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Finance as a career option
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 has suggested 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.
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Comments (90)
I've worked as a trader/quant/developer for coming up on 12 years. Joe Mela's post at 80,000 hours basically matches my experience. I'll also point out that a large portion of trading firms are in Chicago, where the cost of living is really not too bad.
Thanks!
Glassdoor has Goldman Sachs salaries topping out at around $350K for VP-level people, although that doesn't seem to include bonuses, which seem to be about a 1.6 multiplier on your salary at the VP level (and are also taxed a lot more heavily, I hear).
I have no idea why the Glassdoor data is so much more pessimistic than your other citations. Off-topic, but I heard from a Google employee that $500K-ish salaries are within reach for driven managers at Google... and the senior product manager salary data from Glassdoor looks similar to the data for GS VPs.
Just as a clarification for those who don't realize, the title of vice president is given out much more liberally in finance than in other sectors. In particular, Goldman Sachs has 5000 VPs (or maybe 12,000?).
I've noticed Glassdoor to be pessimistic in several other cases as well (where I have hard info contradicting them). It's bad enough that I half-suspect that the numbers are made-up.
I don't know anything about the actual salary figures, but bonuses are actually not taxed much more highly. That's a common misconception. It's just the way the business has to handle the withholding that changes. Bonuses are considered "supplemental wages", so employers have 2 options for how to handle their withholding.
The aggregate method: Bonuses are added to your regular paycheck. This amount is then annualized (amount for pay period * number of pay periods in a year) and then taxed at the rate appropriate for someone making the annualized amount every year. If you get one big bonus in a monthly paycheck by the aggregate method, you take (bonus + regular monthly salary) * 12 and have your tax withheld at that rate, which is much higher.
The flat percentage method: Most larger employers do this. Employers who choose this method withhold 25% of any bonus under $1 million across the board and 35% of each dollar above the $1 million mark. For those who receive their bonuses in large chunks, this is beneficial to the employee. It's also easier for the employer.
However, when it comes time to file your personal income taxes, regardless of which method was chosen above, you only have one number that represents your total income for the year and you are taxed on that according to the marginal rate schedule that applies to everyone for that year. If your employer used the aggregate method and you had a giant chunk taken out of a small number of bonuses, you'll get a lot of that back.
At the end of the day, for the IRS, employee compensation is employee compensation. It doesn't matter how your employer classified it.
I've heard tell of employers going on glass door and artificially deflating the numbers, to give employees less negotiating power.
I have no evidence of this however.
Glassdoor rarely properly includes the top paid employees (those people don't fill out the survey). According to Goldman's own figures, mean compensation per employee (across all employees) is ~$400k. It'll be significantly higher if you're in front office. Your expected earnings from a Goldman job are roughly the mean earnings multiplied by the expected number of years you'll stay at the firm.
Why? It seems like if anything the most salary-obsessed people would be driven to achieve high salaries and driven to compare their salaries on Glassdoor.
They're probably interested in comparing their salaries with those of other very-well-paid people. If Glassdoor currently doesn't attract interest from many of those, that probably means it will continue not to.
Agree - Glassdoor is mainly designed to appeal to job seekers. The way they get their data is by only granting access if you reveal your salary. So the salary data ends up tilted towards the people who are seeking jobs.
There's also a sampling problem. Google has ~10,000 engineers, but there's probably only ~100 who earn $1mn+. Large companies normally only have a couple of responses, so even if you sampled everyone randomly, you'd only get ~1 top earner in the sample.
Still interesting to know that there are so many GS VPs getting paid so little though, isn't it? I would expect that if what you say is true, and GS VPs are well-paid like the consensus from other sources indicates, we'd see very few salary reports from people at the VP level (they're not seeking jobs!) But in fact there are 102 VP salaries, contrasted with 127 Senior Analyst Salaries and 536 Associate salaries... it seems like associates occur at at least a 5 to 1 ratio with VPs within the organization, if not a higher ratio.
