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

A foothold in reality

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