Saturday, July 23, 2011

Quants: The Alchemists of Wall Street

Check out this fantastic documentary on Wall Street. Last decade saw many Scientist moving to Financial world as Quants and they loved it.When I was in college I read this fantastic article  and had a dream of joining wall street someday(I loved both Physics and Finance). But I have now dropped that idea. I have a feel that there are many other areas which are more important than so called 'Financial Innovation' and gambling through high frequency trading. Finance should just have an role of intermediary for money flow - take money from investors or savers and hand it over to entrepreneurs or businesses for creating value. Instead it is earning lion's share of revenue from trading, creating synthetic instruments(CDOs etc.) and gambling with other people's money risk-free. This is not creating any value, it is actually a value-destroying activity.

Remember, sustainable wealth can be only be created by creating real value through Innovation(by creating new products and services and thus solving some problem for large number of people). Trading and creating synthetic financial products can not substitute that. And we need a substantial mindset change for appreciating that. Too many talents are wasting their time in wall-street firms just for money.

The best thing that the government can do to solve many of our problems is to change the wall-street Compensation policy(I am not suggesting a cap on compensation, but compensation based on risk-return and appropriate clawback - Hedge Fund managers can get a share of profit, but then they have to take a share of loss as well). Once this is in place, all this wall-street excess will be gone and it will be more boring  place for many innovative minds. That will be good from two perspectives: Finance will limit its role to the point it creates real value for people - small firms borrowing and lending money(not like today's 'Too big to fail' gambling organizations). At the same time other industries(energy, biotech etc.) will get talents for solving real big problems the world is facing.

Leave East Coast and come to West Coast. West coast is all about casual dressing and creating real value. East coast is all about vanity fair and Financial manipulation. Its your choice!

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