Saturday, March 21, 2009

The New New Meme

The other day on Jay Leno, Obama said (video here ; @13 minutes in):

We need young people, instead of a smart kid coming out of school wanting to be an investment banker, we need them to decide they want to be an engineer, a scientist, a doctor or a teacher. If we are rewarding those kinds of things that actually contribute to making things and making peoples' lives better, that's going to put our economy on solid footing. We won't have this bubble and bust economy we've been caught up in in recent years.

I hope this meme takes off! I've made this kind of argument in the past, for example here in a 2006 post on financier pay, where I wrote

I'm anticipating reactions like "Well, of course they deserve it, their decisions have disproportionate impact on the economy, allocating massive resources. The market is efficient, after all!" All well and good if you can show that the 173,340 people (2006 BLS) working in investment banking really do produce better decisions than the people who would occupy those jobs in return for lower compensation. If not, there are some rents or inefficiencies hidden here :-)

Today in 2009 it should be abundantly clear that the market doesn't always know best :-(

Earlier related posts:

The best and brightest

Is the finance boom over?

A reallocation of human capital

A new class war



Some related comments from Brad DeLong below. I don't agree in detail with everything he writes, but you can see the same sentiment at work.

The engineers of Silicon Valley startups are significantly smarter and work a lot harder than do the traders of Wall Street. Some of the engineers of Silicon Valley make fortunes: they are compensated with relatively low salaries and large restricted equity stakes in the startup businesses they work for, and so if the businesses do well they do very well indeed--in the long run, in the five to ten years it takes to assess whether the business is in fact going to be a viable and profitable going concern. And the engineers of Silicon Valley have every incentive to use all their brains and all their hours to make their firm viable and successful: they get their cash only at the end of the process. They don't get big retention bonuses if they stick around until the end of a calendar year. They don't get big payouts if they report huge profits on a mark-to-market basis.

The traders of Wall Street, by contrast, get their money largely up front. If the mark-to-market position is good, they get paid--even though it is almost surely the case that nobody has tried to actually sell the entire position to somebody else. If the strategy produces short-run profits, they get paid--even though not nearly enough time has passed for anybody to be able to assess what the risks involved in the strategy truly are.

15 comments:

Anonymous said...

Honestly you just seem bitter that you didn't get into finance yourself. Not exactly bitter, no. More like you consider yourself brighter and nobler than any quantitative working in the area. Outraged that your contemporaries don't understand how smart one has to be to get a Ph.D job in physics and that the man off the street considers you lower status than those pretentious traders. So why is that? Why didn't you go to Wall Street when you were called? You yourself have pointed out that academia is one of the most poorly-compensated professions for the amount of educational investment involved, does society need to erect some golden idol for you selfless?

Many of your other posts try to explain for understanding. Recently they've had the self-assured air of someone attacking a caricature of the "efficient market".

And of course the link for our edification is DeLong, who is the poster-boy for obstinacy of ideology on the econoblogosphere, deleting willy-nilly any comment that disagrees with his post, even in a case where a student begged for understanding. If he's wrong about this facet of Valley compensation, we'll never know from his discussion, as DeLong is sole arbiter of "facts were are entitled to." I keep wondering why so many mild-mannered scientists keep entertaining the vilest of the left and their ideas.

Status.

Steve Hsu said...

Huh? Actually I think it may well have been a (personal) mistake for me not to go into finance many years ago. What does that have to do with recognizing that we had a finance bubble going for about a decade?

It's funny you call it a caricature of EM when I actually link to famous economists (e.g., Meltzer) still clinging to it.

I don't actually agree with the details of DeLong's post, but it's an example of the meme I'm talking about. If the meme takes off society will probably be better off.

Matt said...

It might be naive to think that the best and brightest are being siphoned off into the financial world because of the salary, lifestyle, etc.

As a case study, consider me and three of my close friends. We all attended a top-notch tech school and have accepted jobs at hedge funds. The reason behind the acceptance, though, is not (primarily) monetary.

First, quantitative trading is a huge open problem much like the 'grand unifying theory,' the link between artificial intelligence and neuroscience, and PvNP. We are all drawn to the fact that we are in an algorithmic competition against elite computer scientists, physicists and mathematicians across the world.

At an abstract level, the discipline is not much different than what many academics do: taking millions of data points and forming inferences based on assumptions (e.g. neuroscience, statistics, etc). What captivates us is the not only the competition, but the amount of breadth one needs to have to be successful.

Not only do we need to think of the fastest algorithms, but we also need these algorithms to work best on the systems we have (and if they don't, we need to create new systems). We need to do the data analysis, algorithmics and systems programming. Attacking this gambit is both invigorating and enjoyable. Add to it a fast-paced, competitive spirit and its down right addictive.

Steve Hsu said...

I've never had the view that finance was devoid of intellectual challenge, nor have I ever been critical of people who followed the incentives the system offers them. In fact, I'm the guy who said you'd have to be nutty to want to be a scientist under current conditions (see post "Tale of two geeks").

But that doesn't mean that I think the finance bubble was good for the country, which is something hardcore EMers argue all the time (even now; actually EMers can't even admit the existence of a bubble).

Matt, you're going to improve market efficiency over timescales much less than a second. I'm sure it's challenging, and one of my best friends works in your area. Does that mean it benefits society? I seriously doubt it. A good analogy is the MIT blackjack team -- hard problem, fun to attack, does nothing for society. In fact, I'd be more satisfied working on credit derivatives. In a few decades when we have more experience using them (better regulation, more realistic risk management, etc.), they could ultimately benefit society the way that securitization or insurance do today.

