UnRisk 7

I Went To The Best Place In The World

I recently met some American businesspeople and I mentioned to one of them that I had attended NYU's B-school. He promtly replied that he had gone to Columbia´s B-school. I offered the interesting fact that a staff member at NYU once told me that "at least 80% of the MBAs here are Columbia rejects". This emboldened the Columbia grad, who went on to promptly concur and to publicly conclude that he saw no reason why someone who gets into Columbia´s MBA program should go to NYU´s. Unbeknownst to him, his work colleague (the person who literally sits next to his desk) has an MBA from NYU and, intriguingly serendipitously, happened to have listened to our conversation from a hiding distance. She quickly joined our conversation to defensively point out that she had never applied to Columbia.

Whether or not most NYU MBAs suffer from "Columbia envy" (a waste of time if you ask me; they should instead be busy congratulating themselves for having attended one of the best educational institutions on the planet) does not directly concern me as a graduate from NYU´s B-school. For you see, I did a Master of Science (Stats + Finance), not an MBA. And that´s why I know that I will never feel academically second to any of NYU´s academic rivals, Columbia included. For one simple reason: the program I attended was the best one in the world at what it did. Top of the tops.

I chose NYU´s MS because 1) I was looking for a quantitative finance program (as I wanted to go into derivatives and to differentiate myself), 2) I was looking for a leading business school (as the resources and social and professional opportunities are way superior), 3) I wanted to be in NYC (for the obvious social, cultural, and career reasons). NYU Stern was the only institution that guaranteed that glorious triad. And that´s why I chose to go there. No other quant finance program in the world could offer that unbeatable combination of top b-school, Manhattanism, and Wall Street. No other quant finance program could beat NYU Stern´s offering. I enrolled in a peerless, unbeatable program.

Such course of action on my part has delivered me tons of positives ever since. Following my recent encounter with the Americans, I have discovered a new, hitherto undiscovered, advantage: whenever someone brings up their Columbia (or Harvard, or Wharton, or MIT) affiliation I, unlike perhaps many other NYU grads, can´t succumb to the temptation of inferiority. I know perfectly well that my program was superior to all the competing alternatives. And that´s why I feel, now more that ever, awesomely proud of my NYU affiliation. It´s just nice to be able to claim that you went for the best, second to none.

(Of course, this topic is less than insultingly relevant in the cold hard real world of manly work. I live by the motto that "movement is demonstrated by walking", so I don´t care much where one went to school when it comes to professional undertakings. Hey, I don´t much care whether one went to school at all. Perhaps, as Malcolm Gladwell suggests, we should be forced to entirely erase our academic history from our resumes!)

Will This Other Finance-Related Bubble Also Backfire?

University finance programs are proliferating just as both markets and theory take a tumble

The venerable Sloan School of Business at the venerable Massachusetts Institute of Technology recently announced the launch of a new educational program, its very own Masters in Finance. For those less than exaggeratedly interested in the graduate education landscape and who may doubt the relevance of such news, let me assure you that Sloan´s initiative is nothing short of revolutionary. It is the first time that a truly top US business school has decided to offer a fully-fledged specialized finance degree, in a pioneering move that may soon be imitated by some of MIT´s privileged peers (the likes of Harvard or Stanford). In doing so, Sloan joins a bandwagon that had steadily become globally crowdier. The past few years have witnessed an unmistakable explosion in the number of finance university programs worldwide, housed by both notorious institutions (Oxford, Cambridge, Princeton) and by a myriad of less mythical schools. Such development comes on the heels of a prior, even more pronounced, burst in the number of graduate degrees in quantitative finance-financial engineering-computational finance, subdisciplines that concern themselves with the heavy-duty mathematical, statistical, and software-design skills typically employed by the brainiac “quants” found inside investment banks and hedge funds.

In sum, it wouldn´t be far-fetched to say that the international financial education field is experiencing its own bubble, glowingly exemplified by MIT´s jump into the market. Paradoxically, of course, this bubble is reaching peaky dimensions precisely when the bubble that had afflicted the real financial world for so long is being prickled at a horrifyingly accelerating rate. Will all those newly-minted finance graduates be welcomed by such a lackluster job and earnings environment? Could the prickling of the real financial bubble hasten the prickle of the educational bubble?

I for one hope that is not the case. As a very strong defender of the rationale for specialized finance programs (I kind of forecasted MIT´s move a while back), I would hate to see such valiant efforts hampered because a bunch of irresponsible players decided to bet the house (pun very much intended) on the possibility that people with no income, no jobs, and no assets would not default on their unseemly mortgage loans. So my heartfelt support is with Sloan and all the others.

