<p>All joking around aside, and in fairness to the finance academic community (and the management academic community in general), I wouldn’t go so far as to say that they produce absolutely nothing of value whatsoever. They probably do produce some value-add. </p>
<p>But my point is that that value-add is highly limited, as social systems such as financial markets are bewilderingly complex - as the events of the last few years have vividly demonstrated. Almost every observer of the finance system - and especially members of the finance academic community - will readily concede that there is a great deal about the behavior of financial markets that they simply don’t understand. Indeed, that is the very raison d’etre of finance academia, for if we mostly understood how financial markets operated, then, frankly, we wouldn’t really need that many finance academic researchers. In fact, many people suspect that financial markets may be inherently and permanently inscrutable, as markets - unlike electrons or photons - will adjust their behavior in response to academic research. For example, the publication of the aforementioned Black-Scholes model triggered a change in real-world options markets such that real-world options prices correlated more tightly with the theoretical prices after the model was published, compared to before. </p>
<p>But what I absolutely cannot accept with a straight face is the notion that just because finance professors may earn high-paid consulting fees from Wall Street, that must mean that financial academic research must automatically be valuable. Come on - anybody who has ever worked in the private sector has surely realized that companies do stupid things all the time. This is particularly true of the large banks which have proven as an aggregate sector to be incompetently managed time and time again, with the events of the prior decade being tragic proof of that.</p>
<p>So to return to the OP’s question, the reason why most business school professors don’t start their own hedge fund or business is because they can’t, and they have the self-awareness to know that they can’t. {On the other hand, they are perfectly happy to sell their consulting services to clients, for as a consultant, you don’t really care whether your proposals are sound or not as you will be paid either way. Nice gig if you can get it.}</p>
<p>Dude, you are a clown. Do you even work in finance. Yes, my friend working at UBS, making 6 figures on a trading desk, using my professors research for training. </p>
<p>You are maybe an undergrad. Probably a high school student. If you are anything but that you are mediocre at best. Stop influencing these kids on this site.</p>
<p>Please post what you do. Stop misleading these kids. It is sad. Zero chance you know more about business than I do. Frankly, jack shi*t chance you know more about anything than I do. Learn how to get your point across without writing a book.</p>
<p>PS. CAPM is used throughout finance, whether it is perfect or not.</p>
<p>Dude, you are a clown. I’m quite certain that my CV would bury yours. If I am mediocre, I wonder what that makes you? </p>
<p>I do admit to being confused about your point about having a friend making 6 figures in finance at UBS while using professors’ research for training purposes. So what? I’ve already established - and the events of the last 10 days have highlighted in stark relief - that UBS is an incompetently managed firm. Hence, I’m sure that there are plenty of people at UBS making plenty of money that, frankly, they should not be making. After all, if a firm can’t even prevent a low-level trader from losing over $2 billion in unauthorized trades (as you would think that after $1 billion in losses, management would have caught on. then would it then really be surprising to find that plenty of other people are probably looting the compnay as well? </p>
<p>What I would say is congratulations to your friend for taking money from a poorly managed company. All of us would surely do the same, myself included. But that doesn’t mean that the research he was using actually creates value. </p>
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<p>Hahaha, I never said that I was a big-shot. I never said that I understood finance well, and indeed that is the central point: nobody really does, finance professors included. Any finance professor who is being honest would readily concede that financial markets are far more complex than they had realized even a few years ago, as the crash has amply demonstrated. </p>
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<p>You have no clue what I am talking about. I’m quite certain that I know how hedge funds are established better than you do. And I also know full well that very few finance professors can successfully establish one - which speaks to the OP’s question. </p>
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<p>I think the chances are more like 100% that I know far more than you do. The postings on this thread have clearly demonstrated as much. I have presented extensive evidence to support my position. What have you presented? </p>
<p>Let me put it you this way. You continue to assert that academic finance research is useful. Let me ask you a question - how much finance research have you actually read? Pop quiz: Without looking any of it up, answer for me the following questions if you can:</p>
<p>Who’s the current President of the American Finance Association? </p>
<p>Who are the current editors of JoF, JFE, and/or JAR? </p>
<p>What organizations publish them?</p>
<p>How many authors can you name who have published in the current issues of any of those journals?</p>
<p>By far the two most tools used in modern empirical finance research are instrumental variables and matching estimators. Have you ever used either of these tools? Do you know what the difference is between the two? Do you even know what they are at all? </p>
