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Senior Vice-President for Research and Innovation, Professor of Theoretical Physics, Michigan State University

Tuesday, December 13, 2005

2 percent of the Caltech class

A friend of mine who runs a derivatives desk made job offers to 2 percent of the Caltech class of 2006. That's only 4 people, but still a pretty high percentage! 3 have accepted, the other went to a well-known software company. It makes me wonder how many kids who otherwise would have gone on to grad school (e.g., in engineering, math or physics) are heading right into finance these days. Smart move, if you ask me :-)

Most of my colleagues still don't take the theory of modern finance seriously at all. Even researchers who work on complex systems (modeling traffic, sandpiles, networks, ants, etc.) show surprisingly little interest. I guess the future belongs to the young!


STS said...

Finance is a good research direction, but it is confusing to the properly educated scientist. I'm not sure I'd endorse Wolfram's "New Science" thinking entirely, but finance requires people to adjust their scientific mindset a little.

For example, Finance appears to make use of PDE "as if" it was "science as usual", yet their interpretation is not quite conventional. The PDE model no-arbitrage constraints on prices, for instance, yet obviously real world prices also involve a bunch of other phenomena. The underlying cognitive dissonance is probably something well-trained scientists pick up in various ways and it leads them to conclude: pseudo-science!

I would characterize finance as proto-science: tools in search of an elusive model. But a fertile field for those prepared to contend with paradigm ambiguity.

Steve Hsu said...

I tend to think of "no-arb" as an equilibrium condition, but of course we expect to find systems out of equilibrium at times. It is clear that behavioral factors (among others) can lead to very long equilibration timescales in markets.

Rather than be shocked scientifically by finding an arbitrage opportunity, I suggest people trade on it :-)

Carson C. Chow said...

Physicists may not be taking finance seriously but the PDE community has gone wild over finance. For example, Fields medalist Charles Fefferman is now working on it. Pretty much every math department in the country with applied math is scrambling to get into finance.

STS said...

>Rather than be shocked scientifically by finding an arbitrage opportunity, I suggest people trade on it :-)

Well the preference for the comfort zone of a well established paradigm is probably closely correlated with risk aversion. Not to mention the undercurrent of puritan distaste for "filthy lucre" which survives among the intellectual elite if hardly anywhere else.

Needless to say, I'm with you on this one ;)

Steve Hsu said...

STS: I think you diagnosed it perfectly. Sandpiles are great, but an industry that underpins economic development and resource allocation worldwide is "dirty"!

Carson: Fefferman is a smart guy ;-) BTW, I bet math finance programs spend too much time on martingales and too little time on quick and dirty Monte Carlo...

Anonymous said...

D.E. Shaw used to (still does?) send out letters to undergrads at Caltech when they graduated. Actually I think they must have selected for certain students (maybe it was physics, maybe it was those who graduated with honors.) BTW the smartest physicist in my Caltech class now works for Shaw and loves it, although he did go to grad school and PhD himself first.

Carson C. Chow said...

Actually, they're mostly in love with free boundary problems but there is quick and dirty in math departments too!

Leucipo said...

I think it is a requisite to do NOT take seriously finance if you pretend to be sucessful in this field. I mean, you need to see these numbers just as numbers; if you translate they to money then you introduce a bias.

With this criteria, IMO I would not contract anyone going directly to finance school; or at least they should to show an interest on non monetary issues.

Anonymous said...

That pretty impressive! I’m assuming this is one of the better desks and it was a good choice for all. It sure makes my job tougher at the entry level for Caltech folks, but generally we help more people in their second job search. Most entry level guys randomly submit their resume online, and one of the pure internet recruiting firms places them.

Pass my info onto them for later on! :)

Anonymous said...

Quick correction… mistyping: “That’s pretty impressive” and “on to them”

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