But such declaration of love does not imply that these new finance degrees are mistake-free. In particular, the contents of many of them are perilously close to being irrelevant in today´s shaky environment and, worse, may contribute to helping restore and perpetuate notions and practices that have clearly been key driving forces behind the current malaise and turmoil. To put it bluntly, many of these programs indoctrinate students into the sacredness and hallowedness of techniques and tools that have consistently shown (in this crisis as well as before) their unrepentant capacity to wreak havoc in the markets. There is no doubt that a big casualty of the credit nightmare than began in the summer of 2007 has been the validity of theoretical and quantitative methods in finance. The complex mathematical models used to value and rate complex credit derivatives structures proved spectacularly lacking. Value at Risk was revealed clothes-less by much-bigger-than-indicated losses. Advanced econometric forecasting tools did not provide any warning. The central tenets of modern financial economics (markets behave normally, rare events don´t happen, liquidity is not an issue, standard deviation is a reliable measure of risk) were savagely devastated by a tidal wave of hard-knocking reality. Quant funds suffered huge setbacks (though it is not entirely clear the extent to which such computer-aided punters care for finance theory at all).

And yet, the flavour of many of the new finance programs is indelibly theoretical and quanty. While the exact curriculum details are still unknown, there is a danger that, given its technical background, MIT may too err on the side of abstract abstruseness. At a time when the mathematical finance edifice is crumbling harshly and when the obsession with assigning precise, concrete figures to unknown parameters such as expected loss or default correlation has proven sensationally erroneous, is it the right approach to loudly promote those failed tenets from the far-reaching academic confines? Masters in Finance graduates are being touted as an elite corps of financial wizards, the chosen ones who will lead the finance industry into the future. Given the troubles that an unfettered faith in quantitative “certainties” can provoke, we would all be that much safer if those individuals joined the financial world free of any illusions as to the true value of theoretical and mathematical gimmicks.

Are Quant Finance Programs A Conspiracy To Keep Nerds In The Shadows?

What´s more important for a finance career, a course on Markov chains or a course on bonds? a course on SDEs or a course on international finance? a course on MatLab or a course on derivatives accounting rules?

If you don´t understand markets and products, balance sheets and regulations (or have the ability and chutzpah to learn them as you go or to make people believe that you have learnt them), and instead specialize on obstruse quant stuff that may or may not be used in the markets, you may have significantly (very significantly) narrowed your future prospects.

By typically (there are exceptions) focusing all their efforts in teaching the (theoretically used by theoreticians) math and neglecting the "softer" side (who needs to know what a bond is when you can C++?), quant finance programs are effectively condemning their graduates to a life of limited possibilities.

Specially (as the Fordham story mentioned in these blogs shows) if you are not attending the 4-5 top programs.

Courant-Stern Marriage

It seems that NYU Courant and NYU Stern are planning a wedding. If all goes according to plan, the two star schools will begin offering a dual degree in the Fall of 08, with Stern contributing its MBA and Courant its MS in Math Finance.

Such union is certainly unprecedented. Some b-schools do offer dual MBA-Finance-Quant Finance opportunities, but both programs were already based inside the same b-school. This is the first time that a b-school and a scientific school collaborate in such a manner.

Is this marriage a good idea? Yes and no. Courant clearly wins big. Stern´s potential gains are less obvious.

Pursuing a quant finance degree as opposed to an MBA has always been more of a gamble. MBAs simply have many more career opportunities. It is tough to get a job as a quant, given the relative scarcity of positions, the high caliber of the competition, and the fact that bullshit won´t cut it. Either you are good at stochastic calculus and C++ or you are not.

By being allowed to obtain an MBA at the same time, Courant students will be hedging their bets in a big big way. If that desired quant job does not become available, the MBA will open the door to other, softer possibilities, including even non-finance positions.

One big problem for MBAs is that this dual degree instantly makes the Courant students direct and equal competitors of MBAs for MBA-type jobs (traders, marketers, structurers). Until now, Courant guys did not take jobs away from MBAs.

But the opposite does not hold true. It is very unlikely that the dual-degree student coming from the MBA camp could out-smart his peer from the math finance camp when it comes to quanty jobs.

In other words, the dual program would allow those of the quantitative persuassion to receive the same quant training as previously available, plus the extremely highly-valuable MBA hedge.That is, the dual degree helps Courant and its typical students. For Stern and its typical students losses, not gains, may result. The new mahematical training would likely not add much job-searching value and could dangerously tempt non-quants to present themselves as quants, all the while creating thirty or forty new direct competitors just across the street.

