
Friends don't let friends get into finance - mayukh
http://techcrunch.com/2011/03/26/friends-don%E2%80%99t-let-friends-get-into-finance/
======
Jd
I'm of the opinion this understates the problem.

First, it is an ethical problem. The idea of producing things is not taught in
elite colleges, nor is the idea that it is possible to make a positive
contribution to society (e.g. rms) without becoming superrich (no offense to
those for whom this is their primary motivation).

Second, a lot of the products of which the GDP percentage is based upon simply
involve repackaging and selling debt. (e.g. <http://ow.ly/1sf8Rp> ). In other
words, a lot of the economy is based upon accounting tricks.

~~~
secretasiandan
Not all ideas can or should be taught in (elite) colleges. The framework to
analyze any idea should be and generally is taught at colleges.

Repackaging and selling things is foundational to creating value. The
insurance industry is perhaps the quintessential example. They create no
direct expected value, and yet they create societal benefit by creating risk-
adjusted expected value.

What is manufacturing but repackaging?

~~~
maigret
Insurance creates value, and so do banks. The problem really begins when the
banks try to get more revenue than the value they can possibly generate.
That's when it goes into bubbles and finally breaks. Insurance has its risks
also, but the insurance system doesn't crash every couple years from itself
(major natural events, terrorist attacks etc not taken into account).

------
techcrunchtroll
Some career advice for all of you on Hacker News.

This advice may be two years too late, but may help someone just getting in
now. The decision to leave a high-paying Wall Street firm is foolhardy and one
that you will more than likely live to regret later. It would be much more
prudent for you to stick around at a firm for 5-6 years, put away $500K-700K
in cash, get some experience, make connections and then make your move.
Otherwise, you'll probably end up stuck at a startup that is not really going
anywhere anytime soon (maybe it will, but maybe it won't), and it will be too
late to go back to Tier-1 firms to make some cash.

So the lesson for you young guys out there: Don't pull the trigger too soon
_IF YOU ARE ALREADY IN A MONEY EARNING JOB_.

Wait it out for several years, build a small safety net, and stash away some
capital for your entreupreneural endeavors a couple of years later.

~~~
gfodor
"Life is what happens to when you are busy making other plans"

No better way to ensure you'll never follow your dreams than set yourself up
to be dependent upon a large salary and plan on pursuing them "a couple of
years later."

~~~
jgamman
pay bulk of your salary into a savings account. get used to living on say, 20%
of it. you'll see pretty soon if you're 'following you dream' or getting
hooked on cash

------
fleitz
Perhaps it's not a problem with finance but a problem with other industries
that don't pay their people well. Who is to say that a CDO isn't a valuable
economic activity?

If creating a CDO creates more value to the economy than designing an
automobile why shouldn't engineers focus on building those?

People forget that prices and money are essentially information about the
supply and demand of a good. As we progress in the information age deriving
information from price will consume and produce ever more of our GDP. Spending
money efficiently and directing it to the right purposes is a VERY valuable
thing for a nation to do. Perhaps, dare I say it, more valuable than
engineering widgets.

If YC had engineers figuring out algorithms to determine the best startups and
they found one that worked it would be a very valuable piece of information.
Or more relevantly, what if you had a site that required a lot of bandwidth
and you could buy a bandwidth future? If you could buy that sort of thing you
could offer 4 year contracts to your customers with out taking on any risk.

How about this instrument, a YC Summer 2014 startup future, it estimates the
expected return from S14 and pays you if the return is less than expected. YC
could sell them today and gain the advantage of knowing how many startups they
could fund in S14. It would allow all sorts of people to pool their knowledge
about what the Summer 2014 startup scene is going to be like. You might want
to buy one right before the S14 season because you know that some great
startup is applying, etc. If you held office space in SOMA you could use this
as a hedge against losses incurred due to a poor S14 startup season.

Most complicated financial instruments are actually risk mitigation and/or
information pools. The fact that that kind of thing is pricable due to these
engineers spreads all sorts of great information to our economy that you can
use to make informed decisions about how to conduct your affairs and you don't
even need to participate in the market to use it.