Does Glassdoor actually do anything to verify that (e.g.) someone claiming to be a VP at Goldman Sachs actually is? It seems like that would be difficult. But if they don't, then we have a fourth candidate explanation, which I think is probably the right one. Not "GS VPs are paid surprisingly little", nor "Only underpaid GS VPs bother with Glassdoor", nor "GS VPs understate their salaries on Glassdoor" -- but "People who aren't GS VPs are going to Glassdoor and lying about their role and compensation".
(May I just remark that for those of us who are neither in the US nor in the finance industry, it feels really really weird to be talking about what a terribly low salary $350k/year + substantial bonus is?)
[EDITED to fix a grammatical screwup arising from messed-up redrafting.]
I recently interviewed at D. E. Shaw and had a chance to meet many of their team members. I got a very different impression from Cathy O'Neil's post, which seemed pretty stereotyped and xenophobic. Maybe that would change if I worked there, but that post sent up some red flags in terms of tone.
I've met Cathy, and I would largely attribute her DE Shaw attitudes to her politics.
I would be very interested if you could elaborate on that. I'm interested in distinguishing between possibilities like these:
Etc. (Perhaps there are possibilities that don't reflect so badly on either Cathy O'Neil or Dr_Manhattan, both of whom seem from the limited information available to me like reasonable people.)
Occupy Wall Street association.
Forgive me, but that doesn't seem like much of an elaboration.
So far as I can tell, Cathy O'Neil left finance before getting involved in Occupy Wall Street. The fact that she took a job at a hedge fund in the first place, and stayed there for a few years, suggests to me that she didn't start out with overpowering political prejudices against finance in general or hedge funds in particular.
Does your personal acquaintance with her rule out the possibility that her political opinions are (at least in part) a consequence of her experience at D E Shaw rather than a cause, and if so how?
I'm 90% sure her opinions were the consequence of DE Shaw experiences. But it takes a certain personality to react by joining OW.
Yes, I'm sure it does. But wouldn't that mean that her D E Shaw attitudes aren't a result of her politics, but of some combination of her experiences at D E Shaw and whatever personality feature(s) predisposed her to react to them by joining OWS?
Thanks for the information. I added a link to your comment.
I think that this is a bit of a misunderstanding of what HFT does. A lot of HFT firms spend significant resources trying to be fast, but they do that because a lot of other HFT firms are also spending significant resources to be fast, and are pursuing very similar strategies. Speed is all about competing with the other trading firms, not about being quicker than end users. The strategies that HFTs are pursuing are socially valuable (typically, market-making and/or arbitrage), and they are competing along multiple dimensions, not just speed. Speed typically doesn't become important for a given strategy until competition has forced profitability per trade down to a minimal level. Once the bid-ask spread cannot get any tighter, then speed becomes an important factor but not until then and getting those spreads down is clearly valuable to end users. The pursuit of speed is "wasteful" in that it is costly and the end users don't really care about it, but the costs have to be born by the trading firms themselves. They can't pass those costs onto end users by increasing spreads because price priority beats time priority. The firm that tries to be super fast but at noncompetitive prices just won't trade.
Thanks! I don't have subject matter knowledge here, so this is helpful.
I generally agree with the points in this post but I have to point out that examples using I-banking jobs is a prime example of something being over-hyped and glamorized by movies, that don't actually exist in reasonable quantities to even be relevant.
The vast majority of all finance jobs at investment banks are called operations, this includes accounting, settlements, compliance, support, etc...a very small percent is front office sales, and then there is what every single starry-eyed-naive-finance-senior in college aspires to be – an I-banker (rolls eyes).
The problem with finance compensation is that variation in pay is largely due to non-merit metrics, like who you know, or how you look, or how well you signal. I can't walk around the city without meeting a well paid engineer, but I know like one I-banker, and I would rate that person as only slightly above average intelligence. If you are a clearly above average computer programmer you can't walk around with out being hit with a high paying job, the same absolutely can not be said about I-banking.
Simply put, non-operations jobs in I-banking, private equity and hedge funds are to college kids as what basketball players are to inner city kids. There are just better options.
Thanks for your comment.
I would be interested in statistics if you have them.
As with basketball players, it depends on the skills of the individual. I know people who have had no trouble getting a high paying job at a hedge fund.
