Saturday, July 28, 2007

From physics to finance

Professor Akash Bandyopadhyay recounts his career trajectory from theoretical physics to Wall Street to the faculty of the graduate school of business at Chicago in this interview.

One small comment: Bandyopadhyay says below that banks hire the very best PhDs from theoretical physics. I think he meant to say that, generally, they hire the very best among those who don't find jobs in physics. Unfortunately, few are able to find permanent positions in the field.

Mike K. -- if you're reading this, why didn't you reply to the guy's email? :-)

CB: Having a Ph.D. in Theoretical Physics, you certainly have quite a unique background compared to most other faculty members here at the GSB. Making a transition from Natural Science to Financial Economics and becoming a faculty member at the most premier financial school in the world in a short span of five years is quite an unbelievable accomplishment! Can you briefly talk about how you ended up at the GSB?

AB: Sure. It is a long story. In 1999, I was finishing up my Ph.D. in theoretical physics at the University of Illinois at Urbana Champaign when I started to realize that the job situation for theoretical physicists is absolutely dismal. Let alone UIUC, it was very difficult for physicists from even Harvard or Princeton to find decent jobs. As a matter of fact, once, when I was shopping at a Wal-Mart in the Garden State, I bumped into a few people who had Ph.D. in theoretical physics from Princeton and they were working at the Wal-Mart's check-out counter. Yes, Wal-Mart! I could not believe it myself!

CB: So, what options did you have at that point?

AB: When I started to look at the job market for theoretical physicists, I found that the top investment banks hire the very best of the fresh Ph.D.s. I started to realize that finance (and not physics!) is the heart of the real world and Wall Street is the hub of activity. So, I wanted to work on Wall Street - not at Wal-Mart! (laughs!)

I knew absolutely nothing about finance or economics at that time, but I was determined to make the transition. I got a chance to speak with Professor Neil Pearson, a finance professor at UIUC, who advised me to look at the 'Risk' Magazine and learn some finance by myself. There were two highly mathematical research papers at the end of an issue that caught my attention. Having a strong mathematical background, I could understand all the mathematical and statistical calculations/analysis in those papers, although I could not comprehend any of the financial terminology. As I perused more articles, my confidence in my ability to solve mathematical models in finance grew. At that point, I took a big step in my pursuit of working on the Street and e-mailed the authors of those two articles in the Risk Magazine, Dr. Peter Carr at the Banc of America Securities and Dr. Michael Kamal at Goldman Sachs. Dr. Carr (who, later on I found, is a legend in mathematical finance!), replied back in 2 lines: 'If you really want to work here, you have to walk on water. Call me if you are in the NYC area.'

CB: So, we presume you went to NYC?

AB: After some contemplation, I decided to fly to NYC; I figured I had nothing to lose. Dr. Carr set me up for an interview a few weeks later. Being a physics student throughout my life, I was not quite aware of the business etiquettes. So, when I appeared in my jeans, T-shirt and flip-flops at the Banc of America building at 9 West 57th Street, for an interview, there was a look on everyone's face (from the front desk staffs to everyone I met) that I can never forget. Looking back, I still laugh at those times.

CB: Did you get an offer from Banc of America?

AB: Not at the first attempt. After the interview, I was quite positive that I would get an offer. However, as soon as I returned home, I received an email from Dr. Carr saying, "You are extremely smart, but the bank is composed of deal makers, traders, marketers, and investment bankers. We are looking for someone with business skills. You will not fit well here." He suggested that we both write a paper on my derivation of Black-Scholes/Merton partial differential equation, or even possibly a book. He also suggested I read thoroughly (and to work out all the problems of) the book "Dynamic Asset Pricing Theory" by Darrell Duffie. In fact, Duffie's book was my starting point in learning financial economics. I assume your readers never heard of this book. It is a notoriously difficult book on continuous time finance and it is intended for the very advanced Ph.D. students in financial economics. But, it was the right book for me - I read it without any difficulty in the math part and it provided me with a solid foundation in financial economics. Anyway, I think I am going too off tangent to your question.

CB: So, what did you do after you received that mail from Dr. Carr?

AB: The initial set back did not deter me. I already started to become aware of my lack of business skills. So I offered Dr. Carr to work as an unpaid intern at Banc of America to gain experience and to learn more about the financial industry and the business. Dr. Carr finally relented and made me an offer to work as an unpaid intern in his group during the summer of 1999.

CB: What did you do during the internship?

AB: Upon my arriving, Dr. Carr told me that, "A bank is not a place to study. A bank is a place to make money. Be practical." This was probably the best piece of advice I could get. He gave me three tasks to help me get more familiar with finance and get closer to bankers. First, catalog and classify his books and papers on finance and at the same time flip through them. This way, believe it or not, I read tens of thousands of papers and other books that summer. Second, I helped test a piece of software, Sci-Finance, which would help traders to set and hedge exotic option prices. Thirdly, I answered math, statistics, and other quantitative modeling questions for equity, fixed income and options traders, and other investment bankers.

CB: Wow! That is a lot of reading for one summer. So, did you get a full time offer from Banc of America after your internship? What did you do after that?