<p>If you can’t answer these questions, then I don’t know how you can claim to understand finance academic research better than I do. I don’t claim to be an expert on finance - it’s not even my field of focus - but I can answer all of those questions. I suspect that have even a passing interest in academic finance could answer most of them. Can you? {You also said that I must be a high-schooler, and while I don’t know about your high school, I didn’t know many high school kids who could answer any of those questions.} </p>
<p>So what’s your point regarding how I supposed don’t know more than you do? </p>
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<p>Again, so what? Just because a technique is widely used doesn’t mean that it is valuable. Bloodletting once was a widely utilized practice in medicine in the 1800’s, but that doesn’t mean that it was valuable. Finance currently is nowhere near to being a reliable science, but probably is more akin to medicine in the 1800’s. Most finance researchers I think would freely concede this point. </p>
<p>Hence, my central question to you is, MSFHQsite, exactly why are you so confident about the validity of finance research, when even the finance academic community would readily concede that they understand relatively little about how financial markets work, and vast swaths remain to be discovered? Heck, there is now a burning suspicion within the finance community that many things that they thought were true are simply not so and should be overturned, with the crash serving as the impetus for such soul-searching. So if even the finance community is inundated with such pervasive self-doubt, why do you remain so confident? </p>
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<p>I have a better suggestion. If you don’t like my posts because they’re too long, *don’t read them. Nobody has a gun to your head. </p>
<p>But people who want to read my posts should be allowed to do so. If nobody does, then I’m just wasting my time, which should be of no concern of yours. </p>
<p>But what are you afraid of? Seems to me that you’re afraid that readers here might find my posts to be far more convincing than yours. If so, then you should write better posts with better evidence.</p>
<p>1) I am pretty transparent about my experience and education. I’ve read countless academic papers and have worked as a graduate assistant helping with research for them. </p>
<p>2) I work in PE and we routinely discuss research, financial theory and other topics. My friends who all work in finance utilize CAPM, Black Scholes, French Fama, etc. This is the core of finance.</p>
<p>3) Professors I personally know are paid to consult and advise at some of the largest banks in the world. This advice and their research are incorporated into trading strategies, hedging, new structured products, etc. They make money for these banks. If value was not created, these banks would not pay for their services. Market forces in action. </p>
<p>4) Starting a fund is about fund raising and access to capital. This requires a network of potential investors. When you research for a living your network is different.</p>
<p>5) You mask vague points in long winded posts. You might have a more distinguished CV than I do, you might not. Regardless, I work in finance, always have, have two masters, have read numerous academic papers, have helped research these papers, have multiple personal professors who work/consult in finance as well as friends who work in the industry and utilize academic research on a daily basis. </p>
<p>6) I am not afraid of anything you post. Your opinion is either wrong or too broad. You might be correct in a narrow sense, that most accounting professors simply teach or most finance professors simply teach, but at major universities, the research they provide is used on the street very regularly. </p>
<p>7) Just because you can’t predict a long tail event doesn’t mean everything you do is invalidated. PhD’s are not oracles. </p>
<p>Really? Then (without looking anything up), you should have had little problem answering any of the questions I posed in post #25. Anybody who has even a modicum of connection to the academic finance space would have found them to be trivial. {Heck, I don’t even claim to be an expert on academic finance, yet I knew the answers.} </p>
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<p>So? The four bodily humors used to be the “core” of Western medical knowledge. Just because something is the “core” of a discipline doesn’t mean that it is correct or useful, particularly in a discipline as intellectually young as finance, a point that practically every finance academic would concede. </p>
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<p>Wrong again, and this is the central point of disagreement: market forces are not determinative when talking about finance. The finance industry does stupid things all the time: heck, the entire last few years served as nothing less than a litany of a parade of horrible choices that the finance industry has enacted, and continues to enact. Public regulatory reports regarding the financial crisis have now demonstrated that nearly every single major bank and broker-dealer in the US, Goldman included, was technically insolvent at least once during the depths of the crash. </p>
<p>So then ask yourself - why didn’t the entire financial system fall down? And the answer is simple - the government bailed them out, not just through TARP capital injections, but far more importantly, through the impressively creative litany of liquidity facilities that the Federal Reserve made available to the finance industry, and only the finance industry. You and I couldn’t invoke those facilities. But the finance industry could and did to the tune of billions of dollars of emergency funding. </p>
<p>What that therefore demonstrates is that the finance industry is clearly not a free market and never will be. It will never be subject to pure market forces because the government will always bail out the system whenever necessary. The industry knows that fully well; the moral hazard is now irrevocably baked into the system. </p>