Want to know what the best guess as to the price of oil in 6 months? Check the
oil futures market. This one number contains the all the information known to
man, vetted by experts as to what the supply and demand of oil is going to be
in a few months. It also allows anyone with new knowledge to monetize that
information and communicate it to all participants almost instantly. Southwest
can offer cheaper flights because they use oil and jet fuel futures to buy jet
fuel, the brilliant thing is that Exxon also gains knowledge of what Southwest
and every other airline expects their passenger load to be in a few months and
can make decisions accordingly.

~~~
richcollins
The problem isn't the ability to create financial instruments. It's the fact
that the people that created and purchased these ill-advised investments were
given the resources of those that didn't make bad decisions (through inflation
and taxes).

It's easy afford outrageous salaries when your revenue comes from government
assisted theft.

~~~
fleitz
I definitely agree with you that the bailouts are a huge problem, however,
it's not like the alternatives presented for engineers in the article also
don't get a sizable portion of their funding from the gov't.

Given that schooling is heavily funded by the gov't it would only seem natural
to follow the funding train. They're practically begging people to go to
engineering school and become a financier the way they fund things.

------
tedunangst
"They note that the finance sector today produces a greater percentage of GDP
than at any time in history."

This is not an effective argument. The computer software industry is also
producing a larger than ever percentage of GDP. In other news, the building
wooden ships sector is not responsible for much of the GDP in recent years. Is
that a problem?

~~~
rbarooah
It's a problem because unlike other activities finance produces benefits to
society only when it well, _finances_ people doing things other than finance.
Other activities are valuable in themselves.

~~~
Dove
I still find it hard to parse that as a problem. I mean, power generation only
provides a benefit to society when someone uses the electricity to do
something.

So what? Infrastructure isn't inherently parasitic. Lots and lots of
infrastructure isn't even necessarily bad.

I view finance as infrastructure. The machinery that hooks investors up with
investees is fundamentally useful. The machinery that lets people and
businesses manage risk, that lets them define very specifically what gains and
losses apply to them in what events . . . that's really darn useful stuff. If
it's complex sometimes--even incomprehensible--in order to achieve something,
so what? So is software. So is engineering in general.

Some people practice finance badly, I don't doubt; some engineers are snake
oil salesmen, too, hiding behind the inherent complexity of problem and
solution. The government bailed out finance and that's bad, but it bailed out
auto, too. That doesn't make car manufacture generally parasitic.

Those are historical specifics, justified complaints against individuals and
events. But I don't see anything here justifies the demonization of the
industry _in general_.

~~~
rbarooah
If you see finance as infrastructure to help other businesses grow (as I do),
then it's growth should result in the growth of other industries. Instead what
we see is finance growing and other industries declining. To me that suggests
a _general_ dysfunction in the role of finance. It simply isn't doing the good
it's supposed to.

There may be many or even most individuals who are acting in good faith, but
the sector as a whole appears to be broken.

This isn't about demonization. It's about pointing out a serious threat to
society's continued prosperity.

And as for the auto industry - they shouldn't have been bailed out either -
that doesn't somehow make it better that the financial industry was. Also the
auto bailout was a rounding error compared to the financial bailout.

~~~
yummyfajitas
What industries are declining? As far as I know, virtually every sector of the
economy has grown. Manufacturing, medicine, education and technology certainly
have.

What industries are declining, and why do you believe that finance has failed
them?

~~~
rbarooah
The private goods-producing sector value added fell 6.4 percent in 2009, after
a 4.2 percent decline in 2008. The private services-producing sector declined
by 2.1 percent, after a 0.4 percent increase in 2008. The finance and
insurance industry grew 6.1 percent in 2009, partially offsetting the
widespread economic decline. The increase was primarily driven by the strong
recovery of the insurance carriers industry.

That's a quote from a December 2010 report from the government's bureau of
economic analysis.

~~~
yummyfajitas
Sorry, I didn't realize your comment was limited to a single year of our
current recession. You are correct - for a short period, finance has grown
while other sectors have shrank.

That's not the general trend, however, that's just a blip caused by the
recently ended recession.

~~~
rbarooah
Ended?

~~~
yummyfajitas
According to NBER, the recession ended in June 2009.

<http://www.nber.org/cycles/cyclesmain.html>

That's roughly the point where GDP growth became positive again.

[http://research.stlouisfed.org/fred2/graph/?chart_type=line&...](http://research.stlouisfed.org/fred2/graph/?chart_type=line&s\[1\]\[id\]=GDP&s\[1\]\[transformation\]=pch)

[edit: can't respond to your post, but June 2009 is also the time period when
industrial production and retail sales started growing, and when the stock
market recovered.

