Tag Archives: finance

Why would anyone want to become a security analyst or portfolio manager?

In today’s Wall Street Journal, Jason Zweig frets about the popularity of index funds:

If investors keep turning their money over to machines that have no opinion about which stocks or bonds are better than others, why would anyone want to become a security analyst or portfolio manager? Who will set the prices of investments? What will stop all stocks and bonds from going up and down together? Who will have the judgment and courage to step in and buy during a crash or to sell during a mania?

First of all, it hardly seems like the entire stock market is liable to become one big Vanguard fund:  as Zweig says later in the piece, “indexing accounts for 11.5% of the total value of the U.S. stock market.”  Big institutional actors have special needs which give them reason to actively manage their funds.  And an institution like Wisconsin’s pension fund, which manages about $100b, isn’t giving away 2% of its money per year to a manager, the way you or I would.  (This document says we spent $52.5 million in external management fees in 2013; percentagewise, that’s less than I give Vanguard for my index.  Update:  I screwed this up, as a commenter points out.  Our external management fees increased by $52.5m.  They present this as a substantial percentage of the total but I can’t find the actual amount of the fee.)

But second:  am I supposed to be upset if it becomes less attractive to become a portfolio manager?  One out of six Harvard seniors goes into finance.  Is that a good use of human capital?

(By the way, here’s a startling stat from that Harvard survey:  “None of the women going into finance said they would earn $90,000 or more, compared to 29 percent of men in finance.”  Is that because men are overpaid, or because we lie about our salaries the same way we lie about sex?)

 

 

 

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In defense of Nate Silver and experts

Cathy goes off on Nate Silver today, calling naive his account of well-meaning people saying false things because they’ve made math mistakes.  In Cathy’s view, people say false things because they’re not well-meaning and are trying to screw you — or, sometimes, because they’re well-meaning but their incentives are pointed at something other than accuracy.  Read the whole thing, it’s more complicated than this paraphrase suggests.

Cathy, a fan of and participant in mass movements, takes special exception to Silver saying:

This is neither the time nor the place for mass movements — this is the time for expert opinion. Once the experts (and I’m not one of them) have reached some kind of a consensus about what the best course of action is (and they haven’t yet), then figure out who is impeding that action for political or other disingenuous reasons and tackle them — do whatever you can to remove them from the playing field. But we’re not at that stage yet.

Cathy’s take:

…I have less faith in the experts than Nate Silver: I don’t want to trust the very people who got us into this mess, while benefitting from it, to also be in charge of cleaning it up. And, being part of the Occupy movement, I obviously think that this is the time for mass movements.

From my experience working first in finance at the hedge fund D.E. Shaw during the credit crisis and afterwards at the risk firm Riskmetrics, and my subsequent experience working in the internet advertising space (a wild west of unregulated personal information warehousing and sales) my conclusion is simple: Distrust the experts.

I think Cathy’s distrust is warranted, but I think Silver shares it.  The central concern of his chapter on weather prediction is the vast difference in accuracy between federal hurricane forecasters, whose only job is to get the hurricane track right, and TV meteorologists, whose very different incentive structure leads them to get the weather wrong on purpose.  He’s just as hard on political pundits and their terrible, terrible predictions, which are designed to be interesting, not correct.

Cathy wishes Silver would put more weight on this stuff, and she may be right, but it’s not fair to paint him as a naif who doesn’t know there’s more to life than math.  (For my full take on Silver’s book, see my review in the Globe.)

As for experts:  I think in many or even most cases deferring to people with extensive domain knowledge is a pretty good default.  Maybe this comes from seeing so many preprints by mathematicians, physicists, and economists flushed with confidence that they can do biology, sociology, and literary study (!) better than the biologists, sociologists, or scholars of literature.  Domain knowledge matters.  Marilyn vos Savant’s opinion about Wiles’s proof of Fermat doesn’t matter.

But what do you do with cases like finance, where the only people with deep domain knowledge are the ones whose incentive structure is socially suboptimal?  (Cathy would use saltier language here.)  I guess you have to count on mavericks like Cathy, who’ve developed the domain knowledge by working in the financial industry, but who are now separated from the incentives that bind the insiders.

But why do I trust what Cathy says about finance?

Because she’s an expert.

Is Cathy OK with this?

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The S&P 500 and the Dow Jones

Adam Davidson in last Sunday’s New York Times Magazine, on the drawbacks of the Dow:

None of these criticisms will come as news to finance professionals, most of whom use far more precise measures — like the S&P 500 or the Wilshire 5000, which cover more companies more precisely — when making investment decisions.

The S&P 500 certainly covers a wider range of companies.  But in a typical 5-day window its correlation with the Dow is more than 95%.  How much more precise could it be?

It’s good to have fine-grained measures, but it’s also good to know at what point extra granularity stops addding new content.

 

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Are math departments better at recruitment than elite financial firms?

Via Bryan Caplan, Lauren Rivera at Northwestern studied hiring practices at top financial, law, and consulting firms and found some surprises:

[E]valuators drew strong distinctions between top four universities, schools that I term the super-elite, and other types of selective colleges and universities. So-called “public Ivies” such as University of Michigan and Berkeley were not considered elite or even prestigious… In addition to being an indicator of potential intellectual deficits, the decision to go to a lesser known school (because it was typically perceived by evaluators as a “choice”) was often perceived to be evidence of moral failings, such as faulty judgment or a lack of foresight on the part of a student.

