When I started working in finance as a fixed income analyst I realised I had some insight about the macro and the political drivers of financial markets, but I knew very little about finance, formally at least, in the sense I had never really studied it. More importantly, as I came to realised reading financial markets-trader oriented media, I knew nothing about what or how the market itself thought about how it worked. Having been trained in New Keynesian economics, I was accustomed to rational agents, micro-founded models and what I would otherwise describe as the rational choice approach to social sciences. What I eventually realised was that quants and traders couldn’t really care less about those things. Quants looked at probabilities mainly and traders used technical analysis for the most part. So what are their relationships?
Of course, I’m generalising: there are hybrids, but these are few and far between. Now this is a pretty interesting fact. Why? Well because it had been my experience that when different fields of social sciences spoke about the same things in different terms, they tended not to speak with each other. For me, this somehow became a rule of how the world probably worked, which of course was wrong. Economists, financial analysts and strategists all speak to each other, so my rule was worng. Or was it? – The truth of the fact is that they speak to each other, but not that much and when they do there tends to be a hierarchy that manages the flow of information, where often at the top the guy listening is a lawyer, either only by training (if he is a politician, because they tend to study law) or professionally (for the same reason lawyers succeed as politicians, ie they can argue well and convince people, they also succeed in the corporate world). And the lawyer doesn’t want to know why things might work. He is interested in how things actually work, or the closest approximation to it that convinces him and that he can therefore sell. So the three guys are not really talking to each other. They are talking among themselves and every-so-often one of them gets together with the top guys to tell them how things are looking from their perspective.
Interestingly, in my experience, the three guys tend to think quite little of each other’s methods.
- The quant is likely to be come off as the most intelligent of all of them, from a purely formal point of view. He’ll have a natural sciences background generally, engineering, physics, stats or maths and he might think the others are all idiots who couldn’t understand a CDF if it hit them in the face. While in Wall Street the Ivy League remains the preferred source of such experts, as it turns out, in London there seems to be a fascinating concentration, dare I say even dominance, of French Quants from the Ecole Polytechnique. Apparently, if you want to become a quant, having gone to the school and studied under Nicole El Karoui goes a long way. This has the interesting added feature of adding a specialization division where there is already a national rivalry between Brits and the French. It has also led to the ghettoisation of Marylebone into a French neighbourhood because BNP Paribas’ HQ is around the corner. I’m exaggerating, but you get the vibe…
- The economist will often, depending on the his own level of education, seem like he feels threatened by the better math skills of the quant, but will be comforted by his knowledge that he is “really” just a reject from his own field.
- The trader will just be dismissed as some overpaid and overconfident salesman jock (or Essex boy, if you are in England). Finally the trader will agree the other two might be smarter, particularly appreciate the reliable work of the quant, question the value added of the economist, but not really dwell much on the issue. Who cares, they get paid to do what they do, not everyone is tailored to do it, and if you don’t like it they’ll “cry all the way to the bank”, which will be pretty fast given that they work there… On the odd chance that they do get caught doing something wrong, they may not laugh so much… but they are not all Barney Stinson.
Good Quant, Sellable Economist
I have to admit my opinion is closest to the trader’s. Everyone agrees that the quant is smarter. But you can’t “sell” the quant to the rest of the world. He is just too smart to communicate what he is saying to the rest of the world. So he is pretty much for internal consumption. What you need is someone who can think of the world in a way that can be converted into sound bites, whether it is for society as a whole or for shareholders’ General Assembly meetings. So this is where I think the economist has most value for financial enterprises. We can tell you when there’s a macroeconomic imbalance, but we can’t really predict when it is going to go “oink”. We can’t time things, which is really where the money is made as far as finance is concerned. They don’t care whether there’s a bubble or not. As I was once told, “Sure, may be China is a bubble, but if you are the guy who’s stayed out of that market for that reason, you are the laughing stock of the neighbourhood”. I half expected my interlocutor to break into Limp Bizkit song and go on to sing:
“and you’d be thinking he’d be moving on/ but he’s a sucker like I said/ He’s f***ed up in the head”.
(the investor who stayed out, not my friend…)
Anyway, we know as economists that China is in trouble and at some point there will be a reckoning. Roubini has been correctly warning the world about this for years. But we don’t know when that reckoning will unfold. Really, even I am aware that my best guesses are poor guides at best. This is true of China, Brazil and many other places. So we (macro)economists are not very useful from an immediate investment perspective, certainly not on a daily basis.
From each according to his ability…
Now, don’t get me wrong. I’m not masochistically building up to an epiphany where I realise I’ve been wasting my time learning economics. If for no other reason, that I’ve tried to be one of those hybrids. Sorry to disappoint…
Economists might not be very important in finance, if they stick to their original skill-set. However, if you are able to adapt and grow, I think that the background and any professional experience in the field give you a good hedge at understanding what’s going on, if you manage to get your head out of the trading pits for a second. Just because an economist’s skill-set is not the most valued one in finance, per se, it does not mean it is not valued as a good base on which to build.
Finally, finance is far from being the only career path available to an economics gradaute. Clearly, living in London as I do, the focus seems obvious. We all gravitate around that industry in this city.
I believe that economists do provide immense value in government departments, regulatory bodies, central banks, national treasuries, industry and consultancies, where long term trends are perhaps more important. Ultimately, however, this is just my opinion, which is based on my personal experience. May be your is different? Let me know on the comments section below.