<http://research.stlouisfed.org/fred2/data/INDPRO.txt>
<http://research.stlouisfed.org/fred2/series/RSAFS?cid=6>
<http://research.stlouisfed.org/fred2/series/SP500?cid=32255>
<http://research.stlouisfed.org/fred2/series/ALTSALES?cid=98>
<http://research.stlouisfed.org/fred2/series/DGORDER?cid=98>

The period Jan 2009-Dec 2009 was bad, but Jun 2009-present was a period of
growth for most sectors. ]

~~~
rbarooah
Funny - according to the very report I just quoted that positive GDP growth in
2009 is due only to growth in the financial industry which makes up for the
declines other sectors are still seeing.

------
ig1
The report was produced by the Kauffman foundation, a foundation dedicate to
improve entrepreneurship. It's not exactly an unbiased piece of research.

Attacking finance is the popular theme of the days, but finance has done a
huge amount in supporting global economic growth. From providing debt and
capital financing to reducing foreign exchange costs.

~~~
rbarooah
Presumably this growth that the finance has supported is happening somewhere
other than in the US?

~~~
ig1
<http://timetric.com/topic/us-gdp-all-statistics/>

US GDP today is seven times higher today than it was 60 years ago.

At the worst point in the recession US GDP dropped to the same level it was in
2005. Yes, the US GDP grew as much between 2005-2009 as it shrunk during the
recession.

~~~
rbarooah
How much of that GDP growth _is just the financial sector itself inflating?_

~~~
yummyfajitas
Some of it, but not the majority of it. Industrial production is up and retail
sales are up, for example.

<http://research.stlouisfed.org/fred2/series/RSFSXMV>

<http://research.stlouisfed.org/fred2/series/INDPRO>

------
asanwal
Article is totally absent of any substantive suggestions to "fix the problem".
The real issue is that if you look at the risk-adjusted reward of doing or
working at a startup, it doesn't compare well with working on Wall Street.

And then there are those who say, let me do a few years on Wall St and then
I'll pursue the startup thing. What happens during that time is they lose
their entrepreneurial edge (they become corporate dull) or they take on a
lifestyle (nice house, cars etc = high fixed costs) which makes startup life
less feasible.

Of course, in startup land, you have your occasional stellar upside scenarios
a la Zuckerberg, but if economics is the main motivator, Wall St is a logical,
rational choice esp if you work to live (and not live to work).

I say all of this as an NYC startup who feels this pain at times (although I
think it is overblown and more of an excuse). I just don't think bellyaching
about it achieves much.

~~~
Jd
The title is a suggestion. Discourage your friends from putting their energies
into creating financial products of dubious value and instead encourage them
to engage in substantive work that makes a clearly positive contribution.

Yes, yes, I know you want a secure source of income. Well, try think about
ethics first, if not only.

~~~
asanwal
These generalizations about finance being unethical are misguided and
misinformed.

A bank/VC that gives a loan/investment to small business/startup. That's
finance. Hardly unethical.

Allowing people to get a car today while paying for it over time (instead of
paying upfront). Hardly unethical.

Yes, there are bad actors in finance as there are in every space. Don't the
Zyngas and others of the world via their offers engage in "ethically
questionable" tactics?

~~~
mousa
A lot of the financial industry though today works so many layers above actual
loans it's hard to see how they contribute and even harder to see why they
make so much more money than everyone else. I'm not an expert, I'm sure there
is some justification, but it's not obvious to most people and that's why,
sometimes, we the laypeople wonder.

~~~
asanwal
I agree with you to some degree. There is a lot that happens well out of
public (and sometimes regulatory) purview. I just think views that "finance is
bad" or "startups are the best" are myopic, don't advance the discussion and
ultimately fail to realize the inter-related'ness of all these different
forces.

Ultimately, we live in a pretty free agent society and if Wall St can pay more
(no matter the reason), the rational engineer whose primary motivation is
money should take that job. There is nothing wrong with that. The engineer who
is motivated by money and other factors (building something valuable, being
his/her own boss, etc) also has avenues a la doing a startup.

~~~
rbarooah
This would be true if the losses from the last crash hadn't been socialized.