<p>So don’t tell me that market forces are the explanatory disciplining force that determines the structure of the finance industry as it is today. If market forces had been allowed to roam free, then frankly, there would no finance industry whatsoever today, as practically all of the firms would now be bankrupt. What that means is that you wouldn’t have a job, your friend at UBS wouldn’t have a job, the thousands of others working in the finance industry, and all of those finance professors with cushy consulting contracts would have them abrogated, and, frankly, most of finance academia would eventually wither away (as finance departments would stop hiring new faculty and currently tenured faculty would eventually retire). The only reason that the finance industry is even alive today at all is precisely because dramatic government action saved the industry from market forces. </p>
<p>Look into your heart - you know it’s true. I don’t think I’m saying anything that you don’t already know. </p>
<p>But what that also means is that we must return back to my basic point: just because the finance industry does something doesn’t mean that it is valuable to do so, nor are they subject to the discipline of market forces. The finance industry has done plenty of stupid, non-value-added activities, and will surely do plenty more. Heck, the entire 2000’s was an entire orgy of value-destruction by the finance industry. If the industry could waste billions of dollars of capital on dodgy securities, it is really so outrageous to believe that they may have also wasted mere millions on finance consulting contracts with academia? </p>
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<p>Right, so you’re agreeing with me that most finance professors can’t reasonably start their own hedge fund, which then answers the OP’s question. </p>
<p>But more to the point, not only do most finance professors lack the appropriate social network of investors to launch their own fund, they’re also not building such a social network either. To be a successful finance tenure-track academic basically means that you must spend most of your time talking to other academics, hence providing you with little opportunity to build an investor network. </p>
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<p>And again, if you are as knowledgeable about academic finance as you claimed, then you would been able to answer my questions with little difficulty. Heck, like I freely admitted, finance isn’t even my specialty, yet I was able to answer them. Those for whom finance is their specialty would surely be able to answer far more esoteric questions than those. </p>
<p>Now, don’t get me wrong, I’m not saying that everybody needs to be cognizant about the landscape of academic finance. But it does call into question the premise that one can conclude that most academic finance research is highly valuable if you’re not familiar with the landscape. I think even most finance researchers would conclude that the overwhelming majority of finance literature has proven not to be useful. </p>
<p>If you continue to disagree, then here’s a simple question. Name me an article published in the latest issue in a top finance or accounting journal that must surely provide tremendous value to the industry, such that you’re sure that a fund could surely generate alpha by using the paper. </p>
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<p>And like I’ve been saying repeatedly, just because research is used doesn’t mean that it is useful. If research was truly so useful, then I have to return to the basic question - why was the industry unable to avoid the crash? I could understand perhaps one or two firms falling down, but like I said, practically every single major US bank and broker-dealer was effectively insolvent at one point or another during the midst of the crisis. The default of most major US banks would have then surely sundered almost all of the hedge fund and PE industry. Merely consider the chaos foisted upon the hedge fund industry when Lehman Brothers died, locking billions of hedge fund capital within its prime brokerage. Now imagine that increased by several orders of magnitude had the government not actually saved the industry from market forces but rather allowed all of them to default and die. Be honest - how many hedge funds would still be alive now? </p>
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<p>Uh, why not? Those ‘long tail’ events are not just minor one-off events, but are pretty darn important, are they not? Like I said, the crash has basically wiped out nearly all capital gains of the finance sector over the last decade. What’s so great about financial research that allows you to make profits from years 1-9, only to lose all of it in year 10? </p>
<p>And besides, that ‘long tail’ doesn’t really seem to be all that long anyway, but rather seems to be a quite ‘stubby tail’. Financial crises seem to happen every 10 years or so: 1997 saw the Asian financial crisis, the late 80’s/early 90’s saw the Savings & Loan crisis, 1982 witnessed the Mexican Weekend which instigated the Latin American debt crisis, the 1970’s saw the so-called “Secondary” Banking Crisis, and so on. Doesn’t seem to be much of a long tail to me if it keeps happening over and over again. </p>
<p>I could understand if we were truly talking about a once-in-a-millenia or even a once-in-a-century event that nobody could foresee. But that’s not what we’re talking about; crashes seem to be fairly commonplace, and any truly useful financial model ought to account for that commonality. </p>
<p>You continue to assert that PhD’s are not oracles. Um, why not? That is the standard used in the sciences. Physics PhD’s will predict that an electron will move in a certain direction in response to certain forces, and it does. Chemistry PhD’s will predict that a certain reaction will occur, and it does. Biology PhD’s will predict that a certain gene will produce a certain protein, and it does. Why shouldn’t we expect finance Phd’s to do the same? The point of science is to be able to predict. {That is, unless you’re willing to concede that finance is not a science, but if that’s the case, then what is it?} </p>
<p>I’m not disqualifying your friends experience. What I am disqualifying is UBS’s management competence. I think that all of us - including importantly the Swiss banking regulators - can agree that UBS is an incompetently managed firm. </p>
