Welcoming the Wall Street brain drain

By Felix Salmon
June 23, 2009

Societally speaking, it’s a good thing — as Dan Roth says — that Wall Street is losing its brilliant employees and that hot young university graduates are looking to other sectors instead. All that talent is better used just about anywhere else, largely because on Wall Street innovations are kept secret until the point at which they’re no longer of any use:

Instead of spending their days searching for exotic trades, some of these Wall Street wizards could’ve been creating drugs, imagining software, or solving energy problems. Capital markets need geniuses, too, but it’s hard to cheer such a massive money-chase…

On Wall Street, work in the lab never leaves the building; after all, a trading strategy’s value disappears when it goes mainstream. An innovation might strengthen capital markets, but the possibility of that research benefiting another industry—the kind of cross-pollination that turned Velcro from a NASA oddity into a modern staple—is eliminated.

It’s true that the money made from proprietary trading strategies is sometimes put into pure research, as Jim Simons is doing at Stonybrook or David Shaw is doing at DE Shaw Research. But it’s hard to make the case that Wall Street technology has any track record of making the world a better place. Indeed, quite the opposite; Roth goes so far as to say that “a new flowering of creativity on Wall Street would be a very bad thing”. I suspect he’s right.

11 comments

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I wonder… would that fast neutron reactor you mentioned earlier today have made it to production today if some critical mass of engineers and scientists hadn’t decided to chase Wall Street riches. Impossible to know. But a fun thought. Sorry for the pun.

The Wall Street Puzzle – the high wages for high returns – has truly influenced other sectors of the economy. I pulled out a column P. Krugman wrote a few months ago and added that we should use the current crisis as an example of what needs to be restructured: Less incentives for Wall Street and more for the public sector. Read the whole thing: http://theeconomicword.wordpress.com/200 9/06/22/bold-action-in-boiling-water/

I was wondering if Wall Street’s investments in client-server computing in the 90s made better technology more accessible in the 200s. Who else was funding CSCO and SUNW/JAVA more, and how did that affect the subsequent innovations of AAPL, GOOG, HPQ, IBM, INTC, MSFT, ORCL …

Because let me tell you, $1,000 buys you more today than a $1 million did 20 years ago. Believe me, I know, I was at Salomon Brothers in 1989 when such things were ramping up, and folks like Bill Joy would regularly stop by to chat.

It was like the seven years a new drug gets for patent premium pricing, before everyone else gets it for a fraction.

I quote late 18th Century David Ricardo: “Finance is a conspiracy against the laity.”

Who really cares what a wave of frat brats think or do? All they ever will do is conjur new ways labeling reckless leveraging.

Posted by John P. Crowley | Report as abusive

A handful of people actually innovate, on Wall Street or elsewhere, and even fewer in Wall Street firms because the innovation is almost completely technical while most of the highly-pedigreed employees lack those skills. Computer models are generated by math people, who historically have not been paid nearly as much as the traders and salespeople who use them.

Posted by jonathan | Report as abusive

Innovation in finance is innovation in swindling.

Less brainpower used for finding new swindles wouldn’t be bad.

Posted by Max | Report as abusive

The skill set required to be successful on Wall Street isn’t the same skill set required to be innovative in a mathematical, scientific, or engineering field. They’d probably be better off moving to a different realm of economics or politics.

I don’t really believe that the author of this statements is thinking realistically. People that are chasing dreams on Wall Street have no concept of altruism or seek any achievements other than large paycheques made easy. While I believe that now there is a 60s-like trend back towards doing good and helping out the world, it’s painfully obvious that this was NOT the case even only two years ago, when the sky was the limit and people who weren’t flipping houses were weirdos. Plus, it probably doesn’t hurt that Wall Street firms have effectively canned 35% of their workforce…

Posted by the Shah | Report as abusive

I must be one of those so-called smart guys. My papers have 100′s of citations, I wrote a book and I have patents. The smartest thing I ever did was to quit Engineering Research. I wish I did it ten years ago.

Now I am in Finance. I have an office in midtown Manhattan. I have proper comprehensive healthcare (i.e. no nasty surprises at the pharmacy or at the doctor’s office) and I actually have some money at last.

In my last job I worked in a tiny cubicle. I had more bosses than I could enumerate and they were all political idiots. Now I have one boss and he’s somebody I can look up to. And what I do really does matter.

Posted by Hair | Report as abusive

If I foot the bill on an expensive education, be it an MBA from Harvard, Stanford, Chicago, etc, you’re darn skippy I will seek out the best future ROA on that investment. Ain’t joining the Peace Corps…

Largely cylical…same thing happened after 2001 when the dot-coms imploded (along with Enron, Worldcom). By 2003 the hiring spree was back on. I would agree there are other pursuits (engineering, advanced science applications) where the US needs to make new strides into..innovation outside of Wall Street is where the US can stand out and attract foreign capital over long-run anywho

Posted by Griff | Report as abusive

Speaking further of Wall St technology / innovation, perhaps someone here can enlighten us all as to what the MBS markets looked like 25-30 years ago. Because someone once thought it prudent to model prepayment behavior by a variety of factors, including LTV, property type, owner / non-owner, and chiefly the factor of interest rate & refinance ability. There are plenty, plenty of mathematical whizzes that worked on MBS modeling and continue to do so. By referring to MBS, I mean the classical definition and not all the sub-prime, Alt-A; I mean 20% down, 700+ FICO (at minimum) and all things verified that can be.

I think it easy, and convenient to allow the symptomatic betrayal of supposedly all things “Wall Street” today and largely ignore the fact of some good that came out of mathematical engineering R&D 25 years ago. The cost of credit is lower, not in full, but in part because of this effort.

Yep, those pesky mortgage rates really didn’t do anything but come down in the last 20 years. And foreign investors never bothered looking at the yield spread advantage compared to, US Treasuries, and be attracted to MBS (adjusted for duration, convexity, and what-not). Nope, never happened.

Posted by Griff | Report as abusive