Agreed. I never meant to imply that there aren't any high expected value finance jobs, I was really trying to just pick on the job titles of Investment banker or Trader and the excessive use of these examples when talking about finance jobs. Like you said the finance sector is huge with a number of defined categories, but under the compensation examples, investment banker and trader was used. I am confident that these two positions comprise less than 1% of all finance jobs.
I won't just complain about it though, I'll offer what I think are the real high paying finance jobs that actually do exist in sufficient quantities.
For Math majors; hedge fund quantitative analyst,
Comp sci majors; financial systems architecture and development
Marketing/finance talents; financial sales/ sales engineer (sales force)/ wealth management/CFP/ commercial loan officer,
Management skills like MBAs; financial consulting firms/ Project management / CPA/CFA/PPO consulting.
I don't see a discussion of selection effect on expected salary. Finance is known for having a high washout rate with a winner-take-all structure.
Edit: I spoke with Colby Davis (LWer) who is a CFA, works for a private wealth management firm, and seems to have a pretty good idea about the job market having just spent a bunch of time exploring his options. According to him, finance works like law. You have the people coming out of the top few schools doing on average very well, and then a long tail of people not doing that well. So potentially not worth it unless you are going to an ivy league and considering finance. These top tier MBA's and PHD's in math reap a huge proportion of the rewards.
Also: "For some reason when people say "finance" they tend to mostly mean IB, when that's a relatively small part of the sector. You can make a ton of money in wealth management too, and it doesn't require an IB background (though it helps a lot), but that's a lot longer path. Nicer work/life balance too, generally"
Um...
It is a huge huge component of the EV of a finance career. The whole idea pretty much hinges on the actual base rate of expected success. Some preliminary quantitative work would be highly helpful.
Yes, I don't know where to get data though.
This, in a world where the job description didn't exist as such forty years ago and probably won't exist as such forty years from now? I mean, I guess if we're talking "base rate, pretending the world is a static snapshot of 2014 conditions."
I'll take scant evidence over no evidence. Even if we only have anecdotes from finance people that is better than nothing. What we're really interested in is the washout rate for a person with the characteristics of an average EA, which will of course be even harder to judge. I still want some idea of the chances.
You will need to make sure your evidence is unbiased or it might well turn out to be worse than no evidence at all.
The original premise is subject to the exact same caveat. Finance looks interesting because we notice successful people in finance.
No, not really. The original question is "Where can I make lots of money?" A purely empirical search will point you towards a few occupations. There will be creatives, there will be athletes in certain sports, there will be startup founders, and there will be finance, too.
The list of activities where you stand a chance of being paid more than, say, $1m/year, is not long.
This may or may not be relevant in this specific discussion, but I do think there is a serious problem in the US where an unbalanced tax code (with a capital gains tax much lower then the income tax) creates incentives for more intelligent people to go into investments as a career (instead of science, engineering, ect) then might be optimal for us as a society.
I think that on the whole, investment probably does have more societal benefits then societal costs, but I also think that we're spending disproportionately too many resources on that section of our economy that could have greater benefits elsewhere because of the distortion effects of the current tax code.
That's a rather amazing statement.
Question: what would a society without investment look like? Say, some society decides that investment has more social costs than benefits and bans it. What then?
There was a time in the earlier part of the industrial revolution when most factories were privately owned without much outside investment; someone paid for them basically out of pocket, with the money either coming from themselves or from family members, possibly with some bank loans. Stocks have been around for a while, but they didn't really become a major part of the economy until the mid 1800's, when they became necessary for large railroad construction. (Which did lead to a railroad bubble and then a massive stock market crash that badly hurt the economy, but was still probably an overall positive thing.)
The economy would certainly be less efficient without a stock market. Very large projects would probably either not happen at all or would require govenrment backing. (To be fair, most large projects require some govenrment backing anyway, but it would be true to an even larger extent). And small companies would have a much harder time getting off the ground unless the person starting the company was already rich, or had personal connections with people who were. Banks would be much more important for businesses as both a source of capital and as a place to get interest on profits then they are today.
I would suspect that the economy would probably still function as a capitalist country with a reasonable standard of living without it, but it would be much less dynamic and less efficient in its use of capital, and would probably have a significantly lower growth rate.
To start, we seem to be having some terminology issues.