<p>So maybe your friend found a way to be overpaid by an incompetently managed firm. Good for him, as I too would like to be overpaid by an incompetently managed firm. Who wouldn’t? </p>
<p>But that has absolutely no bearing on whether the academic research he was using was actually useful. {That is, unless your definition of ‘useful’ means being able to separate an incompetently managed firm from its money.} Try better next time.</p>
<p>Learn how to make your point concisely, it will benefit you during your undergraduate career. </p>
<p>LTCM was a liquidity event. Had they been able to hold their positions it would of been immensely profitable. </p>
<p>I am a practitioner who has read and continues to read academic papers and research. I do not publish in journals or focus on any specific one.</p>
<p>Professors not being able to start HF’s is indicative of them not being in the industry or having a network. Nothing else. Is every lawyer who doesn’t start a practice a failure? </p>
<p>Market forces don’t apply to finance? Wow, didn’t realize I was working in a nebulous. Market forces influence rates, deal flow, how long funds can hold investments, etc. To sa otherwise is silly. </p>
<p>I can do this all day. You try and split hairs, but when numerous friends of mine on the street are using research to incorporate into their day to day, with profit being their measuring stick, I call that value added. CAPM, BS, etc all stem from research and have been used to increase transparency, market efficiency, pricing, etc. That causes lower costs or increased profits. </p>
<p>Additionally, just because research in the last journal or 6 journals haven’t been anything ground breaking doesn’t mean research is useless. Things are incremental. You build on previous research. </p>
<p>Kids - Here it is in a nutshell. Some professors just like to teach, but many of them also work, have worked or consult within business. Teaching is a different lifestyle, pace, rewards, etc than private employment. At the UG level you never really see professors in their best light. When you have a PhD it is mundane teaching basic accounting. As you get older or advance in your academic career you will start looking at the research they do and you will see what really goes on. </p>
<p>Kind of like pricing options. In the beginning you see the price and don’t think much about it. Then you learn about binomial pricing and black scholes. Then you learn about the inputs within BS and how to calculate it and how each of the elements influence price, etc. It is a progression of understanding. At the basic level you think it is simple and don’t know what the big deal is about. As you progress in your understanding and learning you see how complex it is and you see all the work that lead up to this point.</p>
<p>It’s a very interesting debate between the two of you, i don’t think the OP expected this when he asked a seemingly innocent question
Nonetheless, i really enjoyed reading the previous posts, i just want to pitch in my opinion:</p>
<p>1) i hope you both agree that economics is not an exact science - it is 95% a social science. Why? Because of RISK!! different people value risk differently, and since it is impossible to model risk, all other models lose some credibility - albeit they remain accurate to a certain degree. In fact this is the only accurate mathematics in economics: the utility of money is different to different people, therefore a stock that looks a good catch for you, might be a crazy trade for me!</p>
<p>2) for a long part of this debate, you were speaking different languages: MSFHQ was saying the academic research is used, while sakky was saying that although it is used, research is not ‘useful’ since it wasn’t able for once to predict a market collapse. well since neither tried to disprove the other, you are both correct: academic research in economics has no practical use in predicting the economy, but it is used by most big banks, and in fact handsomely rewarded by them</p>
<p>let’s take the idea of academic research to another field, say engineering (i’m more familiar with this than finance). If i am developing a new V6 engine, and i have one engine that under identical circumstances cannot perform as i modeled it to whereas the 999 other engines follow the model exactly, then I HAVE AN INCOMPLETE MODEL. A fancy word that gets thrown around is 6-sigma which means you are allowed to have 3 defects (i.e. deviation from the model) per MILLION, so unless you have less than 3engines from a batch of 1million that are acting not according to the model, your model will not be acceptable. THIS IS AN EXAMPLE OF AN EXACT SCIENCE pinpointing your location via GPS to within 20 feet is an exact science… but economics is not, and will never be (and the reason is IMO the point 1 above).</p>
<p>i cannot see how academic research in economics can produce results that are true 99.999% of the time - if it can then yes academic research has value, but as it is today economic research is nowhere near being able to predict results, let alone predict with a 99.99966% degree of accuracy!! sakky was more lenient, is there a model that was able in the past 60 years to predict a market collapse. Can all the Ph.Ds tell me how much will the S&P500 move tomorrow? (and this is supposed to be a simple question)</p>
<p>To sum up this point, Ph.D. engineers are paid to predict, because their predictions WORK (as sakky said: Maxwell equations model the electromagnetic theory to a reasonable accuracy, when i turn on the computer it works 99.999999% of the time). BUT!!! why do economics Ph.D.s get paid even more $$?</p>
<p>The reason is financial services is a brand based industry!</p>
