Career in finance

Vampyr

What do you mean by "finance", because that describes a lot of different careers. Most finance careers do not involve highly mathematical/programming type of work. Anyone with demonstrable analytical skills (eg physicist) will be able to get a job somewhere in finance, but this is not necessarily the same as quantitative finance.

Mr.Watson

What I meant was a career that at least somehow involves skills that physicist have. So my question was basicly how hard is it to break into quantitative finance with physics degree.

SolomonX

I am probably being naive but I don't understand why students studying physics (or any science for that matter) would choose a field as socially useless as finance. I once had a "superior" tell me he laid off an entire factory (500+) of people to save a few percentage points on a balance sheet for the owner. The man was worked in corporate finance so I believe that is different from the kind of work two-fish quant does, i.e. high finance, the kind many on this forum seem to aspire to.

Instead of channeling your prodigious mental capabilities towards financial work, why not try and develop something useful for the economy and for society? A sure road to wealth is to create productive goods and services that people desire. I know this is easier said than done and indeed, you may fail. However, failure is a risk in any enterprise. I'd rather fail at establishing a business or shooting for tenure than failing at being some financial whiz. This is the way I felt after earning my bachelor's degree in economics.

I commend two-fish's suggestion that the OP learn the humanities. Too often, people forget that their decision have a real impact on others (e.g., shutting down factories). Reading a bit of philosophy, literature and history helps to gain a broader perspective on our world and our role in it.

mayonaise

Two reasons I can think of. First, it is socially useful for me or any other physics grad to not perish in the tenure pursuit. The other is finance actually is useful for something for some people, otherwise you don't get paid.

Unfortunately, research papers usually are not what people desire. Creating goods and services is not a sure road to wealth, otherwise the 500+ workers who were creating goods would be rich instead of jobless. Or maybe the goods they produced were not desired, then your superior did the right thing and (corporate) finance *is* useful.

NegativeDept

That's the elephant in the room. Many (probably most) of the very smart recent PhDs from my program can't find work as research physicists. The rest of them are temporary adjuncts or postdocs whose meager pay isn't enough to amortize their student loans.

And as mayonaise also mentioned, competent finance workers can produce social value. If a bunch of physics nerds can figure out how to not blow up the financial system - or at least make the crashes smaller and more manageable - that would be very useful. (Whether it's more useful than e.g. biophysics research or solar energy is a tougher question.)

intelwanderer

Would it be possible for them to find a research position that is like engineering or applied physics? Or in something that is technical, but not related to their dissertation(different subfield of physics or applied physics/matsci/engineering)?

I have a hard time believing someone with a experimental physics Phd(theorists might have it harder, I admit, but I'd imagine they could teach themselves what they don't know) couldn't do something like materials science or semiconductor research. I'd imagine that they could learn what they don't know quickly.

But I do agree. Finance is important. Can you imagine what it would have been like if the economy completely crashed? I just don't want finance to be the ONLY option for physics Phd's...

And in all honesty, I'd rather have a physicist in charge of finance than an MBA/sales guy. Maybe that's not a wise idea(can a physicist sell and have people skills), but I'm admitting my bias. Maybe the thing is that they shouldn't BE PREVENTED from doing something like that because they are scientists, but not automatically get it over a lawyer/sales type.

SolomonX

Why?

I'm not disputing the use of finance altogether just the extent to which the industry has grow. A good read about bringing in physicist to Wall Street is Michael Lewis' book Liar's Poker.


Not to be mean, but if you don't think bringing goods and services into the economy is a road to wealth then you have no business in business. I'm not sure what goods were produced in the factory but reducing a nation's industrial base is ruinous in the long run. Many innovations come about by laborers in factories inventing more efficient methods of production. I remember an anecdote like this in the Wealth of Nations.

SolomonX

Yes, finance is important but think of a baseball team (soccer, football, hockey etc). All the players have a different role. When one player becomes too important or powerful the cohesion of the team breaks down. Finance is useful but not so useful that everything else depends on them.

I think your last statement shows your bias! I'd rather have someone trained in the field to do the job than someone who is just very intelligent yet doesn't have the relevant background. Besides, a physicist would, to me, be more valuable than calculating IRR and NPV all day everyday in the back office.

chiro

I have no idea why finance has become this super-complicated thing that it is.

