As for why they are more worthy of praise and emulation than scientists or academics—basically, on the margin, we have too few hedge fund managers (which is why they earn so much) and too many academics.
It’s not clear to me that the “why they earn so much” inference is correct. Consider lawyers; we clearly have too many lawyers (as determined by the percentage of law school graduates who are employed in the legal profession and complaints of unemployment and declining wages for the median or mediocre lawyer), but the best lawyers still command significant salaries. This seems to be mostly because law is a competitive field where you hire your champion, they hire their champion, and the champions battle—and in such a field we should expect that the wage of the best champions will always be high because I’m paying for having an edge, and the value of that edge depends on the value of the case times the quality difference, which is insensitive to a worker of non-extreme legal competence deciding whether or not to become a lawyer.
The analogy to hedge funds seems clear: how many mediocre money managers there are doesn’t matter very much to the price of getting the person with slightly higher (expected) alpha to manage your money. It’s also not clear that more hedge fund managers will lead to the FPE happening any faster, as the marginal money manager loses money, just as it’s not clear that more scientists will lead to the singularity happening any faster, as the marginal scientist gets no citations.
(And, in fact, I think science operates in a very similar situation: the best scientists actually do control sizable resources and have very high ‘effective’ compensation, once you take into account status and security, but we seem to be graduating more science PhDs than their fields can support.)
I like your comparison to law, but there are multiple margins here.
Firstly, suppose that a small change in relative respect or pay for academia and finance convinces some bright maths PhD student to go into finance as opposed to seeking tenure. He’s marginal in the sense that he was shifted by that effect, but there’s nothing to suppose he’ll be a marginal financier in the sense of only just clinging to a job. In fact, my experience was that the prestige of academia (plus status quo bias) meant that the very best and brightest were the ones who tried to become professors, whereas the relative dullards (like myself) tried to get a real job. In other words, I suspect the marginal financier by application might well be an above-average financier by results.
Secondly, neither law nor finance are purely champion games. It is possible for the quality of legal advice to go up across the board, and for people to have improved access to legal services, and both these things will improve our quality of life (and the economy) although there are of course costs and diminishing returns. Similarly, it is possible for investment decisions to be more productive across the board, and it is possible for people to have improved access to capital markets. And I say that without denying that there will always be a premium for the very best.
I am certainly not saying that we should set up poorly accredited Hedge Fund Schools across the country churning out thousands of barely-trained financiers based on false promises of millions to come (although come to think of it, that does sound like a good scam).
In fact, my experience was that the prestige of academia (plus status quo bias) meant that the very best and brightest were the ones who tried to become professors, whereas the relative dullards (like myself) tried to get a real job.
This certainly was the case 20 to 30 years ago, but I’m not sure it’s the case now.
It is possible for the quality of legal advice to go up across the board, and for people to have improved access to legal services, and both these things will improve our quality of life (and the economy) although there are of course costs and diminishing returns.
Sure- but for these gains to impact wages they need to be captured by workers, and it’s not clear that this happens on a large enough scale. (It seems to me that many people try to adjust the status of fields mostly to account for these positive externalities.)
(although come to think of it, that does sound like a good scam)
I am under the impression that most of the personal finance seminar offerings of the Rich Dad Poor Dad variety are the slightly less formal version of this.
how many mediocre money managers there are doesn’t matter very much to the price of getting the person with slightly higher (expected) alpha
That’s not self-evident to me. If the supply of money managers increases under the reasonable assumption that the increase is appropriately distributed along the whole skill spectrum, the supply of high-skill managers will increase as well.
the marginal money manager loses money
Huh? The left tail of the money manager distribution loses money, of course, but that’s almost by definition. The average money manager does not lose money. We can argue whether he makes more money than a passive investment in “the market”, but that’s a complicated discussion that involves different markets, risk, etc.
If the supply of money managers increases under the reasonable assumption that the increase is appropriately distributed along the whole skill spectrum, the supply of high-skill managers will increase as well.
Sure, but I explicitly mentioned I was varying the supply of mediocre money managers. What would make you think it’s reasonable to assume that mediocre managers are appropriately distributed along the whole skill spectrum?
I’m specifically poking at the claim that we can tell that we have too few hedge fund managers because they make such high salaries. I think I’m in agreement with Salemicus that some forms of financing are positive sum (and thus provide a valuable social service), that top cognitive talent is heavily influenced by prestige, and that if there were a flatter plateau of extreme competence the salaries would be lower. I’m uncertain whether it’s possible to achieve that by shifting more top talent from academia to hedge funds, since I think that will simply shift what counts as ‘extreme’ competence in that field.
