Why MBAs get all the gold??

[MBA-Trader]

This is going to be a rant, so I have to declare that I have the out most respect for the quantitative finance community. I am an MBA, CFA but also an amateur algorithmic trader, hence my interest in the field.

Being a quantitative guy myself I can understand the frustration of the financial engineers when things are not heavily quantitative and when others do not seem to grasp even the most basic mathematical concepts, especially when those others seem to beat them in the career field.

There is a lot of trash talk going around in quant forums about the MBA degree. MBAs have a lot of problem nowadays, especially since everyone seems to get one, but an MBA in Finance from a reputed university is not a joke. Problem is most guys seem to think even MIT's M.Sc. in Finance is a joke, compared to what they supposedly know.
So let's see what it is that financial engineers do know and they can truly bring value with. In general that comes down to math and not financial knowledge. I'm generalizing here, for sure there are guys that truly know finance inside out plus all the math a human being can get. But there are a lot of MBA, MiF guys that do really know their math too, so there is no point in comparing the most well rounded of each group. Hence, we are going to generalize.

Problem no. 1: With the birth of the derivatives world and Black-Scholes and all that, engineering/science guys became important. Not that there were no science guys in finance before, markets are quantitative by nature. But the new complexity of these products brought to them a new field where their mathematical knowledge was applicable. Now what I am talking about here is really option pricing and structuring. And risk engineering. And the field is narrowing right now. Where is the problem? Well, first as I said there are fewer jobs right now, it may change in the future, who knows?
The other problem is that there is not quantitative trading for you. Sure, the job exists, but how many are employed in such a position. Very few, but still all the talk in these forums is exactly about it, a very small part of banks and funds, even a very small part of trading itself.

Problem no. 2: Of all the aforementioned fields, there is one with a lot of need and prospects right now; risk management. But nobody seems to care. Even if I tell you that you are going to be stationed in a desk, practically everyone in these forums treats risk like it's garbage. God forbid that I mention getting a job in risk outside financial markets.

Problem no. 3: Of course I do not want a job outside of finance, that is why i went for an MFE. So you must be really interested in finance, I guess. Still for all this supposed interest, all you seem to talk about is math and exotic products. No discussion on macroeconomic issues, fundamental investing, corporate finance/M&A, portfolio theory. It's all about math and career progression. QuantNet is a financial forum and I have never read the name of Warren Buffett in any thread. Of course, the answer would be, I like markets but I am really focused in a particular segment of it. Anyway, I never said I want to be a portfolio manager, I want to be a trader.

Problem no. 4: Sales and Trading, even most of Proprietary Trading requires math but not stochastic calculus. As I already said quantitative trading is really a subset of the field. Most of the guys are either MBAs or M.Sc. or Ivy League graduates, but for sure they are not MFEs or PhDs. And of the financial engineers that do become traders, if it is not about quant/algo, the reasons they got the job is not their mathematical knowledge. It is their financial knowledge that incorporates their quantitative skills.

Problem no.5: What I want to say is that because some physicists became traders, that does not mean that trading is going to be a mathematician job anytime soon. Guess what?? There always were physicists and mathematicians working as traders. There is not a definitive skillset that applies to the job, but for sure stochastic calculus is not one of them.
Look, business and finance was always interconnected with math and science. Before derivatives or after derivatives. But because businesses understood operations research, that didn't mean that CEO positions belonged to operational researchers. Motorola's Six Sigma or Toyota's Lean Engineering did not bring statisticians and engineers at the top of their food chain. Why? Maybe MBA CEOs give all their promotions to their kind. But also maybe because MBAs are conditioned to seeing the broad picture or systems thinking that connects all the dots. As far as financial types go, they surely live and breathe the markets, not math.

 

[JesseLevermore]

That and those successful MBA's are sociopath criminals

 

[TehRaio]

So someone's just wrote a long rant about basically how mathematical finance is virtually non "important" to trading and related positions, and at the same time is going for a master in financial engineering (which is a basically mathematical finance)

so what is going on here? are you trying to justify the money you spent on your MBA or the money you're about to waste on a MFE? or both?

 

[mhy]

There is a lot of trash talk going around in quant forums about the MBA degree. MBAs have a lot of problem nowadays, especially since everyone seems to get one, but an MBA in Finance from a reputed university is not a joke. Problem is most guys seem to think even MIT's M.Sc. in Finance is a joke, compared to what they supposedly know.

