Finance has a weird incentive structure. As my brother the stock trader explained it:
1) There is a practically infinite amount of work that any one group could be doing—there’s always more data to be analyzed, companies to consider, etc., but there’s diminishing returns to more work, because the best opportunities are exploited first and many kinds of financial activity are zero-sum competition over a finite pool of money. Hiring more people makes the total workload greater rather than dividing a fixed pile of work over more people.
2) Hiring someone takes money directly out of the pockets of their co-workers and the boss doing the hiring, so it’s a last resort. Employee labor is the main expense, and pay and group “productivity” are tightly coupled: each group basically gets paid out of their own profits. If you’re running a small group of traders—say, five people—and you decide to hire a sixth person, you and the other four people take a pay cut equal to that person’s salary. (And because of diminishing returns, they don’t make as much money per person as the smallest possible group that can do your kind of finance.)
3) Finance selects for people who want money more than time. People who can’t devote just about every waking hour to work don’t stay employed in finance very long—whether voluntarily or not.
4) Just about everyone in finance retires much earlier than in other professions. Once someone hits 40 or so they’re usually burned out and leave the industry—they already have a huge pile of money, so they don’t really need to keep working hundred hour weeks.
(1) Is true, just as it is true in scientific research, for example.
(2) Hiring people only if their expected contribution is greater than their expected cost is the baseline, standard, utterly normal practice everywhere.
(3) “People who can’t devote just about every waking hour to work don’t stay employed in finance very long”—is false.
(4) “Once someone hits 40 or so they’re usually burned out and leave the industry”—is false.
I think you’re confusing finance as an industry and small-scale, indie trading.
My brother used to do stock trading (in a small group) for Goldman Sachs before jumping ship for a hedge fund that offered him much more money. Of course, not everyone in finance does stock trading, so he might be seeing only a small part of what goes on...
Finance has a weird incentive structure. As my brother the stock trader explained it:
1) There is a practically infinite amount of work that any one group could be doing—there’s always more data to be analyzed, companies to consider, etc., but there’s diminishing returns to more work, because the best opportunities are exploited first and many kinds of financial activity are zero-sum competition over a finite pool of money. Hiring more people makes the total workload greater rather than dividing a fixed pile of work over more people. 2) Hiring someone takes money directly out of the pockets of their co-workers and the boss doing the hiring, so it’s a last resort. Employee labor is the main expense, and pay and group “productivity” are tightly coupled: each group basically gets paid out of their own profits. If you’re running a small group of traders—say, five people—and you decide to hire a sixth person, you and the other four people take a pay cut equal to that person’s salary. (And because of diminishing returns, they don’t make as much money per person as the smallest possible group that can do your kind of finance.) 3) Finance selects for people who want money more than time. People who can’t devote just about every waking hour to work don’t stay employed in finance very long—whether voluntarily or not. 4) Just about everyone in finance retires much earlier than in other professions. Once someone hits 40 or so they’re usually burned out and leave the industry—they already have a huge pile of money, so they don’t really need to keep working hundred hour weeks.
(1) Is true, just as it is true in scientific research, for example.
(2) Hiring people only if their expected contribution is greater than their expected cost is the baseline, standard, utterly normal practice everywhere.
(3) “People who can’t devote just about every waking hour to work don’t stay employed in finance very long”—is false.
(4) “Once someone hits 40 or so they’re usually burned out and leave the industry”—is false.
I think you’re confusing finance as an industry and small-scale, indie trading.
My brother used to do stock trading (in a small group) for Goldman Sachs before jumping ship for a hedge fund that offered him much more money. Of course, not everyone in finance does stock trading, so he might be seeing only a small part of what goes on...
Right, so ask him about the finance industry (which is mostly banks, by the way) -- prop trading is only a very small corner of it...