If the financial industry had actually had to bear the consequences of the
risks they take in the same way that entrepreneurs do, the decisions would be
rational. As it is, the finance sector is protected by the government whereas
startups are not.

~~~
asanwal
When the collapse of Facebook presents systemic risk (or the illusion of
system risk depending on your perspective) to the US, I'm sure it will get a
"bail out" as well.

~~~
rbarooah
Seriously? You're saying that it's fine for the financial industry to hold the
country hostage when they fail because there's equal opportunity for other
industries to do that too if they too can become large enough?

~~~
asanwal
Not justifying it, but when people think the whole system could break down,
crazya$$ isht happens. The rightness or wrongness of what was done is not what
I was getting into.

Merely commenting on your point as to why the "finance sector is protected by
the government whereas startups are not".

~~~
rbarooah
Right - but the finance sector wasn't chosen at random to receive a bailout
because of 'craziness'. It was bailed out _because_ it's dysfunctional. And
now, people in the financial industry _expect_ it to get bailed out when it
screws up, since that's what's happened time after time. Whereas people
joining startups have no such expectation.

If you don't seriously expect Facebook to get bailed out it's not a
particularly meaningful thing to bring up.

~~~
asanwal
I am guessing (and apologies if I'm wrong) that you've not worked in finance
else I don't think you wouldn't paint the entire industry with such a broad
brush. I don't disagree with you that a lot of stupid, ignorant and misguided
things happen in the industry, but in general, I find that the "Wall St is
bad" rhetoric is easy to get wrapped up into because it is fashionable and
easy to do.

But nevertheless, I'll go back to my original point. If the gov't thought that
Facebook (or any startup) presented systemic risk, it'd likely get bailed out.
I'll leave it at that.

~~~
rbarooah
On the topic of straw men, I don't think you'll find me saying anywhere that
the financial industry is "stupid, ignorant, or misguided", nor did I say that
"wall street is bad". I'm not painting the people in the industry with any
kind of brush at all. You make it sound like I'm kicking a puppy.

I believe that there's a systemic problem with the industry and its role in
society and that it is damaging our future prosperity.

Yes, any sufficiently powerful institution _could, in principle_ pose such a
problem, but why distract ourselves with imaginary problems when we have a
real one sitting in front of us?

------
secretasiandan
the quant finance that takes the best and the brightest (as opposed to the
bankers and sales traders), uses informational and computational advantage to
make money.

How are internet startups any different?

Also, even the bankers and sales traders are providing a service that
apparently people want. If you can judge them as not creating societal value,
why can't I say that the Nth photo sharing website is not creating value?

~~~
rbarooah
Will the government bail out the photo sharing sites when they fail?

~~~
med555
Photo sharing sites doesn't cripple the entire economy when they fail.

~~~
rbarooah
So you agree that the financial industry gets to take risks at other people's
expense?

This makes your other points about the benefits of the financial industry and
your defense of them 'not stealing' seem incoherent at best.

------
ulugbek
Only way you compete with Wall Street is you increase the utility of expected
payoffs, not just the wage. People who are going to WS have different risk
profiles than entrepreneurs. You can have low participation in
entrepreneurship as long as participating ones are competitive and innovative.
It is better use of talent and time if those who would have failed anyways
(because they don't have the guts, etc) go and make themselves useful
elsewhere.

~~~
orijing
I think you have it backwards. It's not about max_a U(E(a)), but of max_a
E[U(a)]. Otherwise insurance wouldn't work.

Let's illustrate with an example. Suppose you buy theft-insurance, there's 10%
chance of being robbed and the cost of robbery is $100000. Then, E[a] = 0.1 *
-100000 = -10,000. So you'd be maximizing U(-10000). This is different from
maximizing E[U(a)] because in this case it's 0.1 * U(-100000) + 0.9 * U(0).

It's different if you are not completely neutral.

~~~
ulugbek
You are right

------
Genmai
The real challenge underlying Wadhwa's article is how to incentivise
traditional engineering careers to counter the lemming run to investment banks
and hedge funds that the best technical minds make these days. Because high
finance careers offer lucrative compensation according to market demand for
talent, perhaps the demand itself needs to be adjusted.

Another roundabout approach to counter this phenomenon is greater regulation
to curb non-transparent / overly risky / exploitative instruments. Arguably,
better regulation will help flatten the casino-eque boom (and bust) fortunes
that we've been seeing in recent years. In turn, this may eventually translate
to more moderate compensations in financial careers and may eventually reduce
the outsized finance field demand for engineering talent. The rub is that
government regulators are simply no match for the sharp pointy minds and
enormous resources high finance firms can muster - the financial regulations
of today will be easily be circumvented by the clever finance and accounting
tricks of tomorrow.

Were it implementable (fantasy), the people who create and subsequently sell
these fancy financial products should be paid with their own products and be
required to hold them until maturity.

f.

------
Dilpil
If investment banking is so needless, why did the economy falter when lehmen
brothers went bankrupt?

If high frequency trading is so needless, why does the entire market go into
shock when the traders panicked and left on may 6th 2010?

Most importantly- if these products are useless and harmful, _why do people
keep buying them?_

