Joris Luyendijk talks to an academic about the pressure on students, the social skills of quants and the problem with financial models.
• This monologue is part of a series in which people across the financial sector speak about their working lives.
After the popular interview with a professor of economics at an Oxbridge college, here is a second economics professor, this time at a London-based institution. He is a cheerful man in his early 50s and a scientist by training.
"We are currently offering one course in ethics, taken by 10-20% of students. What would happen if we offered an entire semester with only ethical courses? I suspect many of our students would have serious problems passing those. If they had to engage with complex ethical issues in debates … many would fail. These are people with a strong mathematical bent, the future 'quants', many with mild Asperger-like qualities.
"I am a quant myself, of sorts. I'd say the disconnect between quants and the rest of the world is an important key to understanding the financial sector today. If you allow me to generalise:
"Quants are extremely good at recognising patterns and structures, and at working in very detailed and systematic ways. Quants feel a strong psychological need for those structures, too, and they tend to presume the existence of such structures and patterns for the world to behave predictably, in ways that can be modelled.
"Quants don't have very good social skills. If you react to a quant in a way that requires empathy, this is difficult for them. Say two students are chatting over at the coffee machine. The quant professor recognises his student and stops to say 'look, I really didn't think your latest paper was good enough'. Then he walks on.
"For most people this would be hard to take; wrong time, wrong choice of words. The quant would fail to see the problem, as in his mind the professor has simply made use of an opportunity he saw to communicate something that needed communicating.
"The thing to take away from this: quants are more likely than others to miss certain aspects of social reality, as their brains are less attuned to them. When they then build a model, they are less likely to incorporate those aspects.
"How this works in the real world; a group of quants within a bank develops a financial product based on a model of the world they have built. They take this new financial product to senior management and say: look at this great new product we designed.
"Now, senior management is very unlikely to be comprised of quants, as quants usually lack the social skills to get very high up the management hierarchy. So senior management doesn't really understand what is being pitched to them. Then the quants have a real problem explaining it to them, because that's another social skill they are unlikely to have.
"What we need are people in senior management who know what questions to ask: about the assumptions underlying the model. About the model's vulnerability to yet unknown and unknowable factors. About the data set of the past 10 years used to project the product's revenue.
"But what senior management hears is this: we have this great product, and had we had it 10 years ago, we all would have made a lot of money.
"I do research and I teach. When I see my students go off on careers in the City I do wonder: can't society make better use of all that talent?
"Most of my students are very, very well aware of the kind of pay awaiting them: £50-£60,000 in their first year. Compare that to our beginning university lecturers. They have completed a bachelor, master and PhD, and will have done a minimum of one or two years of post-docs. Then they are given a three-year contract, maximum. Their salary is £25,000.
"The grades we give students determine if they are going to get that job in a bank and some don't hesitate to pass on the pressure, so to speak. I get students saying 'if I don't get that grade, my career is over'. I tell them that's rubbish, but this is how they are made to feel by the recruitment circus that banks and financial firms roll out. It's striking how quickly they get trapped in the nets cast by the financial industry. Student associations organise CV classes, literally from the first week. Students come under intense peer pressure to apply for internships, all highly competitive.
"I speak to students who are beginning to realise they won't get the grades necessary to even apply. They literally think their lives are over, 21-year-old kids who have been led to believe that either you get into a top paying bank, or it's a cardboard box under London Bridge.
"It's crazy but they've heard little else for three years. I like to say, provocatively: if this kind of brain washing were done by a religious movement rather than the financial sector, it would have been banned long ago. By the way, for foreigners there's a different dynamic as the British Border Agency won't extend their visa unless they get a job.
"I tell students, look at how banks treat you, do you really want to work for an employer that treats you like this? And I point out that there's a whole world out there between the bank where your bonus exceeds my yearly income, and that cardboard box under London Bridge. Most companies don't have the money for the kind of recruitment circus that big banks and financial consultancy firms put up. They still need graduates.
"The other day I spoke to an executive from a fast-growing IT company who needed graduates. He told me his company might be willing to contribute a £500 finder's fee. Haha. I mean, the gap between what banks can afford and £500 … the guy had no idea.
"There is a generation gap between students and professors, clearly. Many of my colleagues conceive of a university education at least partly as Bildung, an opportunity for young people to discover, develop and realise themselves, and we believe society will benefit from that.