I'm sad to have to admit, but some people I know who have MBAs in finance couldn't tell me how to price a simple Treasury bond. Granted, this is probably not the case for MBAs from schools worth paying for.

Where is the problem? Well, first as I said there are fewer jobs right now, it may change in the future, who knows?
The other problem is that there is not quantitative trading for you. Sure, the job exists, but how many are employed in such a position. Very few, but still all the talk in these forums is exactly about it, a very small part of banks and funds, even a very small part of trading itself.

There are many MFE programs producing anywhere from 20-80 graduates every year. Then you have those with PhDs looking to get into industry. So you have something on the order of hundreds~1000 MFE/PhD graduates every year becoming (hopefully) employed by banks, hedge funds, and other investment firms. There is also crossover to&from 'traditional' (not so quantitative) trading and asset management which adds to the liquidity of the job market. It's not a huge world, but it's not a tiny world either. By the way, as trading continues to become more automated, shouldn't we expect the number of 'quantitative trading' jobs to increase...?

Problem no. 2: Of all the aforementioned fields, there is one with a lot of need and prospects right now; risk management. But nobody seems to care. Even if I tell you that you are going to be stationed in a desk, practically everyone in these forums treats risk like it's garbage. God forbid that I mention getting a job in risk outside financial markets.

Some of the most respected & senior members are in risk and this number is only going to increase given the business climate. @Ken Abbott

No flaming intended: but a lot of the people trashing risk have probably never worked in a bank (in any division) and have no idea what they're talking about. Not everyone in a bank is a trader/investment banker, and there is an extremely high rate of turnover in these areas which is not brought up as often as it should (survival bias). Depending on the situation, entire first-year analyst classes can be gone within 3 years. Of course trading is a lucrative and attractive career, but too many seem to have romanticized it.

Problem no. 3: All you seem to talk about is math and exotic products. No discussion on macroeconomic issues, fundamental investing, corporate finance/M&A, portfolio theory. It's all about math and career progression. QuantNet is a financial forum and I have never read the name of Warren Buffett in any thread.

Personally I find the technical stuff a lot more interesting and I suspect this is the case for many people here as well. My corporate finance class bored me to death and if I had to re-learn that information it wouldn't be nearly as hard for me to do compared to, say, time series analysis (Yikes, I'm forgetting the material from that class already. Time for a review...). That doesn't mean I don't read WSJ or subscribe to economics journals, because information about the economy and investing is important to know--I just prefer discussing the more 'exotic' stuff because it is more refreshing.

Problem no. 4: Sales and Trading, even most of Proprietary Trading requires math but not stochastic calculus. As I already said quantitative trading is really a subset of the field. Most of the guys are either MBAs or M.Sc. or Ivy League graduates, but for sure they are not MFEs or PhDs. And of the financial engineers that do become traders, if it is not about quant/algo, the reasons they got the job is not their mathematical knowledge. It is their financial knowledge that incorporates their quantitative skills.

The guy who has a PhD/MFE is way more knowledgeable in certain areas than an MBA or someone fresh out of Econ undergrad. MBAs are simply not technical enough for some jobs at banks, the primary example being quant research. At the same time, certain groups will be very difficult for PhDs/MFE to get into (such as corporate finance) because they have traditionally been MBA destinations.

They are different career paths. Within finance, each degree gives you overlapping but distinct options. Someone with a hardcore math finance background could easily go from being a trader to working on the analytics development team; the MBA who gets tired of trading could go into business development / corporate development. Outside the industry, a PhD or MFE graduate likely wouldn't leave Wall Street to take a job as Product Manager at a tech company, but I've seen a lot of MBAs do this. MFE/PhD are highly specialized technical degrees; the MBA is a generalist degree.

Problem no.5: Look, business and finance was always interconnected with math and science. Before derivatives or after derivatives. But because businesses understood operations research, that didn't mean that CEO positions belonged to operational researchers. Motorola's Six Sigma or Toyota's Lean Engineering did not bring statisticians and engineers at the top of their food chain.

Many technical people I know would consider it to be as much a sacrifice as a promotion to become the CEO of their companies. They prefer to be in the deep, surrounded by equations and data and code and spreadsheets. Most industries do not allow high-level managers to remain hands-on, including banks. I've never seen an MD write code (the highest level I've seen that still does are Directors, and only occasionally.) So what happens? They stay in their technical roles while the guys with MBAs climb the ladder.

