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Friends Don’t Let Friends Get Into Finance

Yike Lu

Finder of biased coins.
Thank you for completely ignoring my argument. The so called "objective value" is determined in the end by the value assigned to them by human beings, who assign those values by their own subjective judgment. If there were an objective value to everything, then there would be NO trading and no economy. A person only trades if his/her subjective valuation of the product exceeds the price to be paid. With objective values, everybody would have the same valuation (the objective value) for every product, therefore the price would be the same as this objective value. If the price is the same as the objective value, then everybody would be indifferent between trading and keeping their money.

Yike Lu

Finder of biased coins.
It's called a mispricing. This occurs when the subjective valuation of one asset drives its price away from the value determined by a fundamental connection between two or more assets. In this case, the futures price is different from the value determined by a cash and carry argument. If however, you trace the fundamentals back to their source (from the futures price to the spot price to the supply/demand of the spot) then you will see again the utility function rear its head.

And lest we forget, for the hedge fund, there's the value of taking risk, value of going through all the hassle of processing and selling the oil including book-keeping costs - ALL subjective. An "arbitrage" can exist solely because people on aggregate are so lazy that they don't want to take advantage of it. A statistical arbitrage can exist (and most likely DOES exist) because people on aggregate are risk averse so risk tends to get under-priced. Ever wonder what a prop trader ACTUALLY gets paid to do?

Oh and I almost forgot. What is that extra money worth? Is a dollar really a dollar? Does an extra dollar buy the same amount of extra "happiness" or utility if you are broke or a millionaire?
Just to comment on the thread topic, I think in a matured industry such as manufacturing, there are just not many technological breakthroughs in recently years. In an industry where R&D only brings something evolutionary instead of revolutionary, the marginal benefit of R&D decreases. Therefore, the owners of the business are getting more reluctant to investment additional money into R&D where the risk is high and return is low. This makes it even harder for the manufacturing industry to attract top talents and bring innovation into the industry. More and more smart people nowadays are choosing to join the IT and finance industry because they can either do cool stuff or get paid crazy amount of money.

This may be a bit hypocritical to say as an aspiring financial engineer, I think there is excessive amount of talent and intellect in the financial industry. Too many creative and smart people (mostly science majors) are choosing to work in finance, a industry which is unnecessarily large and provides less intrinsic value to the society than the manufacturing industry.

(Software engineering, on the other hand, does provide a high utility to the society and I am glad many young talents are working in this industry.)

I am saying all these only because it is a saddening reality and it does not work in favor of the well-being or "happiness" of people (unless you get crazy rich like warren buffet and donate 80% of your money to charity). However, unless our government and the industry leaders (manufacturing) are willing to take more risk (I actually mean loss) and create more incentives for talented people to working in traditional science and engineering, more people like me will keep joining the profession that, quoting from Singapore PM Lee Hsien Loong, "creates dreams" instead of "bridges".
Maybe saying that recent R&D was just evolutionary not revolutionary is a bit harsh. But as a university researcher in Math/Computer Science, I must confess I regret not having joined the financial industry 12 years ago when I got my CS PhD. Now it is too late and that is why I advise my best CS students don't be foul and look always at the financial side of the equation when applying for a job. If they have to change expertise area in order to get a safe net please do so. I am sorry to lay down this viewpoint but we all should recognized that, as western society is getting older, more and more people are on their own.