An Ethical Question !

What's the value behind financial engineering??
what does financial engineering do for the economy and what does it do for productivity??

excuse my ignorance but I've been searching for the value behind it,and all I could find was nothing some articles even said that if u're to be a financial engineer ur gonna have to live with the fact that it does nothing for countries' growth ,some even went far by writing that modern finance has affected the annual growth negatively!
I'm an engineering student and I wish to be a quant,but every time that question pops into my mind........what does it introduce to the world??
 
In other words, is it socially unproductive like most articles on the web say?

It's about money making money with superior information and insight. That's the way Brown describes it, without making excuses about some supposed social function it might serve. You might as well ask whether poker playing is socially unproductive.
 
Financial Engineering in ones hands is a set of tools, skills and knowledge that can be used in different ways. In most places they can be used to reduce risks and keep the company afloat.
 
Example? The company doing international transactions with goods and services like Colgate needs to reduce exposure to different risk factors that vary from currency volatility to future production costs.
 
then what interests you, as an engineering student, to pursue a career as a quant, if say quant finance really does not add to social welfare at all?
 
You might as well ask whether poker playing is socially unproductive.

This is way too simple and cavalier.

The difficulty in discussing the ethics of "financial engineering" is the confusion of what exactly that term means to people. If we are going to talk about something specific and often politically-charged, then let's get all our terms straight at the beginning. Additionally let's not conflate "value" and ethics. The original wording of your question seems to assert that value is determined by economic growth. To call this an ethical metric is tenuous without further clarification.

As Alexei pointed out above, one definition is that financial engineering is really just a set of tools and therefore devoid of innate ethics. The question becomes what are you allowed to do with those tools ethically? Alexei further gave an example of an ethical application of these tools by way of currency exchange risk. This reduction of risk (which is, for better or worse, generally used in finance as an equivalent term for uncertainty) allows for more efficient allocation of resources.

Before I get too far ahead of myself try to clarify your terms and I'll give you a better response.
 
Okay, look, if you're going into quant finance, the purpose of your job is to make an epic boatload of money. That's it. Want to be socially conducive? Do something philanthropic with that money like Warren Buffett or James Simons or George Soros. If you can make a gazillion bucks, or even a good amount of bucks, and change somebody's life for the better by writing a check to pay for your neighbor's cute daughter's surgery, you'll probably already have made a bigger personal contribution than all of the rat-racing schmos running a hamster wheel for some for-profit CEO.

Just because the way you earn money may not be socially conducive doesn't mean you personally can't be. Heck make a metric ton of money to the point that your family never needs to look at a price tag, and your future kids grow up to be people who decide to work for a non-profit and volunteer rather than think about how the heck to scrounge together cash for a night out. Would you rather have your future kids be yet another bartender/bus boy/waitress, or volunteer at a kitten shelter?
 
It wouldn't be hard to argue, and I've seen it argued successfully though I forget where (might have been my Macro professor), that quants more often than not push asset prices closer to their true value, increasing the efficiency of the market. This would generally help anyone dependent upon price information to make smarter decisions for their operations, generally translating into less waste. Less waste obviously means a greater (cheaper) supply of resources for everyone else further translating, one would hope, into increased wealth creation.
 
It wouldn't be hard to argue, and I've seen it argued successfully though I forget where (might have been my Macro professor), that quants more often than not push asset prices closer to their true value, increasing the efficiency of the market. This would generally help anyone dependent upon price information to make smarter decisions for their operations, generally translating into less waste. Less waste obviously means a greater (cheaper) supply of resources for everyone else further translating, one would hope, into increased wealth creation.
yep, and this is especially true in the commodities market. For example, many farmer's livelihoods depend on it!
 

Eugene Krel

sunmulA
i have a friend who is completing a social work degree. his contribution to society will be far greater than anything I can provide as an fe.

of course, i can come up with a silly idea that will be used to sell homes to people that can't afford them, but does that make me Jimmy Carter?
 
i have a friend who is completing a social work degree. his contribution to society will be far greater than anything I can provide as an fe.

of course, i can come up with a silly idea that will be used to sell homes to people that can't afford them, but does that make me Jimmy Carter?

His contribution would certainly be more visible, but no, that would make you Bill Clinton.
 
It wouldn't be hard to argue, and I've seen it argued successfully though I forget where (might have been my Macro professor), that quants more often than not push asset prices closer to their true value, increasing the efficiency of the market. This would generally help anyone dependent upon price information to make smarter decisions for their operations, generally translating into less waste. Less waste obviously means a greater (cheaper) supply of resources for everyone else further translating, one would hope, into increased wealth creation.

comon, let's not kid ourselves. As much as people in finance (especially traders/quants) like to make the argument that they create liquidity or make the markets more efficient etc., we know deep down that with the current regime, this is simply not true. Most of the trading nowadays is the facilitation of gambling between large corporations. Obviously trading has its place in society, and regulation should be such that it rewards the 'true' goals of trading (providing liquidity and facilitating more efficient markets) and financial engineering (creating financial products that serve to help a corporations' hedging needs), but the balance (at least right now) is such that it incentivises banks use trading/financial engineering as a gambling tool.

in fact, i would argue that the state of trading/FE is such that it's even worse than poker players - when poker players gamble they make/lose money with one another, but there are no negative social externalities. there have been huge negative externalities from banks gambling with one another.