In light of this, I wouldn´t be surprised if the dual-degree program ends up being almost completely populated by math-types, either students who would have anyway joined Courant and/or Wall Street quants looking for "business credentials". It seems to me that MBA students would soon realize that they have little to gain from inmersing themselves in the challenging fields of numerical methods, stochastics, and computer programming.

Peer-Obssesed Academics

Today I attended a presentation by an important London-based business book publisher (ok I´ll give you a clue: one of my fellow bloggers has published recently with her).

She was quite informative and pleasant. Apparently, the average sales number for a business book is a meagre 400 copies. Clearly, the median must be much less than that (half?). So it turns out that the vast majority of published business authors only manage to sell a few hundred units of their tomes. Depressingly amazing.

But by far the most impacting comments came not from the publisher but from a would-be-published-author present in the audience. This individual, a quite senior academic at a top b-school, argued that business professors are discouraged from penning real-life-focused, practitioner-oriented books out of fear that their peers may stop "taking them seriously". We don´t write "soft books", the academic honcho said, because we don´t want to be seen as "unrigorous" and "unacademic". That is why, he went on, it is much safer for us to devote all our time to producing obscure, technical, theoretical, obstruse, only-our-peers-care-about-them papers.

I replied that people like Paul Krugman or Michael Porter probably don´t give a rat´s ass about whether other academics consider them true members of the sect or not. They are simply too busy writing yet another bestselling tome (that will, evil of evils, be glowingly present at every airport bookstore in the world) and influencing every top executive in the globe. Conversely, I suspect that many invory tower purists would give an arm and a leg to have their own regular column in the New York Times and to be seen as influential by real businesspeople.

After attending this event, I think that I understand much better why so few business academics produce truly innovative, impacting, and insightful books that help practitioners. It is not necessarily that there are few profs with the talent and vision to do the right work. Rather, I now believe, it is that extremely few have the guts to break free from the peer-imposed straightjacket that severely limits their potential creativity.

So, next time you encounter a business bestseller, by all means glorify the author. But not so much for his talent, as for his courage.

ptriana@profesor.ie.edu

The Avis of Quantitative Finance

Following up on my previous "QuantFinance - for VIPs only" post, I just read the following quote by CMellon's great Steven Shreve regarding their world-renowned computational finance program: "I think this happens because we're like Avis -- we're not an Ivy League school, so we have to try harder and we have to be better to get the same recognition."

This goes to the heart of why a quant degree makes sense for CMellon, but not for most other institutions. In the case of CMellon all the stars are aligned right. They NEED such a program in order to gain outlandish recognition that keeps them among the academic elite (as Shreve says, Harvard does not need to be that innovative and forward-looking; no one would point fingers at Harvard for not having developed a new quant program, they do more than fine with their MBA, thus the inescapable priority is to safeguard that). And they CAN design a program that can successfully compete for top dog status.

In other words, for CMellon not offering a quant program would be the crazy thing to do. Akin to missing out on a unique opportunity to become world leaders in an important field. A grand waste of resources. CMellon is of course one of the world´s leading scientific universities and its b-school is more than decent. The place has always prided itself on inter-disciplinary collaboration and it encourages entrepreneurial spirits.

But the (ideal) conditions present at CMellon are not found at most other places. Very few can boast truly outstanding expertise in the sophisticated tools and their financial applications. Very few have a need to portray themselves as leaders in such a specialized field. Extremely few combine both attributes. That is why I believe that in the world of quant education Charles Darwin would feel right at home, for only the fittest can survive.

ptriana@profesor.ie.edu

It´s The Salaries, Stupid!

The Judge Business School at Cambridge is looking for a few new profs. They have placed a nice, large add with a shiny picture of the school´s main entrance. When you combine that with the always grandiose Cambridge shield, you get a pretty atractive and attention-grabbing piece of advertisement.

The problem comes when you notice the salaries on offer. If you get the privilege of being selected by such august institution, you could end up making no more than 30,000-40,000 sterling a year.

Now, more than five years ago a 21-yr old analyst that joined a top ibank through the milkround was expected to make at least double that in his first twelve months. A 28-yr old chap fresh out of an MBA was more or less guaranteed three times the amount currently promised by Judge.

