By Jonah Sinick

Cross-posted from Less Wrong.

As a part of our research for Cognito Mentoring, Vipul Naik and I compiled a draft of a page on finance as a career option. Because some Less Wrongers are planning on earning to give and finance is a commonly considered career option for those who are earning to give, I thought that it might be of interest to the Less Wrong community.  See also 80,000 Hours’ blog posts on finance as a career.

Finance is a popular career option amongst graduates from elite universities: with about 20% of Harvard, Princeton and Yale graduates getting jobs in the field. Economist and New York Times columnist Tyler Cowen hassuggested that people with high intelligence have a significant edge in the field.

Finance has a number of sectors. Careers in Finance breaks finance down into Commercial Banking, Corporate Finance, Financial Planning, Hedge Funds, Insurance, Investment Banking, Money Management, Private Equity and Real Estate. The nature of jobs in finance varies considerably from sector to sector.

Our remarks below concern jobs in higher paying jobs in finance, such as jobs in investment banking, private equity and at hedge funds.

Compensation

Salaries in investment banking, private equity and hedge funds can be very high:

• Careers in Finance reports that somebody with ~5 years of experience at an investment bank typically makes ~$450K/year.
• In 2006, Richard Rusczyk (formerly an employee at hedge fund DE Shaw) wrote “While it’s not expected that you’ll make a million dollars in year 5, neither is it impossible. If you’re not making at least middle six-digits by year 6-8 as a quant in a hedge fund, then something has gone very wrong for you.”
• Stock market trader Joe Mela wrote that “If you’re good at [being a trader], you can make millions 5 years down the line.”
• Some of the most wealthy people in the world, such as George Soros (net worth $23 billion) and James Simons (net worth 11.7 billion) made their money in these fields.

Work-life balance

The high pay in investment banking should be viewed in the context of the grueling hours on the job. According to IBankingFAQ,

Analysts can routinely expect to work 90-100 hours per week or even more. A typical work day during the week might be 10:00 am until 2:00 am. Analysts will also typically work both days on the weekend. During a particularly busy time […] it is not uncommon for Analysts to work all night…

According to a highly upvoted Quora response:

Your physical health will almost certainly suffer. The extent to which it suffers depends on how careful you are with your diet, whether you make time to exercise, how much sleep you get, and how well or poorly you deal with stress. Most people have at least partial burnouts.

The quotations are referring to the hours of work in entry level positions. We have not been able to find substantive information on number of hours that more senior employees work per week. Our impression is that the number is smaller, but not dramatically so.

The number of hours per week that employees at hedge funds and proprietary trading firms appear to be smaller. In 2006, Richard Rusczyk (formerly an employee at hedge fund DE Shaw) wrote:

I would say the average work week at places like Shaw or Jane Street is closer to 55 hours, maybe lower (unless things have changed dramatically).

This is in consonance with what we’ve heard from two other acquaintances who have worked at a hedge funds and proprietary trading firms.

Job security

Job security in the more lucrative sectors of finance may be poor. At the 80,000 Hours blog, Carl Shulman wrote:

While a physician will usually remain a physician throughout her career, lucrative jobs in investment banking and management consulting often come with “up or out” career paths. Either one is promoted “up,” with incomes growing exponentially, as one can see in these links for banks and consultancies, or one is fired “out” and must seek work at a lesser firm or leave the industry. Since most employees will not be around for very long, one must take into account one’s “exit options” in deciding whether to enter.

Culture

Some people have characterized finance as having a very abrasive culture. Others have disputed this characterization. The culture of finance firms probably varies substantially from sector to sector and firm to firm.

• Liar’s Poker by Michael Lewis gives “an unflattering portrayal of Wall Street traders and salesmen, their personalities, their beliefs, and their work practices.” The book reports on the situation in the 1980’s, and may be out of date.
• Former DE Shaw employee Cathy O’Neil gives an unflattering characterization of the culture at DE Shaw at her blog. (However, see this comment by Ben Kuhn.
• Trader Joe Mela wrote at the 80,000 Hours blog “As a rule, traders are highly switched-on, pleasant to talk to, and are great people to learn from. I do not think trading is the optimal career path if you’re trying to meet highly altruistic people, but the Gordon Gekko stereotype is pretty far from the truth.”

Social value

Actors in finance produce both social value and social disvalue, and it seems difficult to make a general statement about whether the typical worker at an investment bank (for example) does more good or harm. The situation probably varies from sector to sector of finance. We give some relevant considerations below.

The correlation between income and social value

In general, there’s a correlation between income and social value contributed. The fact that the earnings of people who work in finance are high raises the possibility that workers in finance contribute high social value.

People and organizations sometimes have a temporary need for money to accomplish their goals, and people and organizations are sometimes willing to lend money for a fee. Actors in finance who enable these transactions benefit both the borrower and the lender, and are paid accordingly. Similarly, actors in finance who lend money themselves benefit the borrowers and are paid accordingly. The proportion of activity in finance that fits this basic model is unclear. Many of the transactions in finance are many steps removed from the basic activity of enabling borrowers and lenders to connect. Some of these transactions indirectly enable borrowers and lenders to connect, and others don’t. It can be very difficult to tell which are which from the outside.

Unproductively increasing the efficiency of the market

If a company is looking for an investor and nobody is willing to invest, this is bad for the company. If the company is deserving of an investment, you spot this, and nobody is willing to invest, then you can benefit the company and make a profit by investing.

But suppose there are actors who are willing to invest in the company, and you invest in the company a tiny bit faster than the other actors. The company doesn’t benefit much from this, because it would have gotten an investment anyway. The other people who would have invested are harmed by this, because they can’t make a profit. So the social value that you contribute is much smaller than it would have been if nobody had been willing to invest within the same rough timeframe.

Some activity in finance takes this form. High frequency trading is a candidate for a sector of finance that makes money through buying and selling stocks a little bit faster than others, without contributing much social value. The transactions that high frequency trading firms make occur on a time scale of a fraction of a second, and it’s unclear that enabling people to buy or sell a stock a fraction of a second faster helps them to an appreciable degree, even after taking into account the number of people involved.

Pushing off tail risk onto the government

Some firms in finance are “too big to fail” in the sense that if they were to go bankrupt, the whole economy would suffer enormously, because of their interconnectedness. When they’re in danger of bankruptcy, the government will often lend or give them money to keep them afloat. Because the firms are aware that they’ll likely be supported by the government in the event that they make bad investments, they’ll sometimes make very risky investments, that have high upside to them if they pan out well, with the expectation that if they pan out poorly, the government will cover their losses. Such actors effectively make their money at the expense of the taxpayers, thereby contributing negative social value.

Not all actors in finance behave in this way.

Causing financial crises

As above, sometimes “too big to fail” firms will take risks that they’re not able to handle, with the expectation that the government will cover their losses. If they’re in danger of bankruptcy and the government ”doesn’t” cover their losses, this can precipitate a financial crisis. In particular, the collapse of Lehman Brothers is thought to have played a major role in the 2008 financial crisis. In this way, actors in finance may be able to cause damage far out of proportion with their earnings.

As above, not all actors in finance behave in this way.

Some people have raised the possibility that high-frequency trading could cause a financial crisis on account of increasing the stock market’s volatility, but others have disputed it, or even claimed that high-frequency trading reduces the stock market’s volatility.

Earning to give

Because the earnings are high in finance, finance has been highlighted as a promising career track for people who want to earn to give large amounts of money to charities. 80,000 Hours Executive Director Ben Todd has argued that the harm one might do in finance is small relative to the good that one can do by donating 50+% of one’s income to highly effective charities.