I understand "investment" as a general term: it describes the process of forgoing (or delaying) consumption and committing available resources towards some project which you expect to bring you benefits (usually monetary) in the future. A village blacksmith who saves money and then uses it to buy bigger and better bellows for his forge is making an investment.
You seem to understand "investment" as stock market -- the public's capability to freely buy shares in some limited-liability vehicles, typically corporations. Is that so?
Ah, yes, of course. Clearly you can't do away with "investment" in the broad sense, since every farmer has to save seeds for next year's crop.
I was just talking about "investment" in terms of the stock market, the bond market, and financial experts, since that was the subject of the thread; if it's altruistically optimal to become a financial expert/ professional investment manager. That is, "investment" as a specialized profession, not "investment" the concept.
My stance was that "investment" as a specialized profession is probably a net positive to our society, but that we probably already have more people going into that field then are strictly optimal, so the marginal benefit to our society of having one more professional investor are probably smaller then the marginal benefit of having one more engineer or scientist or doctor or educator.
Makes much more sense :-) Still. People who professionally deal with investment are usually called "bankers". They've been around for a long time and the banking system (which you obviously can't have if you don't have any bankers) is usually held to fulfill some very useful functions in the society.
A counterfactual world without "investment" in the meaning of without bankers and, so, without banks and other similar financial intermediaries would look to me to be severely stunted. Finance develops very early in the history of civilizations, if it were made impossible it's doubtful to what degree civilization could develop.
What does "optimal" mean in this context and how do you determine what's optimal and what's not?
Basically, I would expect adding more investment specialists (and yes, you are right, that should include both stockbrokers and bankers) to have diminishing returns as you have more of them relative to the size of the economy as a whole. If you have only a small number of stockbrokers and investment specialists, then any one of them would be able to find any number of very profitable investment opportunities every day that no one else had noticed, and each one individually would add a great deal to the efficiency of the economy as a whole. As you get more and more investment specialists, more and more of the obvious opportunities for investment are taken, and the additional stockbrokers are now looking for narrower margins, are looking at investments with either lower potential payoff or higher potential risk, are looking for arbitrage opportunities with lower profit margins, ect. At some point, you would expect diminishing returns; each additional professional investor would be adding a smaller and smaller degree of efficiency to the market. Having too many people in the investment sector might also force individual investors to take greater and greater risks in order to make a reasonable profit, which creates potential risks to the economy as a whole (especially if those investment specialists are investing other people's money and not their own).
It's hard to say exactally what is optimal, of course. However, the fact that mutual funds (stock funds carefully managed by investment professionals) generally have lower payouts then index funds implies to me that we've reached a point where having additional investment professionals playing the markets is no longer adding a value equal to their wages.
It's also worth pointing out that the financial sector is a much larger percentage of the US economy as a whole then in previous years (about 8.5% of the economy now, compared to about 3% in 1950 and about 6% in 1990).
Edit: for a related example, I would make the same argument about lawyers; it's a vital profession that's necessary for our society to function properly, but we currently have more lawyers then is probably optimal, so you end up with more and more lawyers chasing more and more marginal opportunities, adding to the problem of a lot of unnecessary and mostly pointless lawsuits; and a lot of people who spend a huge amount of time and money getting the education to become a lawyer who end up never getting a good job in the field.
That's a fully general argument, isn't it? You can apply it to, say, engineers in exactly the same way.
I'm not sure if that's true of engineers or scientists. Perhaps the rate of invention and advancement in science increases lineally with the number of people working in those fields instead of having diminishing returns? Perhaps not, but that seems much less clear to me.
Anyway, I was just explaining what "optimal number of investors" looks like; there comes a point when adding another professional investor to the economy adds less to the economy then adding a professional of another type. Almost by definition, investors only have value in as much as they direct capital to other people doing other things of value; there comes a point when you have too many investors compared to the number of people doing things worth investing in for additional investors to have any value.
The question of if we're at that point or not is a valid one; but I will say that it doesn't appear obvious to me that the increase in the percent of resources going into the financial sector in the US from 1990 to today has made our markets more efficient or more stable then they were in 1990.
