Diciembre en Edges

Edge 334 � December 2, 2010
(13,600 words)

http://www.edge.org

This online edition with streaming videois available at:
http://www.edge.org/documents/archive/edge334.html

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THE THIRD CULTURE
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METAPHORS, MODELS & THEORIES
By Emanuel Derman

Theories deal with the world on its own terms, absolutely. Models are metaphors,
relative descriptions of the object of their attention that compare it to something
similar already better understood via theories. Models are reductions in
dimensionality that always simplify and sweep dirt under the rug. Theories tell you
what something is. Models tell you merely what something is partially like.

Introduction

Writing in the New York Times ("They Tried To Outsmart Wall Street" March 9, 2009) ,
Denis Overbye observed:

Dr. Derman, who spent 17 years at Goldman Sachs, and became managing director, was a
forerunner of the many physicists and other scientists who have flooded Wall Street
in recent years, moving from a world in which a discrepancy of a few percentage
points in a measurement can mean a Nobel Prize or unending mockery to a world in
which a few percent one way can land you in jail and a few percent the other way can
win you your own private Caribbean island.

They are known as "quants" because they do quantitative finance. Seduced by a vision
of mathematical elegance underlying some of the messiest of human activities, they
apply skills they once hoped to use to untangle string theory or the nervous system
to making money.

Derman, Overbye noted, "fell in love with a corner of finance that dealt with stock
options."

"Options theory is kind of deep in some way. It was very elegant; it had the quality
of physics" Derman told him.

� JB

EMANUEL DERMAN is physicist and a former managing director and head of the
Quantitative Strategies group at Goldman, Sachs & Co., is a professor in Columbia
University's Industrial Engineering and Operations Research Department, as well as a
partner at Prisma Capital Partners. He is the author of My Life As A Quant.
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A PRIMER OF THINGS YOU NEED TO KNOW TO FOLLOW THE FINANCIAL NEWS
By Jeremy Bernstein

"Financial crisis is by definition something that had not been anticipated. If it
had been anticipated it could have been arbitraged away." � Alan Greenspan

At the outset you need to know that I am a theoretical physicist and not a stock
broker or commodities trader. But I have been trying to follow the news. It is full
of terms such as "mark to market" ,"credit default swaps", "qualitative easing"
which at first meant about as much to me as "Bell's Inequality" might mean to some
of you. But I am stubborn and decided that if these things are going to determine my
financial future I better know what they mean.

The first thing that becomes clear when you look into the matter is that these
concepts are part of a virtual economy. They are not like the "real economy" where,
after you go into a grocery store to buy eggs and milk, you come out of the store
with eggs and milk and not an option to buy eggs and milk at an agreed price at a
later time. If you buy a "credit default swap" you come out of the transaction with
a piece of paper-or more likely a computer file-which has no intrinsic value. If you
imagine a situation in which you are confronting an aboriginal tribe you might get
somewhere if you have beads to swap, but not if you have a credit default swap.
These financial instruments are rather new. The commodity they trade in is money.
They are very clever devices that were thought up by very smart people to make money
from money and they are in the process of doing us all in. I am somehow reminded of
something that the great German mathematician David Hilbert said about astrology
. If the ten smartest people in the world got together they could not think of
anything as stupid as astrology. Now to the glossary.

JEREMY BERNSTEIN is a professor emeritus at the Stevens Institute of Technology and
a fromer staff writer for the New Yorker. He is a frequent contributor to the New
York Review of Books. His latest book is Quantum Leapspublished by the Harvard
Press.
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THALER'S QUESTION
An Edge Special Event!

65 Contributors; New: Garniss Curits, Marcel Kinsbourne, M.D., Paul Kedrosky

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EDGE IN THE NEWS

Fast Company, Big Think, New York Times, Boing Boing, Discover
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FAST COMPANY

INFOGRAPHIC OF THE DAY: THE POWER STRUCTURE OF A MEXICAN DRUG CARTEL
By Cliff Kuang
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WHEN 'SCIENCINESS' IS THE ENEMY OF ACTUAL SCIENCE
David Berreby
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NEW YORK TIMES

A SEARCH FOR ENDURING, BUT UPENDED, SCIENTIFIC IDEAS
By Andrew C. Revkin
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BOING BOING

THE BEST SCIENTIFIC THEORIES (THAT LATER TURNED OUT TO BE WRONG)
Maggie Koerth-Baker
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DISCOVER

BIG SCIENTISTS PICK BIG SCIENCE'S BIGGEST MISTAKES
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This online edition with streaming videois available at:
http://www.edge.org/documents/archive/edge334.html
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Edge Foundation, Inc. is a nonprofit private operating foundation under
Section 501(c)(3) of the Internal Revenue Code.
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EDGE

John Brockman, Editor and Publisher
Russell Weinberger, AssociatePublisher

Copyright (c) 2010 by EDGE Foundation, Inc.
All Rights Reserved.

Published by EDGE Foundation, Inc.,
5 East 59th Street,
New York, NY  10022

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