Opinion

Emanuel Derman

Financial engineering as a career: Part 2

By Emanuel Derman
July 7, 2011
(More Notes From What May Be An Article)

What’s Your Edge?
If you are going to seek a career in quantitative finance, what’s your advantage? Is it computer science, financial theorizing, pragmatic modeling, sales or trading, working on the desk with people or solitarily in an office? Which are you best at and, also, which do you enjoy doing most?

For years I came across people who could have had wonderful careers combining finance and applied computer science, a combination rarely found in investment banks, and yet so few of them want to take advantage of their computer skills.

Collegial or Solitary?
What environment do you like working in? Academic or  bureaucratic? Do you like being supervised and taught or do you want to go your own way? Do you want to work in a large organization or a small one? This can make the difference between choosing an investment bank, a hedge fund, or a financial software company.

One incidental remark about working in business which I’ve realized only slowly. If you like interacting with people and working toward common goals, then well-run businesses are great places to work. Everyone is paid to work towards the same end, and there can be tremendous cooperation and team work. Academic institutions tend to be filled largely with people who by choice want to work quietly and alone, and so often, funnily enough, business life can be more collegial than college life.

If you choose to work in a business, do you have the personality for it? Can you bear the slow bureaucracy of a large organization, the ladder you have to climb, being ordered around and sometimes yelled at, the overwhelming respect paid to generating profit? If you’re a quant working for a desk, can you over the long haul bear being regarded as a tool  rather than a prime mover? Some of this is changing, but some prejudice has always lurked beneath the surface. Money changes everything.

Short-Term or Long-Term? Research or Application?
If you choose to work in research, building models, do you have the inner drive to work alone for long periods without too much feedback or encouragement? (A PhD is a good training for this.).

In my case, I like the mix of both.

And, if you work in a university, to a large extent you will be cut off from knowing what is truly useful in practice, as opposed to what you imagine is useful. Many people in universities have false mental models of the way models are used on Wall Street. They imagine too much reliance on models and prediction, or too little.

The truth is that most useable and useful models are relatively simple filters that convert quantities you can grasp intuitively into dollar values. Black-Scholes converts your intuition about volatility into the dollar price of a complicated derivative security. This is very different from the physics or engineering you were brought up on, where models predict behavior accurately.

Anti-Intellectualism
If you’re a scientist by training or nature, you will have to tolerate the anti-academic attitude of many people in the business world, though that is changing too. Are you comfortable with the idea that research should be kept secret, because that’s what many people on the Street believe, even if the secrets they think they know were sometimes borrowed from someone else, are not really that secret much of the time, and perhaps are rarely worth being kept secret? (Looking at the world with a jaundiced eye, you notice that a manager hates anyone that leaves their firm for another, taking useful experience and knowledge with him, until he or she does it himself.)

As For Man, His Days Are Like Grass
Weber, my son once explained to me, pointed out that as a scientist your every theory will most likely soon be replaced by a better one. You have to live with that. That’s even more true in quantitative finance. And it’s the opposite with art, where beautiful creations are timeless. We all still admire the original Venus de Milo, but no-one reads even the original Newton.

Because financial models are so ephemeral, I sometimes find myself opposing undergraduate degrees in the field; maybe it’s better to spend your undergraduate years learning really solid things that will last forever.

Semi-Apologia Pro Vita Sua
One final remark about values, perhaps not entirely inappropriate.

If you’re interested in more than just equations and solving them, then: What is the meaning and value of the work you do in the larger world?

If you’re a practicing scientist, I think it’s at least superficially clear: you’re adding to knowledge, pursuing the truth, (thinking that you’re) helping (perhaps) make the world a better place.

As regards quantitative finance, it’s less clear. Many people think you’re mis-employing your talents when you go to work in finance. (Nevertheless, when people ask me if I couldn’t be using my skills more usefully, I ask them the same.) Yes, you are adding to knowledge, but what is it used for? Often, simply to make money. Yes, that making of money may make markets more efficient, but is that sufficient social justification? I sometimes think that at least in finance, to paraphrase Johnson, invoking efficiency is the last refuge of scoundrels/self-interested people. But everyone is self-interested.