~~~
prodigal_erik
> If high frequency trading is so needless, why does the entire market go into
> shock when the traders panicked and left on may 6th 2010?

Because HFTs, who enjoy the privilege of walking away from the market at the
worst possible moment, had largely displaced traditional market makers who
make expensive commitments not to do that. Nobody specifically chooses to do
business with them, they're exploiting flaws in the way trades clear to front-
run them and become unwanted middlemen.

~~~
yummyfajitas
_...they're exploiting flaws in the way trades clear to front-run them and
become unwanted middlemen._

Could you explain the mechanics of how this works?

Near as I can tell, the only way to become a "middleman" is to offer a better
price than your competitors or to offer the same price at an earlier time. Is
there a "front-run my competitors" FIX command I'm not aware of?

~~~
prodigal_erik
[http://blog.themistrading.com/wp-
content/uploads/2009/01/tox...](http://blog.themistrading.com/wp-
content/uploads/2009/01/toxic-equity-trading-on-wall-street-final.pdf)
describes a predatory algorithm deliberately making inconsequential trades
solely to discover a buyer's limit, then selling short at that limit only to
cover after the dip they themselves caused. This is basically scalping, a
strategy designed to steal the surplus value from both the buyer and seller.
Such abuses were even more egregious back when most exchanges offered flash
orders, which is more like poker with certain players allowed to see your
cards.

When a HFT buys and sells with a holding time in milliseconds, they are in no
way guiding the correct allocation of our economy's resources, they are merely
bleeding those who are. That they can do so profitably is showing us what we
should fix about the way trades clear.

~~~
yummyfajitas
Huh. So basically, before HFT, the clever institutional trader could use HFT
techniques to buy a bunch of shares from less sophisticated retail investors
at $20.00 in spite of high demand.

On net, the institutional trader is gaining $0.01 at the expense of retail
investors.

Now, in a world with professional HFTs, the institutional investor can't do
this as easily and must pay the retail investors $20.01. How horrible!

It's hard to see why you are calling the HFT an "unwanted middleman". I mean
sure - the institutional investor would love to keep taking money from the
retail investors. But the retail investors want to keep their pennies - they
certainly want the HFT to be present.

As I said, the only way to become a middleman is to offer a better price than
your competitors.

------
rbarooah
Finance firms put 100% of their time and energy into finding ways of making
money out of existing money without producing any other value.

Entrepreneurs do a little of this too, but foolishly allow themselves to be
distracted by an irrational desire to also make novel and valuable
contributions to society.

Eventually the entrepreneurs will learn that a part time effort won't cut it
and they can't beat the guys who give it 100%

~~~
med555
Google. Zynga. Facebook. Intel. eBay. Apple. etc.

All needed bankers to get them access to capital and grow faster, helping them
hire more employees and contribute to our economy's growth and standard of
living. I'd highly recommend you rely your points on empirical evidence over
populist talking points.

~~~
rbarooah
The evidence is that the finance industry has grown faster than all of the
other sectors, proving my point.

I'd highly recommend that you rely your points on empirical evidence than
empty claims.

~~~
med555
What does that even mean? Economic growth has grown consistently. Technology
now makes up a large portion of our GDP when it hasn't in the past. Why attack
the finance industry when you could also attack the technology industry?

There's more demand. Therefore, there's a larger supply. Simple, basic, very
elementary economics.

~~~
rbarooah
The financial industry makes up a much larger portion of GDP growth.
Artificial growth that would have contracted if it hadn't been bailed out.
Demand for the financial industry has been produced by force, not through the
marketplace, unlike other industries.

Your simple, basic, elementary economics don't apply when an industry is being
protected by the government.

------
jleyank
paul kennedy. Britain. 1914.

