I am pretty much required to blog about this piece in the New York Times entitled “They Tried to Outsmart Wall Street”: “they” being physicists who left science for Wall Street. And the not-so-subtle implication of the title is that we failed to outsmart Wall Street (and possibly wrecked the economy in the process). To that I say, in the words of Bart Simpson: it was like that when I got here.
More seriously, while I have no doubt that there were crappy quant models out there that contributed to the current crisis by maximizing short-term gain over long-term risk, this was true all the way up and down the chain and the quants don’t deserve any more of the blame than anyone else. Quants respond to incentives the same way everyone else does, and the compensation structure on Wall Street can incentivize immediate profit and deferred risk. (My employer is trying to curb this effect by instituting a clawback provision on bonuses; I don’t know how widespread this is, but it seems like a good idea to me.)
The Times article is curiously focused on ex-physicists, as if quants don’t come from any other fields. In my ten months on the Street I’ve met quants from a broad range of science and engineering fields, and physicists aren’t a majority. That might be a peculiarity of my department’s hiring practices, with physicists being much more common elsewhere, but I’d be surprised. Anyway, Kevin Drum noticed this too and wonders why physicists are so suited to quant roles. He has a theory that it’s the culture:
Even among the number crunching set, physics has a reputation as the most aggressive, male dominated branch of geekdom: only 14% of physics PhDs are women, the lowest of any of the sciences. (Math is pretty male dominated too, but pales compared to physics: 29% of math PhDs are women.) If the first thing that “aggressive and male dominated” reminds you of is the big swinging dick world of high finance, give yourself a gold star. Call this the testosterone theory: physicists are attracted to Wall Street because they like the atmosphere.
I don’t think this is right: the atmosphere in a typical physics department is nothing like the stereotypical Liar’s Poker trading floor that Drum is alluding to. To the extent that the environment I work in is like academia, it’s because I’m lucky enough to work with a group run by ex-academics rather than people with a typical trader’s background. Instead, what Drum calls the “affinity theory” really is the right one. The work I do now is a lot like the problems I worked on as a physicist. It’s not just (as Drum suggests) about math; it’s about the ability to work with huge data sets and make sense of them, and to find signals in a noisy system. This is a much bigger factor than testosterone levels.