Wednesday, December 01, 2010

How the other half lives: quants

I was asked to write a review of Scott Patterson's book The Quants for Physics World, a UK magazine. You can read the whole thing at the link below. My review went through some British copy editing, which changed the writing style slightly :-)

Physics World: This past summer I spent the long US Independence Day weekend at a reunion with three of my undergraduate classmates. All of us went on to earn PhDs in physics, but I am the only practising physicist. The others work in finance – one at a hedge fund, the other two at major banks. They all seem to be enjoying their work, and they have obviously been very successful: our reunion took place near a famous ski resort, where one of the financiers has built a 1200 m^2 retreat complete with gym, indoor pool and wine cellar.

Even the brightest graduate students in maths and physics know that their chances of assuming a position like that of their PhD supervisors are slim. For the last 20 years the cream of the crop of physicists leaving the field has gone on to positions in finance, typically in places such as New York or London. Once there, these individuals become hedge-fund managers, derivatives traders and risk managers, to take just a few examples from my own cohort.

So what do these people do? I have always been surprised that scientists in academia are not more curious about the lives of their former peers working in the "real world". For those who are interested, Scott Patterson's The Quants does an admirable job of exploring the increasingly mathematical and technological world of high finance, and the activities of the many physicists, mathematicians and engineers who inhabit it.

Patterson writes for the Wall Street Journal, and regular readers of the newspaper will recognize him as an insightful reporter who has covered a number of important topics over the years, most recently the rise of high-frequency trading. In researching the book, Patterson had access to a Who's Who of prominent "quants", a colourful group of characters with backgrounds and personalities that will be strangely familiar to anyone who has spent time among physicists. The term "quant" is short for "quantitative" and refers to those who apply mathematical or computational methods to finance. ...

... It is a pity that although Patterson gives us a broad survey of quant finance, he devotes little space to the bigger question: are developments such as the mathematization of markets and the flow of top brains to financial activities good for society? On this matter, perhaps it is best to leave the last word to Charlie Munger, the long-time investment partner of financial guru-in-chief Warren Buffet. Writing in 2006, Munger had the following to say about the "brain drain" of top talent into finance.

"I regard the amount of brainpower going into money management as a national scandal. We have armies of people with advanced degrees in physics and math in various hedge funds and private-equity funds trying to outsmart the market. A lot of…older people…can remember when none of these people existed…At Samsung, their engineers meet at 11 p.m. Our meetings of engineers [meaning our smartest citizens] are also at 11 p.m., but they're working on pricing derivatives. I think it's crazy to have incentives that drive your most intelligent people into a very sophisticated gaming system."

No comments:

Blog Archive