I think it's arguable for scientists as the set of things-to-be-discovered is really vast. But engineers -- they don't discover things, they make things and the demand for them is not unlimited. For the sake of argument, imagine half the population being civil engineers -- does that look useful?
Yep, you're basically measuring things in terms of opportunity costs. But there are a couple of important questions here: (1) What do you want to measure in? Dollars? and (2) How could you possibly know/observe/calculate that particular point? You either need to trust the markets or believe is successful central planning.
Tech companies (and I think startups of all kinds) routinely give large stock options to employees. It's not obvious that the tax preference for capital gains actually helps investment bankers more than it helps engineers.
Phrasing it that way is misleading. Capital gains tend to come from things like corporate profits which are themselves subject to income tax.
That is very true. In practice, however, there are so many exceptions and loopholes in corporate income tax that corporations end up paying on average only something around 12% of income as tax.
Source: http://business.time.com/2012/02/06/the-corporate-tax-rate-is-at-its-lowest-in-decades-is-big-business-paying-its-fair-share/
So even with the "double taxation", if $100 of profit is taxed through 12% corporate income tax and then taxed again through a 15% capital gains tax (let's say the company pays their profit out as a dividend), the investor gets (100.88.85) $74.8, so it's an effective tax rate of only about 25.2%. (And, yeah, the investor doesn't directly get corporate profits unless it's a dividend, but in theory a corporation that isn't paying a dividend should instead be using profits to re-invest in the business in a way that makes the stock price go up, so the end result is roughly the same for the investor.)
A small business that is filing it's profits through the as normal income tax may be paying a 39.6% tax rate, so it's still much higher.
That doesn't take into account the deadweight loss involved in jumping through hoops to get all those exceptions and loopholes. And in any case the fundamental problem is the existence of the exceptions and loopholes in corporate income tax, not the low capital gains tax.
Jonah, what are your thoughts on the points I brought up in my critique of effective altruism, which while not specifically finance-related, argue against the finance / earning-to-give route?
I have also been critical of earning to give as optimal for contributing social value: last June I wrote a blog post titled Earning to Give vs. Altruistic Career Choice Revisited where I wrote
Since writing the blog post, I've updated somewhat in favor of earning to give. I don’t necessarily buy the analysis that I give below (I think it probably leaves out major relevant factors), but I think that it raises the possibility that earning to give is optimal for the typical person who's capable of making $500k+/year in finance.
There seems to be a great deal of room for more funding for cash transfers. Sub-saharan Africa has about 1 billion people and a GNI per capita of $1,351. (Note that the median income per capita will be smaller than this – I've seen estimates of $600.) About $300 billion/year is spent on philanthropy in the US, so even if all philanthropic spending were on cash transfers, there would still be many people of very low income who would benefit substantially from small amounts of cash. One can question whether scaling cash transfers dramatically is logistically feasible (GiveDirectly's model is based on a cell phone payment system that is not present throughout the developing world), but there seems to be a substantial possibility that one wouldn't run out of room for more funding.
Somebody who's making $500k/year in finance and donating $250k/year to GiveDirectly can double the consumption of 225 Kenyan families. (If huge amounts of money were being put into cash transfers, the cost-effectiveness would be maybe 2x worse.)
What about direct work? Carl Shulman points out that a boost to global GDP of $n would raise logarithms of income by 30x less than an $n GiveDirectly cash transfer, so that one would have to contribute $7.5 million to GDP per year to have an impact similar to that above.
Somebody who we know in common estimates that machine learning contributes $1 million to GDP per year per researcher. With this assumption, somebody who's 10x better than the mean (not median) machine learning researcher beats out the finance worker. But somebody who's 10x better than the mean machine learning researcher may be able to earn substantially more than $500k/year in finance in expectation.
Now consider entrepreneurship. Assuming that a tech startup founder contributes 1/5th of the value of the startup, and spends 5 years working on it, and that the increase to GDP is proportional to earnings, the startup valuation would have to be ~$200 million for the founder to beat out the worker in finance. Some startups contribute more to GDP than they internalize as profit, but probably not by a factor of 10x, so that creating a startup of valuation < $20 million probably doesn't boost GDP by enough to beat out making $500k/year in finance via earning to give. Startups of valuation $20 million or higher generally get venture capital funding, and it's been said that only 1 in 400 new businesses get venture capital funding. (Of course, it's equally true that very few people make $500k/year in finance.)
