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1. Introduction
Normally Im a pretty reticent person, but I have to say that Im quite unabashedly pleased to be here
tonight. Im very grateful to the IAFE, to SunGard, and to the Selection Committee for having chosen me to receive the Financial Engineer of the Year Award. Its one of the best things that has ever
happened to me, for a number of reasons Id like to spell out, now that I have an uninterrupted

First, Im happy because I really love financial economics. What I like about the field is that its
so amenable to a variety of approaches and skills. Financial theory in its practice seems to me to
be ruled by a sort of troika of skills, namely mathematics, software, and financial intuition, all of
them requiring imagination. Software itself is just another kind of conceptual art, a sort of architecture with words. My one regret is that I didnt know what a rich field it was during those early
days when I was learning to be a practising physicist, and had never yet opened the Business Section of the Times. In the early 70s I was a physics postdoc at the University of Pennsylvania, and
I didnt know that at that time, across the campus, two thirds of that other ruling troika, Cox,
Ross & Rubinstein, were doing their early work on options.

2. Second, Im pleased because for me, finance and Wall Street have been a second act, or perhaps
even a third in a troika of disciplines. I first spent a biblical seven years as a physicist in academia,
then a further five as a quaintly named Member of Technical Staff at Bell Labs, and finally, the
last fifteen on Wall Street. The first two careers were an excellent preparation, but the third was
by far the most satisfying.
I started out in pure physics. When I left that field for applied work at Bell Labs, I was sad for
several years. I felt that I was abandoning my aspirations to work on what I thought were the
deep and transcendental things in life.
Of course, that wasnt true, though it certainly felt that way for a while. But I eventually learned
that almost anything that absorbs you can expand in scope. A narrow focus, if you take it passionately enough, and if youre lucky, can propel you through a sort of cosmological wormhole into
much wider spaces.
My personal espresso jolt came when I moved to Goldman. There, I quickly became exposed to
options theory, and grew quite excited. I used to sit on the No 3 Express on the West Side, going
home from 85 Broad to 86th and Broadway, reading Jarrow & Rudd and Cox & Rubinstein
about the only books you could get then scribbling proofs on my lap on shaky trains. One day,
soon after I started, one of my ex-Bell-Labs vanpool friends got on and saw me immersed in symbols. He laughed incredulously at me for sitting there and doing mathematics on the subway that was what you were meant to leave behind when you joined the business world!
But I remember thinking the opposite: that it was a relief to be in a place where people actually
wanted you to spend your time on what naturally absorbed you. I told my vanpool friend that I
could easily imagine doing this sort of work for another 10 or 15 years, and I turned out to be

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What jumps into my head when I think of my luck here is a one-paragraph Kafka story, entitled
A Little Fable, that my son Joshua showed me recently. It goes like this:
Alas, said the mouse, the world is growing smaller every day.
At the beginning it was so big that I was afraid. I kept running
and running, and I was glad when at last I saw walls far away to
the right and left, but these long walls have narrowed so quickly
that I am in the last chamber already and there in the corner
stands the trap that I must run into.
You only need to change your direction, said the cat, and ate it
When I left academia, my world did indeed grow temporarily smaller. For several years I could
see the walls and sense the cat, but somehow, I was luckily able to change direction before the
cats jaws closed. My wife Eva helped me, and Im always grateful for it.
3. The third way in which Im glad to accept this award is as a practitioner. Practitioners really do
have more fun, and they have to worry less about referees reports.
The best place to learn the necessary skills, and the best place not to learn too many unnecessary
ones, is in a stint on the Street. Here we have to choose a third way, somewhere between the formal axioms of economics textbooks and the quicksilver thinking of smart traders. Im glad to be
accepting this award as one of the practitioners who makes daily use of what we all do.

2. Thanks
Ive spent most of my working life doing research and I want to thank a few people who made me
feel good about this.
First, the personal part. Im grateful to my wife Eva. Through thick and thin, shes always encouraged
me when I needed encouragement and listened when I needed a sympathetic ear. She, and our kids,
Josh and Sonya, taught me much about the right attitude to life and work.
Now for the professional side.
Before I came to Goldman, Sachs, and at various times afterwards, I was influenced by Stanley
Diller. He was the first person I met who took both options valuation and portfolio software seriously, and understood their inevitable confluence. Stan also emphasized the value of educating
clients, with the faith that education helps the educator too.
After coming to Goldman, I was influenced by a collection of colleagues and academics, among

Ravi Dattatreya, my first all-round guide to finance and financial software;

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David Garbasz, a fixed-income options trader and a modeling and software proponent who built
the first modern commercial risk management system that I know of;

Fischer Black, for many reasons, but especially for his lack of respect for authority and received
ideas, for his stubborn belief in the power of clear thinking and writing, and for his unsentimental
lucidity about the real world;

John Cox, Steve Ross and Mark Rubinstein for their justly famous binomial model. It phenomenal efficacy served as both a crutch and an inspiration in thinking about options in the early days.
Just as importantly, it provided practitioners with a simple and yet honest way of communicating
with traders and clients.

Dan ORourke, an equity derivatives trader at Goldman, who was always willing to try to translate
trader patois into quant Latin and vice versa;

Also, over almost ten years, Ive also benefited from working with my colleagues in Trading and
in the Quantitative Strategies and Equity Derivatives Research groups at Goldman.
Im especially grateful to Iraj Kani, Mike Kamal, Joe Zou and Kresimir Demeterfi, colleagues and
collaborators in Quantitative Strategies. They regularly revived my spirits by their enthusiasm,
insight and perseverance. Several times, they dragged me back to work with them just as I was
about to be sucked over the event horizon and into the bureaucratic singularity.

I also want to thank Tanya Beder and the IAFE and its founders, among them Jack Marshall &
the late Bob Schwartz and Vipul Bansal, whose foresight and perseverance made this organization a home for many of us, and gave us an identity we needed.

Finally, Im grateful to Goldman, Sachs. I especially appreciate the way the company doesnt have
a single mold, but allows people to feel that they can contribute in many different ways by doing
what they excel at. Ultimately, its doing what you love that makes work a pleasure.

3. The Past and the Future

When I think about the early days of financial engineering on the Street, those schoolboy lines from
Wordsworth jump into my head:
Bliss was it in that dawn to be alive,
But to be young was very heaven!
Although I missed the beginning of the financial economics revolution, even in my time the work
was varied and exciting. There were few standard solutions, and anything simple and mildly clever
you could do had a noticeable impact. You didnt have to be too refined. The field we worked in had
no name and no approved curriculum. There were no weekly Risk Magazine conferences and no
martingales. It was simple fun. Now its much more specialized, but thats the price of success.

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Nevertheless, I like to think that financial modeling can still feel like it did then. A while back I read a
biography of Goethe, one of the last people to make contributions to both art and science. Scientists
regard Goethe as a poet who strayed beyond his proper place. His critics said he mistakenly thought
of nature as a work of art, and that he was trying to be qualitative where he should be quantitative.
But, according to the book I read, Goethe was not so naive as to think that nature is a work of art.
Rather, he believed that our knowledge and description of nature is a work of art.
Thats how I like to picture what we do making a beautiful and truthful description of what we see.
Were involved in intuiting, inventing or concocting approximate laws and patterns. We can synthesize both art and science in creating understanding. We can use our intuition, our scientific knowledge, and our pedagogical skills to paint a picture of how to think qualitatively and then, within limits,
quantitatively, about the world of human affairs, and in so doing, have an impact on how other people think. Theres not much more one could ask for without being wishful.
Im very happy to be here tonight with all of you. Thank you.

Emanuel Derman
October 12, 2000