Unruly humans vs the lust for order

Emanuel Derman, one of the first physicists on Wall Street, explains how models can lead people astray. He writes from experience, having been guilty of pragmamorphism in using methods drawn from the physical sciences and mathematics to model stock prices, those decidedly non-physical quantities tha...

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Bibliographic Details
Published in:New scientist (1971) 2011-10, Vol.212 (2835), p.32-33
Main Author: Derman, Emanuel
Format: Magazinearticle
Language:English
Subjects:
Apartheid
Construction costs
Economic models
Economics
Economists
Finance
Human
Markets
Mathematical models
Physical sciences
Physicists
Raw materials
Stock prices
Warning
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Summary:Emanuel Derman, one of the first physicists on Wall Street, explains how models can lead people astray. He writes from experience, having been guilty of pragmamorphism in using methods drawn from the physical sciences and mathematics to model stock prices, those decidedly non-physical quantities that represent value as determined by humans interacting in markets. Model building is not necessarily bad, as long as one understands the limitations. Moreover, Derman asserts that models in social science, and in finance particularly, are very different from models in the physical sciences. They should be accompanied by a health warning to ensure that no one forgets.
ISSN:0262-4079
2059-5387
DOI:10.1016/S0262-4079(11)62584-0