Sophisticated vulgarity

Financial models may be mathematically consistent, but nevertheless wrong. So, what's the point of modelling? Emanuel Derman of Columbia University discusses some of the issues

People who haven't lived and died by financial models often have difficulty understanding how they are used. In physics or engineering, a theory predicts future values. In finance, you're lucky if your model can predict the future sign correctly. So, what's the point?

Let's look at a straightforward financial problem: estimate the price of a seven-room Park Avenue duplex from the known price of a two-room Battery Park City apartment. Here's a simple model: figure out the implied price per square