The conclusion, then, is that Judge seems to be offering less-than-glorious monetary enticements (in spite of this, I am sure that they get hundreds of applicants for each available position). And this is quite possibly a good reflection of the academic reality in both England and Europe as a whole. Bright young things don´t have lots of incentives to pursue a lengthy PhD and land an academic post. The financial opportunity costs for those skillful enough to join a hedge fund or an ibank would just be too grave.

No wonder, then, that the US is way ahead when it comes to the academic league tables. Profs across the Atlantic, of course, make much more money, particularly those inside b-schools. A freshly-minted PhD in Finance that is hired by a, say, top-25 school should expect at least $150,000 the first year. Soon, he could be racking up hundreds of thousands of dollars from executive courses, consulting and book deals. Some profs in the States are rumoured to make seven figures overall.

What this means is that the academic path becomes attractive, even for those who could make it big on the Street. Life at a US b-school can be pretty cool. If you join a place like Cornell or Dartmouth you are basically living in your own country club. Facilities are top-notch even at a top-100 school, and students are normally high caliber. Given these circumstances, it wouldn´t be unreasonable to give up fame and fortune in the real-world. On an expected return basis, a US b-school academic is probably in the top 5% of the population (remember, today´s masters of the universe can be tomorrow´s pariahs). Not a bad proposition, ain´t it?.

Unless places like Cambridge start to pay better, US schools will not be caught up. Having dinner at High Table is certainly a nice perk, but possibly not one worth hundreds of thousands of dollars in foregone earnings.

Quant Finance - for VIPs only

The old saying warns us that the moment you start receiving market tips from cab drivers that´s when you must sell, fast.

When it comes to quantitative finance education, similar bubble-detecting signs can be found, this time emanating not from cabbies but from relevance-seeking academics.

I have recently been made aware of a proposal to offer a quant finance degree at a completely unsuitable institution. This proposal comes from an individual with an econometrics background and four or five graduate degrees under his belt. His main sales pitch seems to be "this is a must for business schools", with no apparent further explanation.

He displays a complete disregard for the reality of the targeted institution, which does not house a math, statistics, engineering, physics, or computer science department. Not a single mathematician, engineer, physicist, or C++ expert works at such institution. A course in quant finance has never been offered over there. The local market for quants is, to put it mildly, limited. The chances for this institution of successfully competing globally in the market for quant education would be insignificant. Anyone who spends five minutes analyzing the institution would instantly understand that it is as bad a fit to quant finance as cricket would be to America.

Why then would this individual peddle the idea of a quant finance program to such an unseemly place? There are two reasons: one, he is aware that for the past few years a bubble in quant finance degrees has been developing throughout universities across the world, and like a cab driver would do with equities, he feels a tip is the proper thing to do; second, he probably wants to take advantage of the bubble to guarantee profits for himself, here in the form of an academic post. In essence, by peddling quant finance to a far-from-quanty school the peddler is trying to con the naive innocent into joining the bubble. As we all know, it is precisely the late-entrant innocent that gets slaughtered once a bubble irremediably bursts.

The main lesson of this story is that quant finance education is a very tough field and that only a few institutions can truly offer top-notch programs. Quant finance, simply put, is not for everyone. It´s only for VIPs, those that posses the necessary mathematical and computational muscle, and that can also boast the presence of experts who can really explain how things are done in the real world. Also, you need a strong quant job market nearby.

It is my personal opinion that many of the universities that have joined the quant bandwagon in recent years are going to have a lot of trouble trying to keep pace with the top programs. You see, in the MBA world a top-50 school can still do very well. It can deliver a satisfactory education and can place its graduates well. Though being top-10 would be nice, being top-50 is not a threat either to reputation or to existence.

When it comes to quant finance, not being top is almost akin to not being. Quant jobs are much more limited, and thus employers can be much more selective. Of course, when it comes to quant finance there can be no bull: either you are really proficient at C++ and stochastic calculus, or you aren´t. Managerial or sales jobs, in contrast, are accesible without such a high knowledge-based barrier. If the interviewer happens to like you, you can get in independent of your brainpower or school pedigree. Not so, clearly, with quant finance. Knowing your stuff and having studied under star professors carries decisive weight.

That is why it would be reputational suicide to offer a quant finance degree unless you can really aspire to be considered elite. Last thing you want is to see your students being systematically slaughtered at job interviews, and your name consequently dragged through the mud. People need to understand that the barriers to entry when it comes to quant finance are very high and that you just cannot become a leader in C++ and numerical methods overnight simply because some individual tells you that you´ve got to buy into that quant finance thing.