"Most of our students could not care less about all this. They conceive of us as a hurdle; a selection station to get through. They aren't here to learn, they are here to pass.
"My impression is that this is what recruitment people tell students, too: 'Doesn't matter how you do it, just meet your target. Get the right grade.' The right grade, then, is anything above the cut-off line established by banks for applications.
"Banks send out their offers for summer internships between February and April. These offers are always conditional; if you don't end in the upper-second class, there's no internship for you. Some students invest so much time in applications, they don't have enough time to actually study. They fail, then come to me and beg for a better grade.
"What happens to the teaching cadre is they decouple, you might say. If my students are only interested in passing tests, they say, then what's the point of trying to teach them anything beyond that? So I'll just concentrate my energies on my research, meanwhile giving students what they want.
"The thing is, 25% of our students are genuinely interested in economics. They lose out. We are thinking about offering special arrangements where they can meet like-minded students. So they can organise a lecture about an interesting economic topic, rather than how to get into Barclay's bank.
"The pressure on students is getting worse, with the economic downturn and positions becoming more scarce. One outcome is cheating. In the old days we were quite forgiving. Now, if you are caught, even with something minor, we kick you out.
"I have spoken to graduates hired over the summer who got laid off in December. 'Now I know why salaries are so high,' they tell me, 'so that we won't complain when from one day to the next we are made redundant.' They are not asking for pity, to be sure. But you can tell this experience is a bruising one, they are still in their formative years.
"I recognise what this Oxbridge professor says about students of Asian working-class immigrant parents. Many of them have told me how their parents asked them for a list of things they might like to study, and where. Then their parents made the choice for them.
"I worry this is sounding a bit bitter. I love teaching. The interaction with young people making their life decisions, it's fantastic. And I am enough of an idealist to think that if we ever want to change anything, this is where we need to start; the heads of these students.
"I celebrate as a victory every student I manage to talk out of a career in finance. Yet a possibly bigger victory is when they go into the City, but with a different and broader perspective. An uphill battle, well worth fighting.
"Has there been a reckoning among academic economists after the crisis? The thing is, they never treated their models the way banks did. As is often the case, the cause of abuse or ill use is the user, not the product itself. Academic economists know that a model is an approximation, a structure helping you understand what you see. Nothing more.
"As a physicist I am very interested in model building. My favourite example is the UK Met Office recent announcement they will no longer issue three-month predictions; they have decided that their models simply aren't good enough.
"Now imagine the Institute of Fiscal Studies saying, we will no longer announce projections for the next quarter, because our models simply aren't good enough. It wouldn't be accepted. They'd probably lose their subsidy. Try to imagine someone at a bank saying: look, you can't model that.
"A very challenging element in any economic model is trust and confidence. If I stop trusting the train I am on, that train will continue to ride just fine. But if people lose confidence in the economy, there are very real effects.
"Take inter-bank lending; banks lending money to each other. As we've seen during the crisis, sometimes banks stop trusting one another, leaving some exposed overnight because they can't access other banks' capital.
"Now, suppose as a regulator you suspect a risk brewing in the inter-bank lending market … what do you do? The problem is that your intervention may bring about the very thing you're trying to prevent. If you intervene, you force banks to make their positions and exposure public. But that will have new reactions across the system.
"What makes it even more interesting is that people are not planets, so will top people at that bank share all they have? Do they have all the information themselves?
"I have worked at universities all my life. If you go and ask, how many PhD students do we have? You'd be amazed how difficult it can be to get an answer. Different departments may use different computer systems, they may use different definitions of a PhD student … now imagine the complexity of a bank.
"My sense is that the Bank of England is quite aware of the need for a far more refined understanding of models and their vulnerabilities.
"To give you an example: the so-called Black-Scholes model is used to calculate today's value of derivatives contracts expiring in the future. That's been incredibly useful. There's one problem. Research shows that were everybody to use the Black-Scholes model, it would cease to work.
"Basically, the quest is for a model that remains unaffected by our knowledge of it. We need lots of talented young economists to delve into this. The trouble is, so much of that talent is sucked up by the banks.
"Ultimately this financial crisis is a crisis of sovereignty; national governments seem unable to exert decisive influence over the sector. I don't mean they will send a tank division into Canary Wharf. But if a national government is to maintain its credibility, sooner or later it will have to prove to its population that it is the ultimate arbiter. Something is going to have to give."
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