Popular version of paper J4.01
presented Wednesday, March 20, 1996
APS March Meeting, St. Louis, MO
A typical physics Ph.D. recipient has spent four years as an undergraduate physics major and six years as a physics "graduate student." His/her training goes well beyond textbook reading, assignments, and exams. There are grueling experimental courses and years of toil in lonely laboratories and libraries. Most of all one experiences immersion in the "scientific method" which implies training in critical thinking, logical precision, invention, research protocol, and communication to the larger scientific community.
Having survived and enjoyed this regimen, why do so many physics Ph.D.'s flock to the financial industry (i.e., "Wall Street")? (The phenomenon is not restricted to physicists. Many mathematicians and engineers take the leap as well.) Given the current influx and future projections, it is not at all unreasonable to speculate that the physics Ph.D. will soon supplant the MBA as the most relevant academic degree for a career in finance.[*]
There are three primary factors driving the migration of physicists to Wall Street. First, the key financial innovations of the past decade demand significant "quantitative" and computational skills that most physicists possess as a matter of course. Such skills include the ability to "model" (translate to the language of mathematics) financial problems, write and execute sophisticated computer programs, and analyze large and diverse data samples.
Second, trained physicists bring rigorous and logical thought processes to bear on new problems even where "scientific" content is lacking. In this regard, the physics Ph.D. is the "liberal arts" education for a technological society. Though they may have valuable roles to play, non-quantitative people can never fully understand the risks of most derivative transactions. The financial knowledge base that an erstwhile physicist has the ability to acquire is tremendous.
Finally, market forces - if you believe them! - imply that physicists benefit society when they migrate to Wall Street. Specifically, employment opportunities within the conventional physics community are dismal. Underemployment, in the form of post-doctoral and other tenuous appointments, is rampant. In stark contrast, established "quants" are in high demand. Annual compensation of $100,000 is not far above "entry-level" and anything less than half a million is not "generous."
But the transition from the scientific to the financial community is not as issue-free as it may seem. While there is no shortage of intellectual challenge, the physicist-in-finance suffers a philosophical setback: the financial world has no sense of history.
History has bequeathed a huge body of knowledge to the scientific world. All physicists seek to study the past and contribute enduring ideas to the future just as all people instinctively seek to contribute their progeny. This prospect of "adding to the future" has no counterpart in finance. (For example, it is highly unlikely that a financial innovator will receive any future recognition for his/her contributions.) The disparity leads to strikingly different cultures.
And further, it is not at all assured that all physicists (or mathematicians or engineers) will succeed. All have the mathematical/computational skills. Those who fail invariably choose the wrong problems to study. Or they may simply begin with the "industry-standard" thought process for modeling certain phenomena instead of bringing in their own creativity and insight.
Finally, the trading floor is the most "diverse" workplace one can imagine. Many quants are stymied by their inability or disinclination to communicate what they've learned to colleagues of different backgrounds.
But still, the prediction holds! In ten years one will hear much less of MBA's "on the Street." And after that? Major corporate CFO (chief financial officer) positions!
* See "Way Off Wall Street" in Fortune, 5 February 1996, pg. 114, for an earlier discussion of physicists in finance.