Finance at it's core is very boring: it's meant to be about resource allocation and management. You have capital and credit and you worry about managing both and creating credit so that you can allocate resources in the best way possible. You have other things like exchange and so on, but the above is still the basic idea of what banking was and should be.

The above is not complicated and finance should never ever ever be that way: if it gets to the point where people don't understand it (I mean any average person in the room) then it's a bad idea: a really bad idea.

Constructing products that people don't understand and buying them is absolutely nuts.

The old fashioned idea of going to see the bank manager for a loan and being scrutinized based on your deposits, saving history, and so on was there for a reason: it's simple, easy to understand for both parties, and more importantly: it actually worked in a lot of cases.

Finance should be boring because it is meant to be boring: it's not meant to be this super creative thing that blows up the economy when the so called "creative products" reek havoc.

If you need super-computers and sophisticated algorithms to do finance, then that tells me something is very very wrong and I'm not saying this because I'm a technophobe (I used to be a programmer). I'm saying this because something like finance was meant to be boring for a very good reason.

intelwanderer

Maybe that's why they are paid so much, to make up for that. And why postdocs, etc, are paid so little. Granted, research can be pretty boring too, but...

Shows the priority system here, which I think is rather screwed up. I'm worried whether focusing on stuff like finance rather than science is great for the USA in the long term....

I do think that there are better uses for physicists than the ones we have available right now. But if they want to(not just this. Let's say a physicist wants to go into politics or foreign policy/nuclear weapons policy?), no reason they can't learn. Nothing should prevent them from doing so. Of course, whether they are hired over someone with relevant training is a different matter.

mayonaise

Because ideally, learning and doing research in physics train a person to think independently and ask important questions. These qualities help maintain a healthy society. It is therefore socially good that we don't starve. It is personally great that I don't starve, because I think I can make a positive contribution to the gene pool.

Then you should know that what finance looks like, in large part, depends on what regulations look like. Individual physicists turning down finance jobs doesn't change the regulations. You need to persuade the correct people for this.

I mean nothing is a sure way to anything.

Locrian

Nobody sits around doing that. Computers do that. Financial professionals do things computers don't do well.

I'm glad that you think so highly of physicists though. How many do you employ? Hopefully a lot, because very few other people find them very useful. Most of the economy would rather not hire them, even if they pretend to think they're super smart. And I don't blame them.

Why don't you regale us with some stories of how awesome your highly paid employees with physics backgrounds are? This place gets a little sad from time to time, and we could use a few happy stories.

meanrev

Because of our commoner, selfish desires. Now, Llyod Blankfein is just a regular human like all of us. He has 24 hours per day, and he is tasked to manage a company. He is just doing his job. Now, most of his employees are honest people who just want to make money for themselves or their families (I don't think most people go into finance with ambitions of cheating other people's money.) Nope, in fact they are running a harmless operation. Instead, it is our collective desires and the political pressures that we've produced for these desires that have led to this demon of our own design.

For example, how did mortgage-backed securities begin to exist? Because we wanted tax breaks for our home savings and loans industry when it was on the verge of collapse... So we gave it to them in 1981 and saved them for a while. But Wall Street just cluelessly stumbled upon treasure when the industry unloaded their portfolios for tax benefits. It wasn't the lobbying - no amount of lobbying would have made MBS profitable. Contrary to what people would imagine, no one on Wall Street really sought to profit out of our mistakes. Mortgage trading was as popular as the music department at an engineering school, and besides no amount of work would have prepared Wall Street to find such an exploit. Instead, it was a seemingly innocuous political decision that started the MBS bubble.

Why? Because we demanded home ownership as a universal right, and no one saw it them that this wasn't sustainable. And because no one likes high inflation and unemployment rates, so the Fed raised the interest rates in 1979 in a bid to end the stagflation crisis - they succeeded - but the home savings and loans began to die because of this.

