Creating software is beautiful. Chapter 8. Stop-Time. Wall Street beckons. Interviewing at investment banks. Leaving the Labs. Chapter 9. Transformer. The Financial Strategies Group at Goldman, Sachs & Co. Learning options theory. Becoming a quant. Interacting with traders. A new cast of characters. Chapter 10. Easy Travel To Other Planets. The history of options theory. Meeting and working with Fischer Black.The Black-Derman-Toy model. Chapter 11. Force of Circumstance. Manners and mores on Wall Street. The further adventures of some of my acquaintances. Volatility is infectious. Chapter 12. A Severed Head. A troubled year at Salomon Bros. Modeling mortgages. Salomon's skill at quantitative marketing. Mercifully laid off. Chapter 13. Civilization & Its Discontents. Goldman as home. Heading the Quantitative Strategies Group. Equity derivatives. The Nikkei puts and exotic options. Nothing beats working closely with traders. Financial engineering becomes a real field. Chapter 14. Laughter in the Dark. The puzzle of the volatility smile. Beyond Black-Scholes: the race to develop local-volatility mod-els of options. The right model is hard to find. Chapter 15. The Snows of Yesteryear. Wall Street consolidates. Clothing goes casual. I move from equity derivatives to firmwide risk. The bursting of the internet bubble. I take my leave. Chapter 16. The Great Pretender. Full circle, back to Columbia. Physics and finance redux. Different endeavors require different de-grees of precision. Financial models as gedanken experiments. Acknowledgments. Index.