Emanuel Derman, a quant with a philosophical bent and a determination not to let the numbers get the better of him, was named Financial Engineer of the Year by the International Association of Financial Engineers and SunGard Trading and Risk Systems. He is a managing director in the firm-wide risk department at Goldman Sachs in New York.

The master modeler is the eighth person (and first nonacademic) to receive the prestigious award since it was launched in 1993. Other recipients have included Fischer Black, the codeveloper of the Black-Scholes model, and Robert Merton, a 1997 winner of the Nobel Prize for Economic Science.

Derman received the 2000 award in part for his pioneering work on interest rate options and for developing the Black-Derman-Toy model with Fischer Black and Bill Toy in 1987. Over the years, he has written extensively on trading volatility through options, and on valuing and hedging exotic options.

Last month, in a speech at IAFE's annual conference, Derman advised a roomful of quants that finance "isn't physics” and that they shouldn't be afraid of being practical. The job of modelers, in his view, is not only to build models but also to demystify them. Traders, with their seat-of-the-pants understanding of how changes in risk factors and variables affect prices, need to be told about the limitations of models. Modelers, meanwhile, need to eschew Ivory Tower purity and devise models that keep in mind how traders actually use models—as tools to finesse their thinking about value.

His larger point: models compute theoretical fair value courtesy of the opinions of those who use them. The need for quantitative risk management may now go unquestioned in finance, he said, but it's worth remembering that models convert opinions about the future into dollars to be paid today. It's therefore wise to not rely too bravely on models. "Somewhere north of hubris but south of idolatry lies the appropriate use of models,” he cautioned.

At the same time, the Goldman executive couldn't resist indulging in the aesthetics of modeling. Fundamental models, he pointed out, describe "in god's language the search for eternal truth,” while phenomenological models, which relate different phenomena to each other, have "something toy-like about them.” Statistical models, for their part, try to anticipate the future based on the past.

Born and raised in South Africa, Derman got a doctorate in theoretical particle physics in 1973 from Columbia University, logged in a few years of post-doc research, then arrived at AT&T Bell Labs as a research scientist, where he worked on computer languages for modeling. He headed to the Street to work at Goldman in 1985, and has stayed put except for a one-year stint at Salomon Brothers in 1989.