By the way, the financial crisis was so disastrous partially because the top brass at some of the firms involved were clueless as to the risk exposure of their firms' positions. Had they been more technical/mathematically inclined, perhaps they would have been more alert and proactive in taking action.

 

[Anthony DeAngelis]

MBA's are managers. They don't need to know how to price a derivative, they just hire someone to do it.


I don't understand a rant on either party. Not everyone loves math and not everyone loves meeting clients or managing people/process. MFE grads from top schools that stand out can make just as much money as top MBA's.


Do what makes you happy and don't worry about other people.

 

[bigbadwolf]

MBA's are managers. They don't need to know how to price a derivative, they just hire someone to do it.

You're probably right but then this leads to the kind of blow-up that occurred during 2007-2008, where the top bosses were essentially clueless about systemic risk. Maybe still are. The lack of technical background is endemic to top US government officials and corporate bosses.

 

[bigbadwolf]

How many of the top bosses even understand something as simple as the exponential function (aka compounding)? For instance, the number of ebola-infected people is doubling every three weeks. How long before everyone is infected? Granted, this kind of extrapolation may not be valid -- but where are the planning and contingency measures if the rate of compounding continues unabated? This is why some technical background is so crucial even at the top end. Instead the training of government and corporate apparatchiks is exclusively in areas like managerial policy, law, and subjects of that sort.

 

[MBA-Trader]

TehRaio, granted I didn't put quotes where I should and maybe that confused you, but even if you only read the first paragraph, it becomes clear that I am interested in Quant Finance as an amateur, I am not planning on a career in the field.

I myself called it a rant, but I see it more as constructive criticism. It definitely is a pro-quant, not anti-quant post.
I made the case that although the job opportunities are less for "pure" quant trading at the moment, risk management job postings are plentiful, but people are snobbery about it in an irrational way. Risk Management IS quantitative finance, and you do get a lot of non-finance opportunities if job-hunting does not go well.

Secondly, maybe a lot of quants don't care for managerial positions, especially the "PhD personalities", but a lot of them do and are clearly at a disadvantage against MBAs, who are good at managing and appearing knowledgeable, "appearing" being the key-word here. Also, as pointed by mhy and BigBadWolf, a lot of the people at the top are clueless to even simple but essential matters, so maybe it would be socially beneficial if quants went out of their comfort-zone and cared about management and traditional finance a little more.

All I am proposing for MFE programs, is a management course, a corporate finance course and a project finance course (being more math-heavy than accounting and corp finance it should appeal to quant senses). And as I already said a slight departure from the safety of the purely mental work, because at the end no matter curricula it comes down to the individual, as far as managing positions go.

 

[bigbadwolf]

Secondly, maybe a lot of quants don't care for managerial positions, especially the "PhD personalities", but a lot of them do and are clearly at a disadvantage against MBAs, who are good at managing and appearing knowledgeable, "appearing" being the key-word here. Also, as pointed by mhy and BigBadWolf, a lot of the people at the top are clueless to even simple but essential matters, so maybe it would be socially beneficial if quants went out of their comfort-zone and cared about management and traditional finance a little more.

All I am proposing for MFE programs, is a management course, a corporate finance course and a project finance course (being more math-heavy than accounting and corp finance it should appeal to quant senses). And as I already said a slight departure from the safety of the purely mental work, because at the end no matter curricula it comes down to the individual, as far as managing positions go.

You would need a sea change in US management culture for this to occur. At the top end, the managers are generalists who are good at talking, good at holding meetings, and good at Powerpoint presentations. It's a culture where there's no insistence on attention to detail and being precise. That is, it's very different to, say, Japan and Germany. But MFE training is all about meticulous attention to detail and precision. Attempts to put in general finance courses will run against not only the constraint of time but the difference in thought processes: the MFE is essentially a finishing school for those who already come with a background in the exact sciences, and want to learn how to apply the tools to quant finance. The strength of the MFE is precisely its narrow technical focus.

 

[TehRaio]

and let's be honest if you generalize the focus of the MFE it will lose its appeal to its core audience. if someone at some point in their career becomes interested in managerial positions, there are executive MBA programs out there for these people.

It seems to me that the success of MFEs and Quantitative finance in attracting competent individuals has been its technical appeal to people from scientific background. That's why people with PhDs or regular science Msc degrees (maths, physics, stats, CS, etc...) became interested by the industry, not because they want to become managers.
I'm tempted to say that people who get into Quant finance with the goal of becoming managers as their priority are in the minority but I could be wrong.