AB: Yes, I got an offer for them, but then I had more than a year left to finish my PhD thesis, so I accepted an even better offer from Deutsche Bank next summer. I worked at Deutsche for three months in the summer of 2000. Then moved to Goldman Sachs for a while (where I gave seminars on finance theory to the quants, traders, and risk managers), then, after finishing my Ph.D., I took an offer from Merrill Lynch as the quant responsible for Convertible Bond valuation in their Global Equity Linked Products division in New York. I left Merrill after a few months to lead the North America's Equity Derivatives Risk Management division in Société Generale. So, basically, I came to GSB after getting some hardcore real-world experience in a string of top investment banks.

CB: Are there any 'special' moments on Wall Street that you would like to talk about?

AB: Sure, there are many. But one that stands out is the day I started my internship at Banc of America. As is the norm in grad school or academia, I felt that I had to introduce myself to my colleagues. So, on my very first day of internship, I took the elevator to the floor where the top bosses of the bank had offices. I completely ignored the secretary at the front desk, knocked on the CEO and CFO's door, walked in, and briefly introduced myself. Little did I know that this was not the norm in the business world!!! Shortly thereafter, Dr. Carr called me and advised that I stick to my cube instead of 'just wandering around'! In retrospect, that was quite an experience!

CB: What made you interested in teaching after working for top dollar on Wall Street?

AB: You mean to say that professors here don't get paid top dollar? (laughs)

I always planned to be in academia. To be totally honest with you, I never liked the culture of Wall Street. Much of the high profile business in Wall Street heavily relies on the academic finance research, but, after all, they are there to make money, not to cultivate knowledge. One must have two qualities to succeed well in this financial business: First, one must have a solid knowledge on the strengths and limitations of financial models (and the theory), which comes from cutting edge academic research, and second, one must have the skills to translate the academic knowledge into a money-making machine. I was good in the first category, but not as good in the second. ...


Anonymous said...

I wanna know which Princeton PhD ended up working at Walmart.

In truth, it was probably either a temporary thing, or someone who had other problems.

Anonymous said...

I always find reading these profiles interesting, but they leave me scratching my head because of the intellectual mystique built up around the subjects. Working in statistical arbitrage, I've found that good engineering is more important than mathematical genius. From this perspective, I'm wondering if these bright star theoretical physicists are really contributing to the trading strategies. I'm inclined to think that more often than not they write papers which no one reads while the programmers are really building the systems. Perhaps this is why Professor Bandyopadhyay mentions in the article that he is better at the research than at translating the knowledge into money making machines.

Steve Hsu said...


1) the underlying theoretical foundations of modern finance (e.g., of continuous time finance, options pricing, etc.) are actually pretty abstract -- I'd say it goes beyond most engineering. You might think one can get by without understanding the deep theory (it's probably more relevant to running a research group or an exotic derivatives desk than to most hedge funds), but that's debatable.

2) I agree that the nitty gritty work of building a trading platform is quite far from the high theory, but many physicists I know have participated at that level too. Actually, many PhDs start in industry as code monkeys or glorified high math-IQ programmers. (This is true even at Google :-)

3) High powered math isn't the limiting factor for finding good trading strategies (alpha). That probably depends as much or more on market intuition or other hard to quantify traits. But in a lot of areas (like derivatives) you probably do need reasonably high math ability. And, it never hurts to have enough science training to know whether your model or hypothesis is really supported by data (backtesting) or not. Physcs is great preparation for this, because physicists are used to looking at data and have seen cases of good and bad models. They know how far an simple idea can be pushed: the power, but also the limitations. In a sense, math guys have only seen good models (or have little experience with data) and econ guys have only seen bad models (just kidding).

4) The guy interviewed is not exactly a bright star theoretical physicist. I'm sure he's a smart guy but there are many more like him in the field. If you read between the lines you can tell he (wisely) understood his own limitations before even finishing his PhD.

Unknown said...

" because physicists are used to looking at data and have seen cases of good and bad models."

Well, that's true of some physicists anyway. Many of the ones doing formal theory don't even know the meaning of the word 'data'.

Anonymous said...

This guy is a joke.
He is an adjunct professor.He does not work in academia,he part-times in academia which makes big,big difference

Steve Hsu said...

He's a joke because he's not a tenure track professor yet? Since he doesn't come from the traditional background I can imagine it is taking him some time to break into academe.

However, I'd take someone with his credentials (PhD in physics, time spent at major I-banks) over a standard finance PhD any day.

Anastasia said...

I am taking one of his classes and I can tell that he is one of the best professors at GSB. He is probably the only professor without a traditional background such as a PhD in Economics, Finance or Business and still he's made as a finance professor at Chicago GSB. That's a great accomplishment!

Unknown said...

A Princeton PhD who ended-up in Walmart? I myself is a PhD in Physics and knows very well he's exaggerating. A physicist should at least be honest. No wonder he had only one publication in Physics - he basically failed in that field.

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Resumedocket said...

i also want to know question's/ and i don't believe this.

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Budweiser_072000 said...

what a load of rubbish, a true professor works full time and dedicates themselves to their work.
buddy t
owner of - kinetic energy

B_P_G said...

Unless the guy totally broke down and gave up on life its obviously temporary. He probably finished his schooling, needed money just to pay his bills, and unfortunately the best thing he could find was Walmart.

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