Q&A: Emanuel Derman on model risks, why quantitative finance is not a theory, and bailout ethics

The use of advanced mathematics and techniques from physics helped give credibility to the financial models that proved inadequate in the crisis. Here, Emanuel Derman, an old hand in the development of finance theory, calls for it to be reassessed – and questions whether it really is a theory at all. By Laurie Carver


Bookended by the publication of the Black-Scholes option pricing formula in 1973 and mass downgrades of collateralised debt obligations in 2007, quantitative finance enjoyed three-and-a-half decades of growing influence and credibility. Now, after the limitations of its models were exposed, the discipline faces scepticism from outsiders, and even insiders – such as Emanuel Derman, professor of professional practice at Columbia University – are calling for a fundamental rethink.

Derman describes

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