Finance and Physics

I just finished reading a book titled "My Life as a Quant: Reflections on Physics and Finance," by Emanuel Derman (co-creater of the eponymous Black-Derman-Toy interest rate model). A nice book, recommended to anyone interested in quantitative finance.

Derman got a Ph.D. in theoretical physics, and worked in several university physics positions, before becoming a Wall Street "quant." His last chapter has a nice line, where he discusses how physics is in many ways more amenable to modeling than are economics and finance. He writes, "Trained economists have never seen a really first-class model. It's not that physics is 'better,' but rather that finance is harder."

As some of us say, because people's behaviors and preferences change, unlike physical laws, "Finance and actuarial science aren't rocket science -- they're HARDER."

- Rick