Carl Shulman gives another argument in favor of earning to give.
Hi Jonah,
Great posts.
I agree these figures show it's plausible that the value of donations in finance are significantly larger than the direct economic contribution of many jobs, though I see it as highly uncertain. When you're working in highly socially valuable sectors like research or some entrepreneurship, it seems to me that the two are roughly comparable, with big error bars.
However, I don't think this shows it's plausible that earning to give is likely to be the path towards doing the most good. There are many careers that seem to offer influence over budgets significantly larger than what you could expect to donate. For instance, the average budget per employee at DfiD is about $6mn per year, and you get similar figures at the World Bank, and many major foundations. It seems possible to move this money into something similarly effective or better than cash transfers. We've also just done an estimate of party politics showing that the expected budget influenced towards your preferred causes is 1-80mn if you're an Oxford graduate over a career, and that takes account of chances of success.
You'd expect there to be less competition to influence the budgets of foundations for the better than to earn money, so these figures make sense.
(And then there's all the meta things, like persuading people to do earning to give :) )
One point to note with Carl's 30x figure - that's only when comparing the short-run welfare impact of a GDP boost with a transfer to GiveDirectly. If you also care about the long-run effects, then it becomes much less clear.
Thanks for all of these thoughts
I have the same intuition, but I would be interested in hearing about whether you have object level reasons for thinking so.
Quoting from an email that I wrote
I would be interested in seeing more analysis of flow-through effects of interventions in the developed world: when it comes to general efforts to increase economic growth / tech speedup, I don't see an object level case for there being disproportionate flow-through effects coming from working in the developed world (though I still give the possibility substantial weight on priors).
Do you (meaning, I guess, anyone reading this) have a good idea of just how altruistic typical people considering "earning to give" are? I mean: a perfect altruist will indeed be looking simply for "the path towards doing the most good", but someone who merely cares much more than most about the welfare of the world's poorest people (or the dangers of runaway artificial intelligence, or eradicating disease, or ending aging, or whatever) will presumably attach some weight to their own earnings.
It seems like it could easily be true that (1) there are other things a smart hard-working person could do that do more good overall than ETG, but (2) ETG handily beats them in terms of the actual preferences of most people contemplating ETG.
(Though there might be benefits in not acknowledging those actual preferences too openly: e.g., doing so might make people feel less good about ETG and therefore less inclined to do it, or it might encourage them to put a higher weight on their own personal gain and therefore give less.)
Perhaps a nitpick, but: in your entrepreneurship example are you taking into account the income (eventually) available to the entrepreneur to give away?
No, I'm not. That's not a nitpick. Quoting Carl Shulman:
It's true that it could be that for a given person, if you consider
then
A, A' < B < C
I tend to think that people who are equally good at finance and entrepreneurship (in the sense of being in the same percentile of each pool of people) should do entrepreneurship: either A or A' could be bigger than B separately, and when taken together all the moreso.
Thanks!
This article needs a section on personal risks of choosing this career: failure modes, with probability and consequences.
It's simply the case that the vast majority of even very smart people aren't making "middle 6 figures" in their late 20s. Having some explanation of why not would add a lot of credibility.
I have a few thoughts on this:
The way to get into finance is to go to a top college and major in either business, economics a hard science or engineering discipline. There are people who take other paths, but that's the main way to go. Financial firms are typically not overly concerned about specific college majors. I personally did Physics + Econ, but Comp Sci + Econ would have worked just as well. The point is that you can pick a major that is valuable outside of finance and still pursue a job in finance. That way, if finance doesn't work out you will still be fine.
You don't generally go to business school straight out of college. Typically, you work for a few years first. So, the "sunk cost" of a finance career is only the cost of college. That compares favorably with being a doctor or lawyer, and is similar to becoming a software developer or something like that.
If you can get an elite finance job (like analyst at Goldman) straight out of college, it will look good on your resume no matter what you do afterwords. If you can't get an elite finance job, but can get some sort of finance job, things change a bit because different areas of finance have different levels of transferability of skills. If you go into a particular niche and then wash out of it or just want to do something else, you might find that your experience is not that valuable.