<p>Financial services will always be a brand based industry because it is so much easier to tell a company or a wealthy investor that your resources will be managed by this Harvard graduate, than trying to convince them that the graduate of U-of-Nowhere is just as good! This Ph.D. research - which is <1% useful in practice - is more useful as a marketing tool: “Hey I am a hedge fund managed by the brightest Ph.D.s from the best Universities, your money is ‘more smartly’ managed with me” Don’t you agree that it is much easier for UBS to ask for investor money if it boasts its arsenal of PhD consultants… the irony is that all the PhD finance/economics cannot and will never be able to answer a simple question like by how many points will the DOW change tomorrow!</p>
<p>anyway this is my viewpoint, i tried to make it as scientific and logical as possible. Excuse me if i am way off, but i wanted to add an outsider’s view to the debate… so don’t go hard on me, both of you!</p>
<p>Disclaimer: I have never worked in finance or studied it formally (beyond ECON 201 and 202 at undergrad)! I am a recently minted engineer who has been a practicing engineer for the past 5 months :)</p>
<p>Um, like I said, I’m sure that my CV can outclass yours any day. </p>
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<p>Really? Then here’s a simple question that anybody familiar with the academic literature should be able to answer easily: without looking it up, what’s the difference between an unbiased vs. a consistent estimator? Specifically, give me an example of a biased but consistent estimator and an unbiased but inconsistent estimator. </p>
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<p>But that’s the point. They weren’t able to hold their positions…and one would think that models guided by Nobel Memorial Prize winners would have accounted for that. Properly functioning models are supposed to account for the fact that a liquidity event might occur and that you may not be able to maintain your holdings. </p>
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<p>So once again, we are agreeing on the central question that the OP raised: most finance professors cannot start their own successful hedge fund. We can argue about the reasons why they cannot, but the fact is, we agree that they cannot. </p>
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<p>I didn’t say that market forces don’t apply to finance. What I said is that market forces are not the only force that applies to the financial industry, and that specifically, the finance industry is not an unfettered free market, and likely never will be. </p>
<p>I said it before, and I’ll say it again: if the governments of the developed world had not bailed out the finance industry in the last few years (and may have to continue to do so, particularly in Europe), frankly, there wouldn’t be any finance industry at all. What exactly do bailouts and emergency central banking liquidity facilities established by fiat have to do with market forces? In fact, it was those very market forces that, if left unchecked, would have caused the entire industry to default, and you, your UBS friend, and (eventually) most finance professors would be out of their jobs. </p>
<p>In other words, it is precisely the non-market forces that have allowed the finance industry to remain alive. Indeed, non-market forces clearly trumped market forces, and therefore market forces are only a relatively minor force in determining the shape of the industry. To say otherwise is silly. </p>
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<p>Uh, you keep confusing the central point. Just because something is used throughout an industry doesn’t mean that it is useful. As we have seen to our great dismay over the last decades, lots of techniques were used throughout the finance industry that caused great damage both to themselves and to the greater economy. The investment into CDO’s tranched with dodgy mortgage-backed securities, or even synthetic derivatives, all supposedly certified with “AAA” ratings, was widely used and resulted in widespread wealth destruction. I think all of us - including the banks themselves - would agree that the use of that strategy was not useful. </p>
<p>I continue to ask the question, if the finance industry was so well-managed, then why did practically all of the major broker-dealers and banks require non-market intervention via bailouts or other emergency liquidity facilities? Retrospective analyses upon the industry indicate that practically every one of those banks - Goldman included - was technically insolvent at one point in time or another. Every of them should have therefore defaulted if free market forces truly held sway. Heck, we can see even now that the only reason that the European banking system is even alive today at all is because of the extensive intervention by the IMF, ECB, and the EFSF (and, by extension, the governments that back those institutions). The finance industry has proven again over and over that they are not optimized for value-creation.</p>
<p>MSFHQsite, frankly, I’m amazed that you would even continue to argue this point. Has the empirical evidence of the last few years not convinced you that the notion that the financial industry is a well-managed, value-generating system that is governed solely by free market forces is, frankly, ludicrous on its face? Even fans of the American auto industry would surely readily concede that the industry was not well-managed prior to its bailout. Yet you continue to assert that the finance industry is? All one needs to do is pick up the newspaper to read about the continuing litany of horribles that continues to plague the finance industry. </p>
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<p>Yes, this incremental research that was built upon has given the world the biggest financial calamity since the Great Depression. </p>
<p>Again, I am hardly the only one saying so. Paul Krugman has stated that he believes that much of the research conducted over the last few decades is worthless. Russ Roberts has noted that while airplane crashes have become less frequent and less deadly over time as aerospace engineering research advances, financial crashes have actually become more frequent and more destructive over time. Daniel Davies has decried the fact that it will be ‘fuc.ing embarrassing’ (the F-bomb is his, not mine) when historians look back and note that academia was publishing quirky papers on sumo wrestling and speed-dating while the Great Bubble was inflating. None other than Queen Elizabeth II herself pointedly asked the economics faculty of the London School of Economics during a public forum why they were unable to predict the crash. Heck, even Raghuram Rajan, the current President of the AFA and former chief economist of the IMF, has decried the fact that much finance research was used not to generate value but to fool regulators and investors by disguising risk (hence, disguising Beta as Alpha). </p>