Everyone wants to be invited to the Playboy mansion, but very few have what it takes to get in and enjoy the untold pleasures. Same with quant finance education. It is a highly tempting, very exciting, rewards-filled world that is strictly reserved to those VIPs who boast the required very-hard-to-get credentials. Just as it would be delusional to dream of mingling with the drop-dead gorgeous playmates when Hugh Heffner doesn´t even know your name, it would be suicidal to think that you can make it in quant finance when you are not endowed with any of the indispensable resources.

ptriana@profesor.ie.edu

An Interesting Quote

I recently started to re-read Paul Krugman´s “The Accidental Theorist” (I have always deeply admired his writing style, though I half-regret his semi-conversion from international economist into political pundit), and came across the following quote: “The old cliches are absolutely true: it is not only harder but more time-consuming to write a 1300-word, plain-English article for the general public than to write a 5000-word, equation-laden paper for a professional journal”.

Insightful stuff. My gut feeling tells me that he is correct. But if so, what are the implications for academic careerism? I mean, if what Krugman says is true, shouldn´t universities value original pieces in general interest publications at least as highly as theoretical contributions in jargon-filled journals? For a piece to be published in, say, the NY Times or the Financial Times it usually must contain a pretty high degree of originality and insightfulness (if only because you are competing with dozens of other potential contributors). In contrast, many of the things that find a home inside academic journals tend not to offer much that´s really new, let alone stuff that a non-academic would want to browse through.

If we all agree that the role of academic institutions should be to advance knowledge, does it make sense to show a bias precisely against those works that a) do offer something innovative, b) reach a lot of folks? Isn´t it a bit contradictory to show a brutal preference towards output that many times presents nothing new and that would only be read by a small group of like-minded peers?.

Executives inside both financial institutions and corporations read the NY Times and the Financial Times everyday (ok, make that the NY Post and the WSJ in some cases). I would bet heavily against the possibility that they also read the Journal of Finance and Econometrica. Economics and Finance departments should be (I guess) expected to try to cater to those people whose very actions the professors try to explain and model. Why, then, would writing for those people be penalized, not rewarded?.

Krugman can boast a powerful combination: a renowned theorist who also happens to know how to talk to the world. Those two attributes make him into a very desirable prospect for any top school in the world. Unfortunately, it seems likely that those institutions would instinctively find the former skill way more valuable than the latter. That´s a pity because, as the Princeton-based man reminds us, developing insights for the average reader is the hardest part.

What B-Schools Can Learn From Option Theorists

The other day I was watching a re-run of the movie “Patch Adams”, where an idealistic young doctor wonderfully portrayed by Robin Williams is relentlessly subjected to attacks and harassment by the medical school’s dean, mainly for the unforgivable sin of spending lots of time at the hospital interacting with patients. Apparently, the dean believed that more hours immersed in theoretical books instead of dealing with real patients and nurses is what a true doctor needs. In the end, Patch is purportedly dismissed from the school, only to be rehabilitated by a panel later.

Applying the movie’s message to the state of b-schools, we might ask ourselves: how many professors want to be like Patch Adams, always priming practice and customer attention over theory? do b-school deans show the same prejudice in favour of theory and taste for the repression of alternative views as the one in the movie? do professors have Patch-like willingness and courage to confront a system they may deem too narrow-minded?.

Business faculty must remember that arguably the most influential contribution ever to come out of a b-school, namely the Nobel prize-winning Black-Scholes-Merton option pricing model, was designed by people who had a profound interest in the real world, and who subsequently went on to play key roles as high-level practitioners (in general, without abandoning their academic careers). Fisher Black became a Partner at Goldman Sachs. Myron Scholes was a Managing Director at Salomon Brothers and LTCM (which, in spite of its final downfall, was the premier hedge fund for many years) and currently manages money for one of America’s wealthiest families. Robert Merton held senior roles at LTCM and JP Morgan, and has recently founded a highly sophisticated financial consultancy firm.

Surely, these are the kind of people that students would like to see in the classroom, capable of producing the most relevant research as well as boasting the most cutting-edge practical experience. To b-school deans out there the message should be loud and clear: put a Black, a Scholes, or a Merton in your life!. And clearly, all well-meaning professors should attempt to at least try to emulate the outstanding academic-practitioner combination of the trio.

In this regard, the now sadly deceased Black had something extremely relevant to say, even more than ten years ago: on being awarded the prestigious Financial Engineer of the Year award in 1994, he flatly stated that he much preferred applied research to pure research, and that professors should be hired, promoted, and paid for their teaching, and not their research. Think this message would be generally well received in today’s b-school environment?.