My particular niche in finance (trading) has fairly crappy transferability of skills. What I do does not teach a lot of general "business" or management skills. There are 2 ways to deal with this issue. One is to only go into trading if you are very confident that it is your true calling. That way, being able to do something else is a moot point. The other is to start out as a quant or programmer. Learning how to program and how to do data analysis are very valuable skills in lots of fields. Finance is one of the best paying fields for programmers and working as a programmer will allow you see how trading works. A lot of traders worked as programmers first. Here is an article about it that features a friend of mine.
I am not a huge fan of "earning to give" and I'm not sure that finance is the best place to engage in that activity anyway.If you want to save lives you could become a doctor and save lives all day and still make enough money to donate to saving more lives. Most people who succeed in finance are intensely interested in money. We have to spend all day thinking about minute details related to making money. Most of the spouses of my colleagues (including my own) have almost no understanding of what we do. They just find it too boring to think about. Having a career that you find boring is a good way to be a miserable person and mediocre at what you do.
I already mention job security, though I acknowledge that the section is very thin.
If one restricts oneself to people who are able to work the hours and who give very high priority to making money, the proportion rises.
What is that proportion? How might one tell whether he or she is in the group likely to succeed or likely to wash out?
Excellent, although you need to take taxes into account, especially if you will be living in New York City.
Thanks, I added a link to your comment.
Another compensation-related consideration: in many cases, base salaries are (very nice but) not stratospheric, and the real money is in the annual bonuses. Large but irregular income may be less valuable than lower-on-average but more regular income, e.g. because it makes planning more difficult and because it leads to paying more tax.
Cultural consequence: A sense of competing with one's colleagues for bonuses may make for a more stressful atmosphere. (In some sense this sort of competition is present in all companies, but it is made more obvious by the bonus system.)
Another ethical consideration: exploitation. That is: some portion of how a hedge fund or investment bank makes its money will be by finding others willing to make bad deals, and making them. See, e.g., the remarks about "dumb money" in Cathy O'Neil's linked article.
Some possible views on this: (1) it's bad because it involves taking advantage of others; (2) it's good because those others would have made the bad deals anyway and your eagerness to take the other side actually incrementally improves the prices they get; (3) it's bad, at least sometimes, because while they would have been willing to make those deals even without you, they might not actually have made them without you.
Shouldn't matter much for earn-to-give.
Not if someone's solely earning to give, no. But (1) it's possible to be "earning to give" and also hoping to enjoy some of the earnings oneself, and (2) AIUI this post is intended to be useful more generally than only to ETGers.
[EDITED to add: On rereading, actually it's not clear that #2 is correct. But I suggest that it should be; LWers might reasonably be interested in finance careers for reasons other than altruism. I have heard that a few people who are not altruists are none the less attracted by the prospect of big piles of money, and some bits of the finance industry are quite well suited to LW-ish brains.]
Your explanation on the above conflicts the experience I've had with the finance sectors who have caused the 2008 Financial Crisis and bankers' fiesta with bailouts unless I'm misunderstanding the definition of 'social value'. I believe the career still is a good option for those earning to give because of the exceptional amount of money people can make, which more than sets off against the socially widespread negative view for financiers if the use of earnings aims at saving the world.
The claim in the article is not "finance people earn a lot, therefore their work is socially valuable". It is "finance people earn a lot; earnings generally correlate with social value to some extent; so we should at least consider the possibility that what they do is valuable, even if at first glance it doesn't look like it". The argument that follows merely observes that some of what happens in the finance sector is socially valuable, which I don't think is controversial. No one is claiming that everything or even most is socially valuable, though it might turn out that way despite the obvious big examples where it hasn't.
(One could argue, though I'm not sure I would, that the fact that financial crises can have such severe consequences is evidence that a properly-working financial sector is very valuable: if it weren't, it wouldn't matter much if it underwent a crisis. The weak point in this argument is that something not very valuable in itself can work its way into a position where its failure can cause disaster; a ruptured appendix can be a medical emergency even though we don't need our appendixes much these days.)