Why do we have a Fed, you'd then complain... Well, because we wanted to get out of an economic crisis when it became increasingly obvious by 1913 that no amount of family wealth would have kept the banking industry afloat when people made bank runs in the midst of an economic crisis. This made sense - families wanted to protect their savings. And in fact, the Fed did achieve most part of its founding objective, considering how we've reduced the frequency and amplitude of our economic crises. Now, this doesn't sound convincing since we're in the middle of the deepest recession since the Great Depression, but if you looked at it from the bigger picture and a statistical standpoint, it would become clear that there is no logical basis for such doubt. Moreover, we forget that it has taken only a century for the Fed to make this happen. I find this entirely acceptable - after all, I reserve the same respect towards why the Clay Millennium Problems mostly remain unsolved. And who are we to say that a few mathematical conjectures are any more "socially important" than the welfare of the populace and putting an end to economic crises?

Now, on hindsight you can say, we shouldn't have given those tax breaks, we shouldn't have raised the interest rates in the 1970s-1980s, and we shouldn't have given the Fed its powers. You could say that AIG shouldn't have insured those mortgages. I find such a statement exceedingly naive from a scientific point of view. If it isn't already clear from the example above, our political decisions have an effect of increasing entropy. That's like expecting entropy to reverse itself. Now, unless something drastic like an asteroid impact event takes place to wipe out half of our population, don't expect the changes to be as instantaneous and simple as removing the layers of complexity and creating a short rulebook. Taking any single step above out of the picture might well have pushed our economy past its tipping point, to its collapse.

Physics at its core is very boring: it's meant to be about phenomenon and theory. You have observations and hypotheses and you worry about understanding both so that you can model phenomena in the best way possible. You have other things like universities and so on, but the above is still the basic idea of what physics was and should be.

The above is not complicated and physics should never ever be that way: if it gets to the point where people don't understand it (I mean any average person in the room) then it's a bad idea: a really bad idea.

Inventing theories that people don't understand and publishing them is absolutely nuts.

I absolutely agree with your premises, but not the conclusion that you have come to. There's a saying: "Vote with your wallet." Cancel your home loans because they generate billions of turnover for finance. Cancel your health and home insurances because insurers pay investment banks a lot of commissions to get their portfolios reinsured. Don't use ATMs or electronic payment methods. Cash in your retirement fund right away. Don't pay tuition to your university. In fact, don't fund programs for child education because much of their assets are managed in hedge funds. Don't fly airlines that buy futures contracts to hedge their losses against the crude oil, because these contracts were created by investment banks or traded on exchanges that pay proprietary trading firms tonnes of money to create liquidity for their products.

The fact that we cannot do without any of these is because the financial industry does indeed generate useful services and products. The claim that they don't is an entirely false. Now, you're going to say, you are not going to throw away your rights to these services simply because the financial industry has become too powerful for you to avoid recourse from your insurances to the pockets of Goldman Sachs. Right. So let's do this instead: have the government buy over and nationalize every service that shouldn't be in the hands of Goldman Sachs, Morgan Stanley and the likes.

Let's give the governments the power to be direct market makers. Let them create the market for treasuries directly - so instead of having a dozen over banks buy the entire stash of US treasuries so that they can resell to smaller buyers, let's pay our taxpayer monies to a whole new department of the government that now has to be hired to make money for the very products that they have created themselves. Or let's give China the right to be a main market maker for US treasury notes. Or let's give Google the chance to invent an algorithm or sole discretion for finding people to fund the national budget.

It will probably work if we tried - I'm evoking a tone of sarcasm not because I don't think it will work, but because I think no one is going to accept such a solution.

So nope, let's also fix how the government works, let's find politicians that can make it all happen. That has to be easy as well right? No - you have to do the dirty work yourself - politics is in need of people with such forward-thinking ideals for the financial industry.

This boils back to my point is that the criticisms of and proposed replacements for the financial industry in this thread are mostly naive, undue and unfounded.

This sounds to me like management or management consulting instead.