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<p>Kids, here it is in a nutshell. Finance is not a science, and likely never will be. At very best, it is a proto-science, and probably more accurately described as voodoo or witchdoctor-craft, akin to the use of bloodletting or trepanning in the early days of medicine. Finance academia has yet to devise a set of core theories that could be said to be scientific in the sense of producing reliable, non-obvious empricial predictions. All they can offer at this time are unfalsifiable mathematical tautologies such as CAPM or reflexive expressions such as Black-Scholes. </p>
<p>Now, to be fair, that doesn’t mean that finance shouldn’t be studied. I entirely agree that finance is a worthy field of academic investigation. But at the same time, we should not kid ourselves that we know more than we really do. The ongoing events of the last few years are emphatic proof that we know little about how real-world financial markets - as opposed to the perfect models envisioned by academia - actually behave. Maybe in 100 years, finance will become scientific, but we’re certainly nowhere near to being there now.</p>
<p>And finally, I would re-emphasize that the finance industry as a whole would have become completely rent asunder had it not been rescued by the ultimate non-market force of governments. Short of value-add via lowered cost and profit generation, much of the finance industry is therefore characterized by value-shifting, or more specifically, risk-shifting to the taxpayers. The finance industry will make high-variance bets, : when those bets succeed, they make huge bonuses, but when those bets fail, they just stick the taxpayers with the bill. To use economic parlance, this is not value-generation but rather a form of rent-seeking, that is, essentially extracting resources from society. </p>
<p>I find it odd indeed that many, probably most, finance academics are now engaged in a meditative period of deep soul-searching as they rummage through the wreckage of the crash to see what of their research can be salvaged. Yet, you, MSFHQsite, seem unbowed, as if the ongoing calamity had never happened. We’re all entitled to our own opinions, but we’re not all entitled to our own facts.</p>
<p>Well, at the risk of being disputatious and arrogant, I would say that I am more correct than MSFHQ because while we both agree that academic research is used in the finance industry (which I never disputed), the animating question is whether something is ‘used’ automatically proves that it is useful. I continue to reject that assumption, as the events of the last few years have emphatically proved that numerous financial techniques were pervasively used but proved not only to be useless, but indeed destructive. </p>
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<p>Well, to be fair, engineering - or at least, certain aspects of it - is also a brand-based industry. For example, I can think of numerous people who strongly prefer to buy luxury cars from BMW’s, Benz’s, or Audi’s because of the supposedly superior German engineering…yet who have never themselves studied engineering and know relatively little about why German engineering is supposedly superior, and ignore the fact that German luxury cars do not rank higher on quality and reliability metrics than their US or Asian luxury counterparts. And surely all of us can think of somebody who will buy products from Apple - (Steve Jobs, God rest his soul) - because they are members of the ‘Apple Cult’. Yet neither do German luxury auto companies nor does Apple pay millions to their PhD engineers, even if they come from name-brand engineering schools such as MIT or Stanford. Heck, a PhD engineering graduate from MIT will surely make far more money by taking a job in finance than by staying in engineering.</p>
<p>You can debate the usage of the word “used” all you want, but quants, PhD’s and other academic research is fundamental for making money in a variety of Wall Street fields. </p>
<p>On the street, ROI is what matters. Destructiveness is subjective.</p>
<p>I’ve read some of your posts regarding your views on jobs in finance, MBA placements, and management consulting recently. I found your insights and knowledge on these matters to be very thoughtful and impressive. As a result, I would like to ask you some questions and advice regarding my situation and career aspiration.</p>
<p>To tell you briefly about myself, I recently graduated from a lower tier Ivy with degree in Econ. I did decently well, and had 3.7 GPA by the time of graduation. Last year, I went through on-campus recruiting, and, it was brutal. 2 of BB’s didn’t even show up to recruit at campus and like 500 kids from my school applied to 4 analyst jobs at BCG. Although I strongly desired to break into IBD or consulting, I couldn’t cut it.</p>
<p>After striking out on finance, I did not know what else I had to do. And, I prepped hard for LSAT because I thought going to a top law school wouldn’t be a bad idea, even if I didn’t know much about a career in law. I ended up getting into Columbia Law, and plan to attend Columbia Law next year. Right now, I am working as a BigLaw paralegal to save up some money and build up my resume to better position myself to get a top NYC big law firm job, once I am in law school.</p>
<p>I was wondering if you have advice as to how I could break into IBD or private equity after working at M&A corporate NYC law at BigLaw firm. It seems like that is the only legitimate route I should take, given my circumstances. My eventual goal is to get a job that is lucrative, fast-paced, has good exit opps, and has a lot of client interaction. (Which I believe is finance…) </p>
