An Ethical Question !

How about this: there are plenty of people vying for these positions that, if they can contribute something socially positive as a direct result of that work, so much the better, and if they don't, then it isn't the end of the world either.

If making a social contribution through your 9-5 (or whatever hours you work) is what you're after, why not go and become a math teacher? I hear Jim Simons wants plenty of people who'd otherwise go to Google or Genentech or Goldman or RenTec or whatever else to say "forget money, I'm going to teach math to the next generation".

No, really. If you want to be socially productive, there are plenty of fields with more obvious social contributions.

If you must be a quant though, why not go into model validation or risk, and keep firms from betting the ranch on loony schemes cooked up by MBAs who haven't done math/programming in 30 years? Certainly we need such kinds of people in high positions these days. Just look at Corzine's firm that just got splattered all over the financial headlines.
Not sure why you think quants are only used for hedging strategies...

I don't. That's why I said "partly".

"at what point do products become too complex to give rise to any social benefit?".

I would say at the point entities quit demanding the new products, spending their own money as they see rationally.
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.

Fictitious paper wealth, you mean. And since late 2007, Western states have been co-opted into maintaining this pyramid of paper wealth -- no matter what the cost to everyone else (like austerity measures).


MFE Hunter
Just asking -
Is this question similar to asking about the usefulness of Nuclear Reactors in the society?
Everyone knows the risks associated with it, but nations still are marching ahead to meet their future energy and war needs. We saw what happened in Japan recently.

Man has some plan, He has some other plan :)
Financial Engineering adds marginal value on financial products - it flavours the underlying to varies taste for investors.

metaphor: I don't want a stock, but I want an option derivative on that stock.
<=> I don't want a plain ice-cream, but I want a chocolate flavoured ice-cream.

You can say that by tailoring a basic security to investor's need, derivative creating (financial engineering) broadens the market of investment and help the economy more securitized.

That's the only role traditional derivative engineering plays in the market.
It is not the solution that saves the world - no matter what tedious formulae it employees.
Financial engineers are highly paid just like the fashion designers are - you pay us if you like our styles.

That is all.
Of course there are misuse on fixed-income derivatives.
It is like healthy hamburger - unqualified products to fulfil unrealistic customer need
or you could say deceitfully satisfy
like no-risk supreme debts, here the "no-risk" is equivalent to "healthy"
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.

Yes, people do need exotics to gamble in the market.
e.g. Some people give up forecasting the price of a stock, but he/she is confident to gamble its volatility. And a convertible might be used to place the bet. A convertible, widely recognized as a special kind of debt, is in fact a very complex path-dependent exotic.

Again, any derivative is not used to control risk, but a tool to redistribute or tailor the return uncertainty to suit an investor's need.


Quant Headhunter
What is "gambling" ?
There is no such thing as a risk free instrument, even cash may be stolen and certainly will suffer from non-deterministic inflation.
A simple, long term holding of a mix of blue chip equities can vary in price by enough to ruin your life or make you affluent.

Arbitrage incurs counterparty and operational risk as well as the fact that the software and maths may be in error in saying the arb actually exists.

Is there an objective, quantifiable distinction between gambling and investment ?
This is some interesting read "What is the contribution of the financial sector?"

Looks like the authors are not defining "financial recession." In my exceedingly humble opinion, this is not a recession/depression brought about by financial excesses: rather, the excesses covered up for a while deep-set problems with the real economy by means of asset-price bubbles. When these collapsed, the real economy they were artificially propping up collapsed as well. This sort of financial activity has become an instrument to camouflage a structural crisis of Western economies (and arguably of the global economy as a whole): there is no more real growth to be had. The only "growth" is statistical sleight-of-hand. The heart of the problem is arguably a resource-strapped world. If we perform a little thought experiment where we had five more virgin planets to utilise, we could grow out of this stagnation. But world peak oil was in 2005, and other resources are equally constrained. This is arguably why prices of essentials continue to rise in real terms and there is no exit from this economic morass. But perhaps this deserves a thread of its own.