Dedication Title Page Copyright Model I Chapter 1: A Foolish Consistency MODELS THAT FAILED I: ECONOMICS THEORIES, MODELS, AND INTUITION OF TIME AND DESIRE MODELS THAT FAILED II: POLITICS MODELS THAT FAILED III: THE MOVEMENT A LOOK AHEAD TWO IMPOSSIBLE THINGS BEFORE BREAKFAST Chapter 2: Metaphors, Models, and Theories THE DIRAC SEA ANALYTIC CONTINUATION DIG WE MUST A MODEL AIRPLANE: THE ZIPPY TYPES OF MODELS THE NATURE OF MODELS THE NATURE OF THEORIES MONOCULAR DIPLOPIA MAKING THE UNCONSCIOUS CONSCIOUS AGAIN ADDENDUM: GOETHE ON SYMBOLISM Model II Chapter 3: The Absolute THE TETRAGRAMMATON THE NAME OF THE NAME OF THE NAME THE IRREDUCIBLE NONMETAPHOR A THEORY OF THE EMOTIONS FIAT MONEY LOVE AND DESPERATION HOW TO LIVE IN THE REALM OF THE PASSIONS THE FOUR QUESTIONS SPINOZA’S ANSWERS Chapter 4: The Sublime THE BIRDS OF THE AIR THE PHENOMENA: ELECTRICITY AND MAGNETISM QUALITIES: POSITIVE AND NEGATIVE QUANTITIES: COULOMB’S LAW OF FORCE BETWEEN STATIC CHARGES VOLTA’S ITALIAN INSIGHT: CHEMISTRY IS BETTER THAN FRICTION OERSTED: ELECTRIC CURRENTS BEHAVE LIKE MAGNETS AMPÈRE: A LAW FOR THE FORCE BETWEEN CURRENTS A SYMPATHETIC UNDERSTANDING FARADAY: MOVING MAGNETS CREATE ELECTRIC CURRENTS FARADAY IMAGINES FORCE-TRANSMITTING LINES MAXWELL MODELS THE LINES MAXWELL REIFIES THE LINES MAXWELL MODIFIES AMPÈRE’S EQUATIONS MAXWELL’S THEORY: THE FIELD ITSELF MAXWELL’S EQUATIONS: THE FIELD’S GEOMETRY— CURLS AND DIVERGENCES THE GREAT CONFIRMATION: LIGHT IS THE PROPAGATION OF ELECTROMAGNETIC WAVES REALITY = PERFECTION; FACT = THEORY THE BEASTS OF THE FIELD ELECTROMAGNETISM AS METAPHOR EPILOGUE Model III Chapter 5: The Inadequate FINANCE IS NOT MATHEMATICS PRICE, VALUE, UNCERTAINTY THE EFFICIENT MARKET MODEL UNCERTAINTY VERSUS RISK RISK DEMANDS A POSSIBLE REWARD A MODEL FOR RISK RISK AND RETURN THE ONE LAW OF FINANCE THE CONCLUSION: EXCESS RETURN IS PROPORTIONAL TO RISK AN ASIDE: THE PLEASURE PREMIUM THE EMM AND THE BLACK-SCHOLES MODEL THE CAPITAL ASSET PRICING MODEL THE UNBEARABLE FUTILITY OF MODELING Chapter 6: Breaking The cycle THE PERFECT CAGE THE MYSTERIES OF THE WORLD MODELS THAT FAILED WHAT IS TO BE DONE? THE FINANCIAL MODELERS’ MANIFESTO AN ETHICAL COROLLARY MARKETS AND MORALS TAT TV AM ASI Appendix Acknowledgments Notes Index About the Author ALSO BY EMANUEL DERMAN My Life as a Quant: Reflections on Physics and Finance This edition first published in 2011 Copyright © 2011 by Emanuel Derman Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com The right of Emanuel Derman to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988 First published in the United States by Free Press, A Division of Simon & Schuster, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books Designations used by companies to distinguish their products are often claimed as trademarks All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners The publisher is not associated with any product or vendor mentioned in this book This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold on the understanding that the publisher is not engaged in rendering professional services If professional advice or other expert assistance is required, the services of a competent professional should be sought Grateful acknowledgment is made to the following for permission to reprint previously published material: "The Precision of Pain and the Blurriness of Joy: The Touch of Longing is Everywhere" from Open Closed Open copyright © 2000 by Yehuda Amichai, English translation copyright © 2000 by Chana Bloch and Chana Kronfeld, reprinted by permission of Houghton Mifflin Harcourt Publishing Company and Georges Borchardt, Inc., on behalf of Chana Bloch, Chana Kronfeld, and the Estate of Yehuda Amichai John Maynard Keynes, Essays in Biography, published 2010, reproduced with permission of Palgrave Macmillan "This Be the Verse" from Collected Poems by Philip Larkin Copyright © 1988, 2003 by the Estate of Philip Larkin Reprinted by permission of Farrar, Straus and Giroux, LLC A catalogue record for this book is available from the British Library ISBN 978-1-119-96716-3 (hardback) ISBN 978-1-119-94468-3 (ebook) ISBN 978-1-119-94469-0 (ebook) ISBN 978-1-119-94470-6 (ebook) Text design by Erich Hobbing I MODELS ... European and African ancestry, who lived in the southern part of the country, their skin tone ranging from indistinguishable-from-white to indistinguishable-from-black and including everything in between... numbers: in the complex plane, the points at plus and minus infinity coincide, and again far left and far right become indistinguishable South Africa’s models were rife with internal contradictions... real conditions of life, and his relations with his kind,” wrote Marx and Engels in The Communist Manifesto in 1848 They were referring to modern capitalism, a way of life in which all the standards