I *definitely* don't consider myself nobler than my friends in finance -- I made a trade in which I exchanged net worth for intellectual satisfaction, but had I known then how big the finance bubble would get I might have done otherwise. I do get more personal satisfaction from building a real technology product than from looting a system. I get even more satisfaction from making (or trying to make) contributions in fundamental physics.

STS said...

This meme has been around a long time. Worthies like Bill Gates and Andy Grove (among others) have been complaining about how too few Americans get into science and engineering. But people aren't dumb and they respond to incentives. A lot of those same moralizing "worthies" have been making a fortune off of global labor arbitrage -- offshoring many of the jobs they pretend too few Americans train for.

Now that the finance bubble has burst, there's a chance more American students will choose the science, math and engineering tracks again. But the dollar probably has to fall, or geopolitical risks have to rise (or both) before the global labor arbitrage stops leaving American workers at a severe price disadvantage.

Steve, had you known how big the bubble would get, maybe you'd have gone the finance route and then quit to set up something like Perimeter Institute. Of course it was *tech* money that built Perimeter. There's still hope ;)

anon said...

"how too few Americans get into science and engineering"

The mantra "science, math, and engineering" must mean engineering. That it is repeated can only be accounted for by the stupidity of the speaker. Science and math grads are not in short supply. There are far more of them than there is demand for.

Hedge fund managers like Soros, Jones, Griffin, Simons are SCUM. 100% tax on capital gains of less than one year and their thievery is over.

Steve hits the nail on the head in comparing trading to financial engineering. The role of money-brokers (banks) is to direct as much money as possible to the highest possible return. A mathematically sophisticated treatment of risk enables this. "high-frequency finance" DOES NOT. For anyone with a conscience it is as distasteful as pornography. It's DISGUSTING.

BTW, The kind of work Steve does in academia is not selfless at all.
Nowhere else is the trivial and the useless paid for.

Horatio said...

Would irrational actors have created such a large bubble without state intervention? This meme presupposes market failure, but what if the bubble was driven by government failures?

Matt said...

Steve, I see your point. Perhaps we aren't benefiting society. But, then again, perhaps we are? From what I've read, many philanthropic foundations, schools, hospitals and other people who 'benefit society,' end up investing in hedge funds. While my incentive might be the intellectual challenge, the better I do, the more these investors can further their own causes.

My thoughts are naive, I know. I am new to the game. But one thing I know is certain: we are all connected. Whether my motivation is to help the world or to help my wallet, the cause and effect relationships we have on one another are deep and intrinsic. I am certain that we can find a selfish person in any job and make a case against them helping society. Why unravel the secrets of the universe when you can be volunteering at an orphanage?

I hope you don't think I'm attacking you. I find this whole argument against the financial industry very anthropologically interesting. Those who stayed away have a new sense of pride. But just like prestige and money, pride is a dangerous commodity.

anon said...

The same people who hostile to high-finance are fans of Mel Gibson.

Steve Hsu said...

Horatio: Re: blame it on govt, see the Meltzer post.

Matt: I don't think you are attacking me, although it seems the first anonymous commenter was :-)

Hey, I'm a goofy guy with a blog -- I have to have thick skin to subject myself to this :-)

anon said...

"From what I've read, many philanthropic foundations, schools, hospitals and other people who 'benefit society,' end up investing in hedge funds."

But ordinary high-frequency or stat-arb hedge funds only "make money" by taking it from other "investors". It is a zero sum game.

The public securities markets is productive in two ways. 1)corporate finance. 2) the "meta-management" of money managers.

Quant hedge funds do niether of these.

And thus the PhD in theoretical physics is useless whether he goes into academia or hedge funds. But only someone without a moral sense would study theoretical physics seriously.

Horatio said...

Steve: The Meltzer post does not address this issue. It is not efficient markets vs. market failure, it is market failure vs. market failure + government failure. Government fundamentalists often fail to realize that the same irrational behaviors that can lead to market failure can also lead to government failure.

Anon: Newton did far more for society as a theoretical physicist than he could have as a physician. Those of us who study theoretical physics often do so because it is more intellectually stimulating than anything else we could do, but the potential long-term benefits for society are not lost on us.

STS said...

Where are the Government fundamentalists? This whole regulation debate is amazingly shallow. Typical argument looks like "regulation is BAD!", "no, regulation is GOOD!". Imagine if you took a virtual synonym of regulation -- law -- and substituted in. "law is BAD!", "no law is GOOD!". Gives you a better sense of the toddler-level intellect at work.

The whole question is how to regulate human beings. Just as government needs checks and balances to avert tyranny, people with licenses to print money (ie. bankers both 'real' and 'shadow') need some checks on their ability to write themselves blank ... um ... checks.

The whole question is how to frame regulations that aren't mindlessly pedantic and confining, yet are strong enough prevent the kind of outright fraudulent behavior we've seen in the past decade (and more).

anon said...
This comment has been removed by the author.
anon said...

Someone smart enough to be a quant shouldn't waste his talent in hedonistic selfish "stimulation" like the famous son of a physicist, and a man talented in his own way, Ron Jeremy.

On a moral level the quant hedge fund and pornography are the same.

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