But for those people, the only degrees that I've seen which could provide such career paths are MIT MFin and Uchicago MBA.

 

[Anthony DeAngelis]

To be fair, LTCM blew up in a major way and everyone there was a PhD. Sometimes being super technical can be a disadvantage.


And the banks fell for a variety of reasons, not just MBA's running things. These CEO's have to worry about countless divisions and initiatives. They rely on managers and others to synthesize technical information into something palatable.

 

[bigbadwolf]

On a more general note, there's this chasm between those trained in the exact sciences and those who aren't. Between those who have assimilated the nuances of, say, real analysis (power series, convergence tests, radius of convergence, etc.) and those jocks who never got beyond business calculus (differentiating and integrating polynomial functions).

 

[Daniel Duffy]

On a more general note, there's this chasm between those trained in the exact sciences and those who aren't. Between those who have assimilated the nuances of, say, real analysis (power series, convergence tests, radius of convergence, etc.) and those jocks who never got beyond business calculus (differentiating and integrating polynomial functions).

Calculus is what you done in school; analysis is what you should learn in university.
Calculus is very close to rote learning. It is however, needed. It's like a driving licence.

How many know
Lebesgue's theorems

Bounded convergence
Dominated convergence
Beppo-Levi

..
Cauchy sequence??

 

[Liam]

the top bosses were essentially clueless about systemic risk. Maybe still are.

I would say some technical people are too. It's a very subtle concept and I have seen technical analysts get confused by the difference between knowing credit spreads would blow up (we discussed this at a credit course months before anything happened and everybody felt something bad would happen) and knowing which products completely unrelated to mortgage based derivatives would be affected (which frankly the amount of which no-one knew).
On paper, given that many of the quant reading lists include books that cover systemic risk and examples of past crashes, technical people should never screw the system up with the right management, but there's things about systemic risk, thinking and analysis that you'll likely only experience and get the feel of on the markets. Also the uncertainty is huge, even with prudent due diligence.
To the OP A previous poster is right - the first thing I told myself prior to entering the financial industry was that views from outside the industry were to be ignored. The thing that amazes me is how many non-finance people tell me to my face how an industry I worked in for 6 years operates. I don't want to know what shit they're trying to project onto me and anybody that arrogant I don't give a fuck about.

 

[bigbadwolf]

On paper, given that many of the quant reading lists include books that cover systemic risk and examples of past crashes, technical people should never screw the system up with the right management, but there's things about systemic risk, thinking and analysis that you'll likely only experience and get the feel of on the markets. Also the uncertainty is huge, even with prudent due diligence.

Systemic risk seems to be an "emergent property" of rapidly increasing financial markets, and one which is difficult to quantify. Only with 20/20 hindsight does it appear inevitable.

 

[MBA-Trader]

To be fair, LTCM blew up in a major way and everyone there was a PhD. Sometimes being super technical can be a disadvantage.


And the banks fell for a variety of reasons, not just MBA's running things. These CEO's have to worry about countless divisions and initiatives. They rely on managers and others to synthesize technical information into something palatable.

In my opinion a lot of quants fail to understand the LTCM case. It seems that there is no problem if they fail, because their mathematical rigor excuses them. If they use the power of mathematics, then it cannot be their fault. If some non-quant fails, he had not a deep understanding of underlying mathematical principles.

I think it is the same state of mind, that blocks them from understanding your second statement. Managerial positions cannot become too quantitative. Of course, I am proposing that these positions become accessible to quants.But the main advantage of a quantitative type of manager lies on being knowledgeable about the information that is communicated to him by quants, and selecting the right people for technical jobs. CEOs cannot go after their Risk Managers' work like they are reviewing papers for a scientific journal. There simply is not enough time for this, even if they could. Plus, the MDs are supposed to do this.
Why do they need quant education then;; For example, without strong quantitative foundations, how can they understand if "creative" financial engineering leads them to uncharted waters;; Strategic decisions depend on answering these kind of questions.

But in order for quants to get those jobs, you have to develop some traditional finance education. It is not only a career necessity. It is a professionalism issue. You should get it, even if you don't care for managerial positions. For example, Roubini, Taleb, Schiff and the IMF economist whose name I do not recall right now (and many more), predicted the crash. More accurately, they did not predict anything, they just understood that the housing market had collapsed. In hindsight we could all do the same, back in 2004, but we didn't because the models told us it's alright. And because we had a psychological bias to follow the "everything is good" interpretation that came with them.