The average money manager does not lose money. We can argue whether he makes more money than a passive investment in “the market”, but that’s a complicated discussion that involves different markets, risk, etc.
I find it remarkable the number of financial concepts you think are complicated that look simple to me and the many experts in economics and finance (who aren’t trying to sell a product) that I’m familiar with.
It’s not clear to me that the “why they earn so much” inference is correct. Consider lawyers; we clearly have too many lawyers (as determined by the percentage of law school graduates who are employed in the legal profession and complaints of unemployment and declining wages for the median or mediocre lawyer), but the best lawyers still command significant salaries. This seems to be mostly because law is a competitive field where you hire your champion, they hire their champion, and the champions battle—and in such a field we should expect that the wage of the best champions will always be high because I’m paying for having an edge, and the value of that edge depends on the value of the case times the quality difference, which is insensitive to a worker of non-extreme legal competence deciding whether or not to become a lawyer.
The analogy to hedge funds seems clear: how many mediocre money managers there are doesn’t matter very much to the price of getting the person with slightly higher (expected) alpha to manage your money. It’s also not clear that more hedge fund managers will lead to the FPE happening any faster, as the marginal money manager loses money, just as it’s not clear that more scientists will lead to the singularity happening any faster, as the marginal scientist gets no citations.
(And, in fact, I think science operates in a very similar situation: the best scientists actually do control sizable resources and have very high ‘effective’ compensation, once you take into account status and security, but we seem to be graduating more science PhDs than their fields can support.)
I like your comparison to law, but there are multiple margins here.
Firstly, suppose that a small change in relative respect or pay for academia and finance convinces some bright maths PhD student to go into finance as opposed to seeking tenure. He’s marginal in the sense that he was shifted by that effect, but there’s nothing to suppose he’ll be a marginal financier in the sense of only just clinging to a job. In fact, my experience was that the prestige of academia (plus status quo bias) meant that the very best and brightest were the ones who tried to become professors, whereas the relative dullards (like myself) tried to get a real job. In other words, I suspect the marginal financier by application might well be an above-average financier by results.
Secondly, neither law nor finance are purely champion games. It is possible for the quality of legal advice to go up across the board, and for people to have improved access to legal services, and both these things will improve our quality of life (and the economy) although there are of course costs and diminishing returns. Similarly, it is possible for investment decisions to be more productive across the board, and it is possible for people to have improved access to capital markets. And I say that without denying that there will always be a premium for the very best.
I am certainly not saying that we should set up poorly accredited Hedge Fund Schools across the country churning out thousands of barely-trained financiers based on false promises of millions to come (although come to think of it, that does sound like a good scam).
Agreed that there are multiple margins.
This certainly was the case 20 to 30 years ago, but I’m not sure it’s the case now.
Sure- but for these gains to impact wages they need to be captured by workers, and it’s not clear that this happens on a large enough scale. (It seems to me that many people try to adjust the status of fields mostly to account for these positive externalities.)
I am under the impression that most of the personal finance seminar offerings of the Rich Dad Poor Dad variety are the slightly less formal version of this.
That’s not self-evident to me. If the supply of money managers increases under the reasonable assumption that the increase is appropriately distributed along the whole skill spectrum, the supply of high-skill managers will increase as well.
Huh? The left tail of the money manager distribution loses money, of course, but that’s almost by definition. The average money manager does not lose money. We can argue whether he makes more money than a passive investment in “the market”, but that’s a complicated discussion that involves different markets, risk, etc.
Sure, but I explicitly mentioned I was varying the supply of mediocre money managers. What would make you think it’s reasonable to assume that mediocre managers are appropriately distributed along the whole skill spectrum?
I’m specifically poking at the claim that we can tell that we have too few hedge fund managers because they make such high salaries. I think I’m in agreement with Salemicus that some forms of financing are positive sum (and thus provide a valuable social service), that top cognitive talent is heavily influenced by prestige, and that if there were a flatter plateau of extreme competence the salaries would be lower. I’m uncertain whether it’s possible to achieve that by shifting more top talent from academia to hedge funds, since I think that will simply shift what counts as ‘extreme’ competence in that field.
I find it remarkable the number of financial concepts you think are complicated that look simple to me and the many experts in economics and finance (who aren’t trying to sell a product) that I’m familiar with.
And why do you think this is so?