Just because the way you earn money may not be socially conducive doesn't mean you personally can't be. Heck make a metric ton of money to the point that your family never needs to look at a price tag, and your future kids grow up to be people who decide to work for a non-profit and volunteer rather than think about how the heck to scrounge together cash for a night out. Would you rather have your future kids be yet another bartender/bus boy/waitress, or volunteer at a kitten shelter?

This is a cop-out, and in fact used by a lot of my friends in finance (including me).

Having said this, I am a hypocrite and I haven't yet the courage to quit and do something more socially productive. However, that day will come soon...
 
It's fair to say a lot of people go into this line of work because solely of money. When money is the only reason they are still put up with this level of stress and long hours, it would be hard to explain with a strong conviction.
When the money plays a less important role in their life (maybe when they are richer, older, etc), they will find better things to do with their life.

It's a lot simpler if you think of it as just a simple case of providing technical skills to any highest bidders. Right now, it's banks. Tomorrow, it may be Google, Facebook, or any industry. It's dangerous to limit your options to only one industry, especially one that is in the biggest transformation phrase of its history.
 

DominiConnor

Quant Headhunter
I teach ethics on the CQF, (yes a headhunter teaching ethics to bankers, go figure)

Part of my argument is that the world is not only non deterministic, you can't realistically know what is best for most other people.
Yes there are some obvious bad things, but in general it is tough. In British law we have the notion of "Gillick Competence" and I draw from that to the notion that if someone freely chooses to pay you to do something then by default you are behaving ethically, since they usually know what is best for them better than you do.

Of course as a quant, you are paid to know more than average people, so again we look at medical ethics to the idea of "informed consent", ie it is bad to over ride someone's best interests by your superiority in this context.

So we can generalise this to society as a whole.
We are paid to do stuff, society could at any time stop any activity in banking either on a large or small scale.
It chooses not to stop banking, though it is restricted in what it can do.

Has modern finance made the economy better ?
I believe this is trivially obviously the case.

Over the last 20 years the credit bubble has caused one of the greatest expansions of wealth ever seen by the human race.
The problem for most commentators is that not enough white people were made richer
We have taken a whole billion people out of the most abject poverty. This is the level of poverty where letting your daughter survive is an unaffordable luxury, not "I can't buy the new iPad".
Without the credit expansion the opening up of China and the move towards markets in India and much of Asia would have been small almost un-newsworthy items.
Depending on what you measure, we have fallen back to the dark ages economically, 2006 by most estimates I read.
You're mostly young on this forum and don't remember clearly the famines in the US midwest of 2005, the breakdown of civil order in Rome, refugees in their millions fleeing Canada, oops that didn't happen. We landed badly; that's partly the fault of bankers but equally politicians. The sovereign debt crisis in Greece et al was caused by government, should we be also asking "Is politics ethical" because there is no siginificant political party in the civilised world that does not share the blame, Democrats, French Nationalists, Berlusconi's gang, advicates of European unity, opponents of European unity, the British Labour party, Greek Communists, the Icelandic ruling party, Republicans, all of them of every and any political position, the only commonality is they are politicians.

Almost without exception they are arts graduates, that holds true far more than any other characteristic including race, nationality, sex or faith.
 
finance definitely has its place in society (especially the traditional services like lending, investment banking etc), but in its current form (where most investment banks' revenues come from trading activities) i don't see how people can argue that they add any legitimate value.

In British law we have the notion of "Gillick Competence" and I draw from that to the notion that if someone freely chooses to pay you to do something then by default you are behaving ethically, since they usually know what is best for them better than you do.

How can you not see fallacies in that? Who is this "someone" that pays you in this context (banks? society?) Just because something is lawful does not mean that it is ethical.
 
banks use trading/financial engineering as a gambling tool

Someone please guide me out of here if this truly the case, but it's always been my impression that Quants' rigorous math background was partly used to identify statistical arbitrage in order to aid educated hedging strategies as opposed to gambling, which I've had the skill set for since I could reach into my wallet.

If Quants are right more often than not, then the demand they create more often than not causes asset prices to additionally reflect their identified risk. It simply increases the accuracy of price information, which is widely beneficial to society.

I can see where this falls apart if say a company attempts to trigger an irrational price movement by "playing poker", but do you really need a Quant to do that? Why not hire a game theorist?
 
Someone please guide me out of here if this truly the case, but it's always been my impression that Quants' rigorous math background was partly used to identify statistical arbitrage in order to aid educated hedging strategies as opposed to gambling, which I've had the skill set for since I could reach into my wallet.

Indeed, at times their math background is used to aid in 'educated hedging strategies', but at other times they are used to take huge directional bets. Not sure why you think quants are only used for hedging strategies...
If Quants are right more often than not, then the demand they create more often than not causes asset prices to additionally reflect their identified risk. It simply increases the accuracy of price information, which is widely beneficial to society.

I can see where this falls apart if say a company attempts to trigger an irrational price movement by "playing poker", but do you really need a Quant to do that? Why not hire a game theorist?

Again, agree on the fact that quants allow for market participants to obtain 'fair' prices. My rebuttal to that is, fair prices of what? At what point do these 'exotic' instruments get too ridiculous? are synthetic CDOs really needed? what about options on options? Some people will see proliferation of such products as innovation - I agree, up to a point. But after a certain point its just creation of products for gambling purposes. This of course raises the question, "at what point do products become too complex to give rise to any social benefit?". That's a question for the regulators (and there is of course no clear cut answer), but right now the regulators have gotten the question very wrong.
 
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