If you accuse the executives for following the bad models (that everyone used), it is incomprehensible why the people that actually built and proposed them (quants) are not to be blamed.

 

[bigbadwolf]

In my opinion a lot of quants fail to understand the LTCM case. It seems that there is no problem if they fail, because their mathematical rigor excuses them. If they use the power of mathematics, then it cannot be their fault. If some non-quant fails, he had not a deep understanding of underlying mathematical principles.

...

If you accuse the executives for following the bad models (that everyone used), it is incomprehensible why the people that actually built and proposed them (quants) are not to be blamed.

The quants served as window dressing, probably still do. Their job is to come up with justifications for decisions made at board level, or for policy decisions non-quant executives would like to make ("See? Our team of PhDs came up with this."). Also, another interesting subject for discussion -- but outside the bounds of this thread -- is the extent to which quant finance is just empty hocus-pocus, the emperor without any clothes. The equations are just there to hoodwink people into thinking the "experts" know what they're talking about ("Hey, pal, you're not even familiar with PDEs? How can you possibly understand today's financial markets or understand the depth of our expertise?") Of course, quants didn't start this con game -- economists have been doing it for donkey's years with their bullshit macroeconomic math models. But again, this is outside the scope of this thread.

 

[Ken Abbott]

In my opinion a lot of quants fail to understand the LTCM case. It seems that there is no problem if they fail, because their mathematical rigor excuses them. If they use the power of mathematics, then it cannot be their fault. If some non-quant fails, he had not a deep understanding of underlying mathematical principles.

I think it is the same state of mind, that blocks them from understanding your second statement. Managerial positions cannot become too quantitative. Of course, I am proposing that these positions become accessible to quants.But the main advantage of a quantitative type of manager lies on being knowledgeable about the information that is communicated to him by quants, and selecting the right people for technical jobs. CEOs cannot go after their Risk Managers' work like they are reviewing papers for a scientific journal. There simply is not enough time for this, even if they could. Plus, the MDs are supposed to do this.
Why do they need quant education then;; For example, without strong quantitative foundations, how can they understand if "creative" financial engineering leads them to uncharted waters;; Strategic decisions depend on answering these kind of questions.

But in order for quants to get those jobs, you have to develop some traditional finance education. It is not only a career necessity. It is a professionalism issue. You should get it, even if you don't care for managerial positions. For example, Roubini, Taleb, Schiff and the IMF economist whose name I do not recall right now (and many more), predicted the crash. More accurately, they did not predict anything, they just understood that the housing market had collapsed. In hindsight we could all do the same, back in 2004, but we didn't because the models told us it's alright. And because we had a psychological bias to follow the "everything is good" interpretation that came with them.

If you accuse the executives for following the bad models (that everyone used), it is incomprehensible why the people that actually built and proposed them (quants) are not to be blamed.

Thank you.

 

[kwlmy]

To move up the corporate ladder, you need to know the right people and have them advocating you. This applies to all industries and companies.

 

[TehRaio]

Am I the only finding this weird?

This discussion would be more interesting in a forum, say wallstreetoasis as an example (where many more people are actually aiming at managerial positions and would be more receptive to the idea)
I'm not sure I understand what MBA-Trader is arguing because as was said a bit earlier there are ways for people who are interested in management to make up for the lack of general management/finance in their background.

About the practicality of this: if MFEs become more general they will be de facto competing with regular MFin programs and i'm not certain they can win that battle. The edge of the degree is it's core technicality and the type of people it attracts (which I think is quite different than the general MFin/MBA population).
In order for those change to be effective they would have to be more important than one or two courses (you don't want that at all).
This is also a professional degree so it minimizes learning time for maximum employability. Arguing that people should take management courses even if they don't need them defies a bit the concept of a professional degree: it's a "specialized" degree where every courses matter unlike undergrad.

Interestingly enough taking additional courses in management would be feasible for PhD students (time-wise) but I have my doubts the PhD types would be interested in management at all but that's just me.

One stats I think would be interesting: percentage of people with background in quantitative finance who left technical positions for non technical ones. I'm tempted to say that it's low and for good reasons (i'm being provocative here). Obviously I speak for myself but I would seriously consider doing something else than finance/economics if not for the technical side of it. I'm not sure there is much room for compromise on this.


ps: again correct me if i'm wrong. I feel like i'm repeating myself