A majority of "products" that have been created by the financial industry arise because of our aversion towards risk, much like insurance. If you feel that there's something wrong with the statement, "Insurance should not exist," then there is also something wrong with its semantically-sugar-coated version of, "Exotic options should not exist." Farmers need to protect their crops against disaster. Home insurers need to insure themselves against a huge event like Hurricane Katrina that would drive them - and the beneficiaries of these insurance policies - to bankruptcies, which should then spark a chain of catastrophic results (a cascade of homeless and unemployed people). A semiconductor manufacturer needs to protect itself against volatility in silver and copper prices. A university's endowment fund needs some consistent, but low-risk growth. Most of the trades made in the financial industry are done in good nature. Many of these products were created simply because we found a fair and neater way to create them out of cash and the underlying, just as we have found a recipe for a delicious dish. (Of course, chefs are paid extra over the ingredients for making the food, as a market maker is paid a commission for creating such a combination). It's supposed to be a good thing. The aggressive risk-taking, rogue and inside trading that fit well in headline narratives constitute the exception, not the norm, of the financial industry.

There is much grunt work whether in finance or physics. There are some elegant elements to finance. For one, an abundance of open problems to work on (not necessarily problems of the profiteering kind). For another, there is abundant supply of quantifiable data (typically price time series) for your models. There's less to worry about proper data collection than actual modeling work. Besides, it's human nature to feel a stronger sense of appreciation for your work when you've been paid more for it. In every other field I know of, the question is whether a balance of your personality and desire for money can be met by a particular job - not, in the other way around, whether you meet the requirements of "passion" for a particular job.

I've read Liar's Poker. I think it's a terrible read for this purpose as compared to something like "My Life as a Quant" by Derman.

There is a lack of jobs in physics; there is a recession going on for everyone. I think it is inanely obstinate to shackle ourselves to the dated view that a move from physics to finance is a passionless behavior of penny-pinching. Instead of driving away the scions of our community simply because they have chosen a career in finance, we should support and assist their decisions to do so. If anything, the physics community needs this alliance now more than ever, and easing the demand for tenure positions is probably a good thing for our future generation of physicists.

SolomonX

Thinking independently and asking important questions is not a result of being trained in physics. Sure, a physics or any STEM degree helps a person to think analytically and tackle an important problem from many different angles. These are very important skills but they are not solely acquired within the domain of physics. I think these abilities are somewhat natural, but can be sharpened by a rigorous degree program.

Can you provide any good reasons why you should not starve other than your physics degree? What exactly is so special about your gene pool?

SolomonX

Computers do that, eh? No input required? No analysis of the output? When did computers become sentient?

Training in a rigorous field, such as physics, is of high value to the economy. Many innovations of the past 70 years have come about as a result of a interdisciplinary team of law-makers, businesspeople, and scientists (including physicists) innovating products that have lead to the remarkable world we live in today. Advancement can only continue if we channel our resources into productive fields (communications, infrastructure, health care, etc.) Financing is useful tool in this equation but only if confined within its proper bounds.

I agree fully with what chiro noted earlier, that is, that finance should be very boring and vanilla. If you couldn't explain it to your grandmother then something must be fundamentally wrong with whatever it is you are trying to do.

And of course, as an American and someone who believes in free mobility of labor, if a physicists wants to go into finance, go right ahead. Especially if you can't find work within your field and need money. Of course, understand that finance is not physics and the subject matter should be treated differently. I read a few economics research articles when writing my thesis about applying a gravity model used in a financial model and thought that this is madness!

chiro

What a load of BS: it's not a harmless operation when you have an industry with huge systemic risk that needs money to not become insolvent all because some people made a bad call.

People thought that LTCM were the smartest guys in finance, and people thought Enron were the smartest guys in the room: neither of them were.

Huge amounts were just completely wiped out completely. Evidence has come out that the people who made these products called them crap. Some of these banks even took out insurance policies betting against the very products that were selling to clients.

Just doing his job? What a crock. The nazi's were "just doing their jobs" as well.

Again, the idea of what banking was and should be about was that giving credit to someone was not easy.

There were no subsidies and the only way to get easy credit was if you were a solid government or an oil company.

These easy loans where you had no income no assets helped create the mess.

This is really really simple: banks have been doing this kind of thing for a long time (it's what they are meant to be good at) but they threw it all out the window when they gave people loans that could not possibly pay them back.

Again: this is why banking should be boring and why it's important to just stick to the time tested basics.

