David Heath, co-Founder of Financial Engineering at Cornell, Dies at 68
David Heath, together with ORIE field member Robert Jarrow of the Johnson Graduate School of Management, established Financial Engineering as a discipline in ORIE. Heath was on the ORIE faculty for more than twenty years, and retired as Orion Hoch Professor of Mathematical Sciences from Carnegie Mellon University (CMU) in 2006.
David Heath died in Rochester, New York on August 11, 2011. He leaves his wife, Judith, their three children and four grandchildren, as well as the many Ph.D. graduates of Cornell and CMU whose thesis work he supervised.
At Cornell, Heath collaborated with Robert Jarrow and their Ph.D. student Andrew Morton to establish the Heath-Jarrow-Morton (HJM) framework for determining the term structure of interest rates, i.e. the yield from a fixed income investment as a function of the time until its maturity. This work, widely recognized in the finance community, established a new approach to developing models for the evolution of the entire term structure, or forward rate curve, over time.
Jarrow commented that "it was always fun to do research with David. His ideas were fresh, imaginative, and rigorous. I always learned something from our conversations."
Earlier, Heath worked with ORIE field member Louis Billera and Ph.D. student Joseph Raanan on the problem of determining rates to be charged for a situation in which services are purchased in bulk but are to be paid for by a large number of small users. According to Billera, Heath and ORIE Professor Uma Prahbu had been involved in a queueing problem to determine the optimal distribution of dedicated telephone connections between the Cornell telephone system and the phone company central office for long distance service. "The question arose of how to charge for calls going out over these lines," Billera said, since the economic theory argument that you should charge the marginal cost of the last call would not recover the total system cost.
Heath and Billera used an approach from the then new theory of non-atomic games to work out the basis for a charging system, which was used by Joseph Raanan to compute rates for the Cornell system. "These rates were eventually implemented and were used for many years," according to Billera. Their work on a general approach to cost allocation led to papers, at different levels of abstraction, in the Journal of the Operations Research Society of America, the journal Mathematics of Operations Research, and the Journal of Accounting Research, "in order to spread the ideas more widely," Billera said.
With Billera, Lee Schruben (then an ORIE professor) and Scott Provan (then an ORIE graduate student), Heath, an accomplished violinist, formed a bluegrass band that performed in private and sometimes in public, once on Schruben's front porch in Ithaca. Heath's time with this band was "among Dad's most enjoyable times at Cornell." his daughter Susan once told Schruben, according to Billera.
More recently on the academic front, in a landmark paper Heath, Philippe Artzner, Freddy Delbaen and Jean-Marc Eber worked to establish measures of risk that are "coherent" in that they obey a specific set of axioms established by the authors. In 2007, The Actuarial Foundation awarded a prize for the best paper in actuarial science to the authors' extension of this work. The axioms include a requirement that the measure of risk serves to reward investment diversity. Somewhat surprisingly, the most widely used measures of risk, including one used by a SEC rule and one known as Value at Risk, do not always conform to this axiom. The prize-winning work of Heath and collaborators proposes suggestions to repair this deficiency.
Among Heath's Cornell Ph.D. students was Dr. Victoria Averbukh, now director of Cornell Financial Engineering Manhattan. Like Morton, Averbukh's work was jointly supervised by Heath and Jarrow. "Professor Heath opened a lot of doors for me when I was his Ph.D. student," she recalled. "But the most unforgettable experience was the level and intensity of the intellectual challenge during our work together," she said. "I wish I appreciated it more at the time, as it was the only time in my life I worked with such a great mathematician. He is certainly missed."
Another Heath student, Professor Refik Gullu of Bogazici University in Istanbul, said "Dave was not only an excellent academic advisor, but also a great wise man figure, and a mentor. Being a student of Dave gave you the feeling that you were almost watching a magician at work. So easy for him, not so easy for you, and the gap is not merely due to hard work," Gullu said. "Often when I started sketching my results, he stopped me after the first line, guessing where I was or was not heading, always with a nod of encouragement. But it was a good thing that he stopped you, as then he always told great stories," he added. "Everyone should recall how witty he was. Before my defense, I asked if I should wear a tie. He said 'I've seen people passing without a tie, and people failing with a tie...you'll do fine,'" Gullu recalled.
Yuri Boykov, a Heath student who is now a professor of computer science at the University of Western Ontario, said "I learned a lot from David. Most of all, I was inspired by his creativity in developing mathematical models that help to understand our complex world." Heath student Roberto Malamut, a portfolio manager at Tower Capital, said "his example and my brief privilege of his company and advice gave me enough capacity to dare trying new things." He said that Heath could "optimally mix a superb mastering of mathematical theory's tools" with "the application of those tools into solving difficult and relevant problems stemming from the finance practice."
ORIE Professor Sidney Resnick summarized the reaction of Heath's ORIE colleagues: "Bad news! A gentle giant and ideal colleague went down."