I’m not sure what those four schools are, but they exclude some pretty good undergraduates:

You will find it when you go to like career fairs or something and you know someone will show up and say, you know, “Hey, I didn’t go to HBS [Harvard Business School] but, you know, I am an engineer at M.I.T. and I heard about this fair and I wanted to come meet you in New York.” God bless him for the effort but, you know, it’s just not going to work.

And don’t neglect those extracurriculars:

[E]valuators believed that the most attractive and enjoyable coworkers and candidates would be those who had strong extracurricular “passions.” They also believed that involvement in activities outside of the classroom was evidence of superior social skill; they assumed a lack of involvement was a signal of social deficiencies… By contrast, those without significant extracurricular experiences or those who participated in activities that were primarily academically or pre-professionally oriented were perceived to be “boring,” “tools,” “bookworms,” or “nerds” who might turn out to be “corporate drones” if hired.

All this stuff sounds bizarre to people outside the world of corporate recruitment.  And it is natural for academics like me to read this and silently congratulate myself on our superior methods of judgment.  But surely there are things about our process which would seem just as irrational and counterproductive to people outside of academic mathematics.  What are they?

It might make more sense to concentrate on graduate recruitment as against tenure-track hiring, since then both we and the financiers are talking about recent BAs with little track record in the workplace.

(Linguistic note:  “Counterproductive” is surely a word that people would deride as horrible managementese if it weren’t already in common use.  But it’s a great word!)

(Upcoming blog note: At some point soon I’ll blog about Michael Lewis’s The Big Short, which I just finished, and which is the reason the credentials of financial professionals are on my mind.)

 

 

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Cathy O’Neil blogs at Mathbabe

Cathy O’Neil is blogging!  Cathy was my classmate in graduate school — we’d meet once a week and she’d drag me through Milne’s survey on abelian varieties, which I was optimistically trying to read without knowing what a scheme was.  A theorem of hers appeared uncredited (sorry, Cathy) in this post, where it guarantees the maximal isotropy of the global cohomology group with respect to the quadratic form studied by Poonen and Rains.  Lately, Cathy’s been in the private sector, working in both the financial industry and the Internet economy.  If you know her, you’d probably guess that her blog is big on strongly held opinions and light on pulled punches.  Your guess would be right!  Here’s Cathy on working at a hedge fund:

Most of the quants at D.E. Shaw were immigrant men.  In fact I was the only woman quant when I joined, and there were quite a few quants, maybe 50, and I was also one of the only Americans.  What nearly all these men had in common was a kind of constant, nervous hunger, almost like a daily fear that they wouldn’t have enough to eat.  At first I thought of them as having a serious chip on their shoulder, like they were the kind of guy that didn’t make the football team in high school and were still trying to get over that.  And I still think there’s an element of something as simple as that, but it goes deeper.  One of my colleagues from Eastern Europe said to me once, “Cathy, my grandparents were coal miners.  I don’t want my kids to be coal miners.  I don’t want my grandchildren to be coal miners.  I don’t want anybody in my family to ever be a coal miner again.”   So, what, you’re going to amass enough money so that no descendent of yours ever needs to get a job?  Something like that.

But here’s the thing, that fear was real to him.  It was that earnest, heartfelt anxiety that convinced me that I was really different from these guys.  The difference was that, firstly, they were acting as if a famine was imminent, and they’d need to scrounge up food or starve to death, and secondly, that only their nuclear family was worth saving.  This is where I really lost them.  I mean, I get the idea of acts of desperation to survive, but I don’t get how you choose who to save and who to let die.  However, it was this kind of us-against-them mentality that prevailed and informed the approach to making money.

Once you understand the mentality, it’s easier to understand the “dumb money” phrase.  It simply means, we are smarter than those idiots, let’s use our intelligence to anticipate dumb peoples’ trades and take their money.  It is our right as intelligent, imminently starving people to do this.

I also like yesterday’s post, where Cathy speculates about people with happy childhoods and people with unhappy childhoods, and asks whether marriages should contain one of each.

Oh yeah, and for the people who don’t like when I post about women in math, try reading Cathy’s blog — you’ll hate it!  Here’s her inspirational speech for women in math:

Hi, I’m your unemployed role model.  I thought of not coming here today since, after all, I’m unemployed, and what kind of role model does that make me?  Actually it makes me a good one, and here’s why.  That job I left wasn’t good enough for me.  I didn’t get fired, I quit (although plenty of great people I know have been laid off so that’s no proof of anything).  The truth is, I deserve a job that I really like, where I’m challenged to grow and to learn and to do my best and I’m rewarded for doing so.  After all, I have a super power, which is mathematics.  So the reason I’m saying this is that you do too.  All of you have a superpower, which is mathematics.  You all deserve to work at good jobs that you actually enjoy- and if the jobs you have turn out to be bad, or if the become bad for some reason, then quit!  Get another one!  Get a better one!  I actually got a job offer on the plane over here yesterday (true!).  I know I’m going to get a good job, even in this economy, because I can do something other people actually regard as magical.  Mathematical training and thinking is something that everybody needs and not everybody can achieve, so remember that.  Never feel stuck.  This is not to say that the specific training you have right now is sellable on the open market, but since you’re a mathematician the one thing you can count on being good at is learning new stuff.  So if you decide to change fields, get ready to roll up your sleeves and work your butt off to learn the necessary stuff, but be sure that you can do it and that it will be really important to the people you work for.  And if it isn’t, or if you don’t think your work is being appreciated, go get a better job.  Thanks!

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