<p>Right now, I am kinda frustrated since I want to get into banking. Doing law and going to a law school don’t sound terrible to me, but I just want to use it as a stepping stone to get into finance. I know that you can get into banking/PE/Consulting out of a top MBA, but, top MBA’s require several years of strong work experiences, which I won’t have. And, even if I manage to get into a top MBA program, I am not sure if I will score a IBD gig with certainty given the fact that I did not have pre-MBA IBD analyst or consulting gig. Additionally, getting into a top MBA is a long-shot and I don’t want to spend 5 years working with uncertain future of whether or not I will make the cut at a top MBA program…</p>
<p>But, I would appreciate any advice you might have regarding my situation. Also, I heard from many that I need to ‘network’ to get a job in IBD, or even ‘network’ once I try to lateral out of law to IBD/ finance. However, I’ve never tried networking before my life, and I don’t know what specific steps or actions constitute effective tools for ‘networking’. For instance, I don’t even know how to find alums from my school who work at X, Y, Z i-bank and how to target them to networking purposes… I was wondering if you could give me some tips on this area, as well.</p>
<p>Lastly, what would you say are pros and cons of doing banking vs. law?? I would greatly appreciate your advice.</p>
<p>Please feel free to shoot me a PM or email in response if that is more convenient. I couldn’t shoot you a PM because your inbox is full.</p>
<p>Is it? That’s actually an empirical question, but on the face of it, the evidence seems strikingly poor. I’ve said it before, and I’ll say it again: if the financial services industry was so proficient at making money, then why has it required massive government bailouts throughout the world during the last 3 years? Heck, why are the bailouts continuing to happen? For example, just a few days ago, the governments of Belgium and France announced a bailout of Dexia, one of the largest banks in Europe. I suspect that that’s only the first of a long series of bailouts of European banks, as the sovereign debt crisis reaches its crescendo. {Heck, the only reason why many European banks are even alive today at all is because of the extensive non-market-based support being provided by the ECB and the EFSF.} </p>
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<p>Really? Subjectivity means that one can perhaps argue that about whether something is true or not. Extensive worldwide taxpayer bailouts - in fact, some of the largest bailouts of any industry in history - are not ‘subjective’. Nobody can argue about whether they did or did not happen, for they actually happened. Since you raised the example of UBS, are you going to argue that it was ‘subjective’ whether the Swiss government implemented a 6 billion CHF capital injection into UBS? Whether USB offloaded a multi-billion franc portfolio of questionable securities into a ‘bad bank’ with the cooperation of the Swiss central bank? Whether UBS in 2009 announced the largest annual loss of any company in the history of Switzerland? Are any of these events ‘subjective’ - that they might not have actually happened?</p>
<p>I don’t think it is subjective in the least, but rather an indisputable fact, that financial firms have managed to destroy hundreds of billions of dollars of value in recent history. Otherwise, why did governments bail them out? Why did central banks open heretofore undreamed emergency liquidity facilities for them? Heck, why did governments who bailed out banks then require bailouts themselves (ask Ireland and Iceland)? Was that all just for fun? More importantly, was any of that ‘subjective’? </p>
<p>I said it before and I’ll say it again: the only reason that the financial services industry as we know it is even alive today at all is not because of market forces, but rather because of the extensive non-market forces, but rather the sociopolitical forces, of government and central banking intervention. In fact, if free market forces truly held sway, then many (almost certainly most) of the world’s major banks and broker-dealers would have gone bankrupt because they were technically insolvent according to mark-to-market calculations. Even now, government bailouts continue to prop up the balance sheets of European banks that are riddled with dodgy sovereign debt. </p>
<p>So, MSFHQsite, it seems to me, you have two choices regarding the value of academic finance research, both unpalatable. Pick one:</p>
<h1>1) Academic finance research was extensively used by the industry and directly contributed to the poor investment choices being made, thereby necessitating a deluge of taxpayer support. In this case, the research clearly destroyed value.</h1>
<h1>2) The academic finance research was not responsible for those poor investment choices that those firms enacted anyway. But in that case, that means that the research was not really heavily used, because it was precisely the aftermath of those poor choices that have dominated the financial landscape in the last few years.</h1>
<p>To be as charitable I can be, I’ll even allow a ‘third’ option:</p>
<h1>3) The research was heavily used, with some firms utilizing it well in order to curb losses and even generate profits (although such firms seem to be few and far between) with other firms either not using the research at all or using it poorly, and those latter firms are responsible for the carnage we see before us today. But that’s just a weighted combination of options #1 and #2.</h1>
<p>But in any case, either academic research was widely used and therefore was responsible for the financial crisis. Or it wasn’t widely used at all. Either way, it doesn’t exactly speak well for the value-add that research provides. But in any case, something is responsible for the crisis.</p>
<p>Actually, this is not strictly correct. It is certainly true that most top MBA students will have work experience. Yet you will still find a small minority of MBA students at top B-schools who have precisely zero full-time work experience. Harvard Business School, for example, continues to admit such students, the 2+2 program notwithstanding. </p>