Personally, I like to think that to do quantitative finance you need to be committed to clarity – that there’s value in the world to seeing anything clearly and understanding it honestly, to seeing the world the way it really is. That’s enough of a vocation — to understand some part of the world. To be a good practitioner I like to think you need a dedication to unsentimental truth about whatever you deal with, wherever it may take you. I like to think that part of our job on earth is to be perceptive and accurate about as much as possible, including ourselves, about the way the world really works. If you do that, even for small things, it can add up to something bigger. It’s the one standard that transcends individual fields of study. That’s part of my rationale. There are others parts too. But mostly, it’s interesting work and sometimes useful and I’m not a saint. You have to decide for yourself what your rationale is, and whether the field is merely your job, or your career, or, if you’re lucky, your vocation.

Comments
8 comments so far | RSS Comments RSS

One thing you don’t emphasize enough: if you go into finance you can lose a lot of money for other people, like Scholes. In academics, not so much . . .

I was going to recommend a couple of essays by Max Weber — then I read your Part 1. Incidentally, the title one of these essays has sometimes been translated “Scholarship as a Vocation” (Not “Science.”) I think it’s more apt.

I guess I reveal which side of the dividing line I fall on!

Posted by jbernar | Report as abusive
 

As a reader of yours for years, being able to add a comment to your musings is a treat. It’s nice to see you posting here.

A few questions, earnestly, on this particular post: What in today’s academic currciulum might pass for “really solid things that will last forever”? I suppose an education in the classics might be a start, but, on the other hand, the it is self-evident that the so-called dead languages are already defunct.

Another part of the post seems curious, inasmuch as an acknowledgment of self-interest is articulated, followed upon immediately with an appeal toward the pursuit of clarity. Clarity about what? Is that exhortation intended in the Socratic sense of being clear about oneself, or being clear about how heuristics and biases work in the real world … or how to maximise profits, or something else entirely? Closer to Platonism or the Tao? Cheers.

Posted by TimothyB | Report as abusive
 

If quants can develop a better understanding of financial risk, that alone might provide social justification for their careers.

It’s hard to believe the finance industry destroyed $trillions in value out of spite. More likely: financial professionals failed to recognize the dangers of their actions. If greed alone caused people to disregard evidence of an impending bubble-and-crash, then no equations could have stopped them. But what if ignorance was a bigger culprit than greed, and ratings agencies, regulators, and banks only vaguely understood the risks they created?

If so, then we could all benefit from better tools for predicting financial disasters. Quant research won’t save us from market crashes, but it might help. Radar and GPS don’t eliminated shipwrecks, but they do provide safer navigation and faster rescues. If quants can build more reliable “financial radars” for investors and regulators, the result could be safer markets for everyone.

Posted by DalekSec | Report as abusive
 

By things that last for ever, I mean chemistry, physics, mathematics, biology in the sciences, and literature and history and philosophy in the arts, for a start.

By clarity I mean simply clarity about the way the world works and in the Socratic sense, that is both of the things you mentioned.

Thanks.

 

Thanks for Part 2.
Quant is better pay than all other fields maybe except traders.
It is challenging work and makes real money as oppose to theoretical research

Posted by Jeffrey. | Report as abusive
 

You might want to consider adding a few things about ethics and attitude on your next keynote. Seems like the unpreceeded bonuses at wall street nowadays makes everyone there feel like much more important to society than for example a scientist at fermilab. About the comment on how quants add more social value, seriously? That’s what quants keep telling themselves to justify their earnings?
How can’t you tell that prof Derman could have a much greater impact to society if he had a career in theoritical physics?
A few things to note from someone in the physics field.

Posted by jedkins | Report as abusive
 

You might want to consider adding a few things about ethics and attitude on your next keynote. Seems like the unpreceeded bonuses at wall street nowadays makes everyone there feel like much more important to society than for example a scientist at fermilab. About the comment on how quants add more social value, seriously? That’s what quants keep telling themselves to justify their earnings?
How can’t you tell that prof Derman could have a much greater impact to society if he had a career in theoritical physics?
A few things to note from someone in the physics field.

Posted by jedkins | Report as abusive
 

To Jedkins:
Thanks for the comment. In fact, at this year’s keynote, I did say some more about ethics. I welcome suggestions for what to tell students.

But it’s kind of hard to know what to say about the fact that Wall Street pays so much more than theoretical physics. And doing physics can be discouraging.

Goldman pays 44% of their profit to employees. Nice work if you can get it, I suppose, but it’s suppressing their share price when employees do so much better than shareholders in a public company.

Posted by EmanuelDerman | Report as abusive
 

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