Who Goes Into Finance, and Who Stays?

The Sociology of Risk-Takers, Fee-Collectors, and More

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Financial transactions are, in a narrow bookkeeping sense, zero-sum: a transaction either swaps assets between two balance sheets or creates an asset on one and a corresponding liability on another. Most people in the economy are net payers of fees and transaction costs, and a small minority of people receive enough of the income from these to earn a decent living, and sometimes a very nice one.

Who are these people?

Stereotypes about financial industry professionals are a moving target, for a simple reason: whenever there's an iconically profitable job, like trading bonds or doing M&A in the 80s, running a mutual fund in the 90s, operating a discretionary hedge fund or PE firm in the 2000s, or working as a quant in the 2010s, it must be the result of some kind of supply/demand imbalance. The field in question needs to be lucrative, and there needs to be some reason why it hasn't already become crowded to the point that all the excess profits (alpha!) are gone.

This was true in all of those cases listed above:

  • M&A used to be a free add-on that banks would use to promote their capital markets services. Eventually those bankers and their clients figured out that there were situations where a good investment banker could sell a company for a much larger premium than a bad one could, or could help buy one for less. So instead of getting that banker's services through the indirect approach (by developing a long-term relationship with a bank through capital markets transactions), it was more straightforward to spin up an M&A advisory as a separate paid service.

  • Since bonds are so illiquid relative to stocks, and since trading in them isn't centralized, bond trading was and remains a more decentralized business than equities, futures, or options. The people who built relationships with bond investors when the business was unfashionable had a head start once trading volume heated up.

  • Mutual funds, hedge funds, and private equity firms raise money based on their track record. When the industry was small, it just didn't look like a great way to make money. The only way to raise a giant PE fund in, say, 2005 was to have remained in private equity instead of getting tempted by dot-coms and telco in, say, 1998.

So industry-specific advice—when the question is "how do I get a job doing [thing that is currently, obviously, insanely lucrative]?" the short answer is "start five to ten years ago." But there are some traits that generalize across different subfields in finance.

The baseline skill in finance isn't cleverness, but conscientiousness. Any kind of financial analysis is a long chain of reasoning, whether it takes the form of a discounted cash flow analysis or an analysis of some predictive price signal. Regardless, it’s always about converting some no-longer-profitable N-step process into some profitable N+1-step process. Which works, but it also increases the set of potential ideas to look at, so as N goes up, the value of getting every step right compounds—or, rather, the cost of being 99% accurate instead of 99.9% accurate rises with the complexity of the task at hand.

And since it’s the easy stuff that gets automated, working in finance tends to be somewhere close to the efficient frontier, where full automation doesn't pay off but partial automation is possible. So accuracy, or being relentless about cross-checking different data points and carefully cleaning data, becomes a critical trait. (This is one reason some people in finance are so picky about typos, ugly formatting, etc.—it's an easy-to-check indicator of general conscientiousness.)

It feels redundant to list analytical skill as a criterion, but it’s worth talking about a bit. At an object level, some amount of mathematical talent is pretty important; quants tend to need a deep understanding of probability, discretionary investors need to be able to eyeball model outputs and make sure they make sense. Even in sales, it's very helpful to be able to do quick mental math in order to iterate through permutations of transactions.

One of the surprising determinants of success in the financial industry is what's usually called "being commercial." It's a somewhat amorphous concept, but the easiest way to think about it is to think about the failure mode of what would otherwise be a conscientious and analytical person: spending a lot of time and effort on a question that isn't especially profitable to answer.

A second dimension of being commercial is having a sense of when to scale things, and of how to make them proprietary. Billions of dollars of alpha get transferred every year from people being indiscreet, whether that comes in the form of sharing a pitch or from being insufficiently judicious when talking shop. (Most people in the industry know better than to answer a straightforward question like "Why does your firm do X," but the answer to "Why doesn't your firm do X" can also be valuable.) And being commercial has yet another dimension: people who are good at zeroing in on which parts of an investment thesis contribute to the economics of a trade are also good at making sure they get proper credit when the trade works out.

Given the other traits discussed so far, being contrarian is not absolutely necessary, but it can help. There are many dimensions to being contrarian: someone who just reflexively disagrees with any claim they hear is going to waste a lot of time coming up with clever arguments for things that are obviously wrong. Contrarianism, properly understood, means being aware of the consensus and being roughly aware of the distribution of outcomes from being outside of consensus. That distribution is that usually the contrarians are slightly wrong, but occasionally, they're massively right. So a good contrarian briefly considers lots of superficially dumb ideas, and makes money when they're early to identify evidence that those ideas are right.

Being a contrarian is a useful trait for someone who fundamentally makes a living from taking risk, but that’s only one part of the financial services industry. If your job is closer to asset-gathering, then being contrarian is a liability. It’s much, much easier to sell a product if people are already inclined to believe in it. And one source of persistent alpha is that the expected value from earning management fees on blind extrapolation from a trend is, for most people, higher than the expected performance fees from arduously raising money to bet against it.

It’s this kind of dialectic that keeps finance interesting, by exaggerating the hype cycle. If contrarianism matters, but doesn’t have a straightforward payoff function, how should you think about it? The unfortunate answer is to figure out where your comparative advantage is—and then to tack towards neutrality in either case. The right amount of conformity/contrarianism varies a lot based on circumstances, and people who are opportunistic about it tend to get the best results.

It might seem somewhat tautological to sum up finance with these career traits: people will have good careers if they’re careful at analysis, good at analysis, and good at making money, and there are lucrative paths for people who are effective at being disagreeable or at being agreeable. But the entire field of economics is built off of clarifying tautologies (as are other fields—evolution is a useful model even though “survival of the fittest” is, at heart, a tautology since “fitness” is measured by offspring). These skills can all be cultivated, too: there’s more variability in people’s underlying conscientiousness than in the conscientiousness they express, because naturally sloppy people either get in the habit of building checks into their work or their sloppiness leads to big mistakes. Practicing “being commercial” is probably the most difficult of these to really affect, but it’s also applicable across many more domains: in any business situation, asking what matters most for making money means asking what problem is most worth solving.

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