<p>Consider Christopher Wilson-Byrne, who graduated from Boston College in 2007 and then immediately joined Harvard Business School class of 2009, without any work experience. Or consider Adam Flake, who graduated from Rose-Hulman in 2007 and then immediately joined Harvard Business School class of 2009. None of them, as far as I know, had any full-time work experience. {Note, summer internships do not count.) </p>
<p>Actually, the more direct way is to not even work as a lawyer at all, but rather place in IBD right after you finish your law degree. You’re attending Columbia which is obviously a major draw for the top IB’s in the world, and they hire not just MBA’s from Columbia, but graduates from all of Columbia’s programs. Heck, if IB’s will recruit people with degrees in the humanities - of which I can think of quite a few - then they will surely recruit somebody with a law degree, as let’s face it, law is actually somewhat relevant to IB (if, for no other reason, IB’s are always getting sued and are always interacting with regulators). That’s clearly more relevant than somebody with an English degree (yet they too have been recruited). You may also try to transfer to a more prestigious law school where IB’s recruit heavily (i.e. HLS) after your 1L. </p>
<p>Yet another option is to attempt to transfer into the joint JD/MBA program at Columbia or elsewhere. Like I said, lack of work experience, while a detriment, is not always fatal in terms of securing MBA admissions. </p>
<p>And while I hesitate to mention it, another option, albeit a cynical one, is to continue to defer your admission to CLS (if possible) and hope to be admitted to a top economics, finance, or business PhD program. Your 3.7 GPA in economics would make you seemingly competitive, although you made no mention of your pure mathematics background which is de-rigueur for a top economics or finance PhD program (but not necessarily for a business Phd program). Once in such a program, you will enjoy extensive opportunities for IB recruitment. </p>
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<p>Alumni clubs are your friends! Join your school’s local alumni club and attend events where you can meet fellow alumni. You say that you graduated from an Ivy; well, every Ivy has an alumni club in New York City. It should be relatively cheap for you as a recent graduate. Attend the club’s events, and then start talking to people. You should especially want to attend the events where financiers are going to be.</p>
<p>As an example, in just a few days, the Cornell Club of New York, along with the Penn Club, is going to host their annual Hedge Fund Panel, replete with numerous hedge fund honchos. Surely you will find plenty of people there to talk to about finding a job in finance. </p>
<p>If you’re worried about the fees associated with alumni clubs - which are generally not excessive for recent graduates - just compare it to the small fortune you propose to pay for law school.</p>
<p>Sakky, I don’t have time to read your essays. Whether you are right or wrong, academics work on the street, make a ton of money and generate large sums of revenue for banks that employ them. Case closed.</p>
<p>Once again, you persist the definitions of ‘used’ vs. ‘useful’. I have never disputed that academic research is used in the finance industry. The question is whether it is useful. Banks have demonstrably proven that they utilize plenty of stupid strategies, and still do (witness Dexia). After all, something caused the crash and the resulting bailouts. </p>
<p>I’ve said it before and I’ll say it again, if the finance industry truly conformed to free market principles, then most of the industry would have defaulted in the last 3 years. What does CAPM have to do with taxpayer bailouts? What does Black-Scholes have to do with the creation of emergency central banking liquidity facilities? What does Fama/French have to do with regulatory forbearance? Yet without those policies, the industry wouldn’t even be alive today at all. Far from being a free market oriented industry, the finance industry is instead a heavily government subsidized and therefore market-distorted industry. </p>
<p>So is finance research useful in terms of creating value (as opposed to the simple rent-seeking behavior of risk-shifting to the taxpayer)? Case very much open.</p>
<p>Then I’ll make it elementary for you. You mentioned 3 pieces of research - Fama/French, CAPM, and Black-Scholes. Fama/French is an assertion about supposed market efficiency (as I suspect you’re not talking about Fama/French’s other work). Market efficiency is a statement that markets are complete and deep enough that market prices reflect all (publicly available) information. CAPM and Black-Scholes utilize market efficiency as a baseline assumption. {Modified CAPM and B-S models that do not assume market efficiency require that you know where the inefficiencies lie.}</p>
<p>Given that, you have 2 choices:</p>
<h1>1) Markets are indeed efficient and complete.</h1>
<p>But if they are, then why did governments around the world bail out their financial industries? If firms needed capital infusions to survive, then they should have been able to easily raise that capital through the supposedly complete and efficient markets, right? Barring that, they should have been relegated to the ashbin of history as Lehman Brothers was. After all, if market prices indicate that you are insolvent, well, since market prices are efficient, you should default, right? The Swiss government should therefore not lifted a finger to save UBS and your friend would have likely lost his job, right? </p>
<h1>2) Markets are actually not efficient and complete, which is why governments and central banks must intervene.</h1>
<p>But if that’s the case, then that doesn’t exactly bode well for the value of that academic research that such efficiency and completeness, right? </p>
<p>MSFHQsite, you have 2 choices. Pick one. Either way, academic research does not come off well.</p>
