Apologia Pro Vita Sua

Abstract

Honest assessment of the ethical behavior of our financial institutions and markets over the recent past has made many former defenders rather uncomfortable. In this article, whose Latin title translates as “a defense of one’s life,” Derman reflects on the moral dimensions of the derivatives business—in particular, the practice of financial engineering, which creates the models that drive the markets. He offers a “Modeler’s Hippocratic Oath,” similar to the oath that guides the medical profession, whose precepts are meant to clarify and limit the proper role of abstract modeling in guiding financial decision making.

TOPICS: Derivatives, exchanges/markets/clearinghouses, financial crises and financial market history