The point of a good bank is to say "no" when they should say no, not because it's politically correct or fashionable.

Again it used to be that when you went to a bank for a loan, they would deny you if they didn't feel you had a good chance of giving them a return on their investment. It wasn't a sure thing, but experience tends to help in this regard (i.e. the bank's experience).

Access to unlimited credit when it's clearly not deserved is not a right of any kind and that's the lesson and the whole point of why banking should be boring.

Bankers of all people who are decent and have a brain cell or two should be the first to realize what happens when you give out easy credit: if they have been in the process of funding businesses or mortgage holders then the experience should tell them what happens when you have an environment that is highly subsidized and where credit is given easily and how that affects the market as well the environment for debt.

The amount of money sloshing around is at an insane level. The first trillion dollars took a very long time to print (and create on a computer since most money in circulation is purely digital) and from that point money has been entering the system at a frightening rate.

Also we have derivatives that are "valued" at many many times the global GDP. This is very dangerous especially if something happens where these products result in a wiping out of value in the same way that happened with the MBS products.

The other thing that is different is the leverage: the so called market cap of a bank is not what it's assets are. A lot of banks are leveraged up to levels like 50:1 and sometimes a lot higher.

A 50:1 leverage means that a 2% price swing can make it completely insolvent. We didn't have situations like this in the 1930's and it means that we have a situation much more fragile and much more frightening.

You talk about bank runs: you might want to find out how many banks have failed around the time of the GFC: the idea of the FED somehow preventing this kind of thing is really naive.

You might want to look also at how the capital requirements of banks have changed throughout the years too.

Also this idea of reducing the crisis is naive I don't know where to begin. Did you forget the Savings and Loans scandal? What about the MF Global scandal where segregated funds were reached into? If you don't understand the MF Global situation, think of it as if you went to the ATM and your deposit account was empty: that's what literally happened.

Buddy: this is not a physics experiment, this is finance and it affects everybody.

If credit wasn't easy to get across the board, whether it's for a working family to have a home, a small business, a large corporation or even a bank, then a lot of these problems would be averted.

The other thing is that this situation is not like the one where you have one or two loans that default: this is a global practice and you had a global instance of defaults and subsequently a systemic collapse.

The other thing is that right now, interest rates are near zero.

This means that people can borrow money really really cheaply. It also means that the deposits that are used to create the new money don't get a return on the investment.

This encourages depositors to spend and borrow instead of save.

This whole thing is a bomb just waiting to cause chaos.

I'm not saying you have a simple rule book. Decision makers don't use rule-books because they can't cover all the circumstances especially in a dynamic environment, but they do use guidelines in many cases. I have proposed a guideline that has been used time and time again and it's easy to understand.

When people don't understand what they are buying: they shouldn't buy it. When people are selling something they don't understand, or know beforehand that they really should not be selling something, then they shouldn't sell it.

There are some really basic laws that businesses have to follow that incorporate the above and some of them are related to what is known as fraud.

This experiment called our current financial system is a failure, and at the very least, going back to the era where credit was not only hard to get but hard to create should be a key issue on all relevant policy makers mind.

You can do the above in many ways including with central banks or without central banks, but never the less it's important to do for society at large.

twofish-quant

You have one banana that is worth $1. How much are two bananas worth? The answer is roughly $2. If the price is significantly more or significantly less than $2, you can make a great deal of money, buying/selling one banana and two bananas.

Now let's apply this "banana-rule" to stocks. You end up with a partial differential equation. Now let's add interest rates, foreign exchange, and collateral to it. You end up with very, very complicated partial differential equations.

The trouble is that reality is very complicated.

Finance was never that simple. It gets more complicated now, because the trouble is that the money for that loan comes from some person in Dubai, and connecting the dots get messy because of the "banana rule."

One loan you can handle without supercomputers. Five million loans, you need some very, very powerful computers.

And it's not just loans. Think about every financial transaction that you do. Most of that is electronic now, and you end up with massive computer issues.

Even *without* the computational issues. Just think of the database issues. Every line in your credit card or transaction in your checking account has to get tracked, and you end up with horrendous computer science issues.

Then take that for each person and apply things like the banana rule and things get very complicated.