Ali’s blog

Mostly quant stuff with occasional digressions

The post-quant future

Posted by alifinmath on April 7, 2009

It’s been clear to me for well over a year that neoliberalism (aka deregulated global finance capitalism) is dead, and that as a corollary, so too is quant employment in meaningful numbers.

A lot of physics, math, and engineering people have been going into quant finance not because of the attraction of easy lucre but simply because job opportunities in their own disciplines have shriveled. Until 1970 a freshly-minted physics Ph.D. could literally step into a job. But since then it has become progressively more difficult. Unemployed, misemployed, and underemployed physics and math Ph.D.s have become a commonplace phenomenon. For this reason, droves of them have gravitated towards Wall Street and the City of London. But this has now come to an abrupt halt over the last year or so. Sure, a few quants are still being hired — but they tend to be experienced ones who are hired for pricing specific products with which they already have experience (see here for more detail). And a lot of experienced quants are out on the street looking vainly for work. Graduates of even the best programs — CMU and Haas — are having problems with internships, let alone real jobs. These problems will not subside.

So what is the future for quantitative types? There’s an article by Gillian Tett in today’s FT:

Until three years ago, smart, numerate students took it for granted that one of the fastest ways to become rich and successful was to dive into the world of complex finance, producing structures such as collateralised debt obligations (CDOs).

Now, however, those CDO dreams have crumbled. By late last year, large western banks had shed more than 125,000 jobs. Thousands more have gone since then, many in high finance. The betting in the management consultancy industry (which is cutting back too) is that some 300,000 global jobs linked to banking could vanish before the crisis ends.

That is striking, given that the City of London was thought to employ some 350,000 financial workers two years ago. An entire financial army, in other words, is being demobilised – of all ages and ranks.

Tett goes on to suggest how highly trained physics and math people could go on to benefit the real economy but I remain a sceptic. If societies cannot productively use these highly trained people, the societies themselves don’t have much future. A dog-eat-dog laissez-faire regime wreaks havoc with most human beings (except for the oligarchic minority that benefits). And trained people are among the victims. 1990s Post-Soviet Russia is one glaring example. But contemporary USA has become another.

On a philosophical note, the way a society trains and deals with its best and brightest gives us a good idea about how efficient and progressive it is. Thus, for example, a third-world dump like Pakistan — a failed state, a worthless heap of garbage — has no social mechanisms for training and dealing with its brightest (perhaps because it doesn’t exist as a society to begin with). I’ve no doubt that other third-world heaps of garbage — say Zimbabwe or Brazil — are approximately the same. But the opposite is true in, say, Scandinavia or Germany. It’s a testament to how the USA has itself been converging to third-world status that it lacks social mechanisms to productively employ its best and brightest — except in parasitical occupations such as financial ‘engineering.’

The group of people with IQ > 135 are the prize possession of any society. From this group come the mathematicians, physicists, design engineers, tech entrepreneurs, architects, whiz programmers, and so on. If a society has no mechanism for training these people and harnessing their efforts, it is doomed and en route to systemic failure. The “Third World” is characterised not only by not having such mechanisms, and not only by “brain drain,” but also by not having many such people in the first place: IQ differences exist among different ethnicities. India and Pakistan, with their average IQ of 82, are not going to produce many people with IQs over 120 or 135 (since intelligence roughly follows a Gaussian distribution). Likewise for Brazil, with an average of 87. But now I’m clearly digressing; more can be found in Lynn and Vanhanen’s  flawed but interesting IQ and the Wealth of Nations.

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