Wall Street Brain Drain: Why it Doesn’t Matter

by JT McGee

brain, drain, college, wall street, quantitative analsytsMeet John.  John majored in aeronautical engineering at a top university where he was #1 in his class.  He’s nerdy as hell, and he loves rockets.  He always wanted to be an astronaut someday, or at least involved in the design of rockets and their components.

But John won’t go to work for NASA.  In fact, the closest he’ll ever get to space is living vicariously through Luke from the Star Wars trilogy.  John is headed for Wall Street.

Meet our next guy, Dylan Ratigan.  Dylan Ratigan, like most people, believes his opinion is valuable on subjects he can’t fully comprehend.

As such, he’s a frequent critic of the financial markets, and routinely bashes derivatives, speculation, and other financial industry buzzwords of the day for sheer populist appeal.  It works for him.  People tune into his show, even though what he says is entirely off base.

Regardless, Mr. Ratigan is a leader in promoting the concept of “brain drain,” or the belief that Wall Street siphons off the smartest and most talented people from more productive uses in research, especially in developing lifesaving diseases.  (Step 1 for finding an illogical argument: look for the appeal to sick and dying people.)

brain drain, fed, transparency, derivatives, gambling, wall street

Mr. Ratigan believes that John (the guy above) is wasted talent on Wall Street.  His appreciation and understanding of aeronautics means he’d be better suited for NASA, not for Goldman Sachs.  And standing firm in this belief, Mr. Ratigan also believes that the financial markets not only siphon off IQ points, but also productive capacity of the economy.  That is, in Ratigan’s world, all this wealth is being plundered because speculation or something somehow destroys all things tangible—I don’t know, I think he’s just another loudmouth on TV.

In his professional life, John is sure to become what people call a “quant,” or “Quantitative analyst.”  John’s job as a quant will be vastly different on Wall Street than it would be at Cape Canaveral.  On Wall Street, John will work to find the price and value of everything, based only on his mathematical models and assumptions.

A typical problem for John might be finding how an extra inch of rain in Topeka, Kansas will bring higher than average corn yields, which will exert downward pressure on pork bellies, and ultimately result in higher than expected earnings in the 3rd quarter for Bob Evans Farms Inc.  In doing so, his employer can underwrite bets on the weather with confidence, knowing it can arbitrage the different in risk pricing between the derivatives market and Bob Evans stock options.

For Dylan Ratigan, the productivity ends here.  See, John, that perfectly smart and capable person is now just a stupid white collar financial guy who only wants to make money.  But what Mr. Ratigan and so many others miss isn’t that John is making a ton of money, but that John’s job is insanely productive.

Someone else took the short end of that one-inch rain bet.  Maybe it was a homeowners insurance company, or a city government hedging the financial risk of a levee failure and flooding.  Maybe it was an outdoor party planner that sees a linear drop in business equal to 3% of revenue for each additional 1” of rainfall.  Who knows.  All we need to know is that reducing risk is good as it allows us to leverage up production and turn a safety net into another avenue for growth.

And Ratigan, come on; it’s about time you realize that financial services are the largest US export.  That trade surplus tells me we have the comparative advantage, why not let us work it?  Clearly, manufacturing isn’t doing it any more.

Too long; didn’t read:

  1. Wall Street doesn’t create brain drain, but it does create serious productivity
  2. Financial services is one of the country’s best exports, so why do we hate it so much?
  3. You don’t actually have to make something that you can hold in your hand to be productive

Dylan Ratigan seems like the type that would try living without money. Not that there’s anything wrong with that…

{ 7 comments… read them below or add one }

Ravi Gupta April 18, 2011 at 04:25

Awesome article! It amazes me the people that are allowed to broadcast on media. Many times you hear from “financial experts” and “top senior correspondents” who hold no credentials. Often times it makes you wonder if these people run the media we have many bigger problems.
I’m all for letting the financial industry grow. The way I see it if that is our top export we need more of it.

-Ravi Gupta

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Dave @ Money In The 20s April 18, 2011 at 05:38

Good article, JT!

I think the main reason that people dislike financial services so much is because the economic crisis is so recent. You have to remember these are also the guys that came up with credit default swaps on collateralized debt obligations.. Look where that got us

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jeff April 18, 2011 at 12:56

Great article JT. I’ve never watched Dylan Ratigan, maybe its a good thing. I agree with Dave, many people dislike the financial services industry because of the past 2 years. Whether you like or dislike the financial services sector also depends on the household that you grow up in. Nevertheless, it is America’s greatest talent.

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Bogey April 18, 2011 at 20:35

The same people who dislike the financial services industry because of the last 2 years are the same people who were basically drooling to take out huge mortgages on houses they knew they could not afford. There are at least 2 parties to every contract – how quickly we forget.

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JT McGee April 19, 2011 at 11:27

@ Ravi – I think we need more of it too. Why let such a good thing go to waste?

@ Dave – You’re probably right…recency is dominating our thinking. It’s just a shame that we’ve launched a war on the retail banks for what the larger banks created. And truthfully, that subprime monster was mostly set loose by government sponsored entities Fannie and Freddie.

@ Jeff – Yep, when it comes to financial services, it’s all “USA, USA, USA!”

@ Bogey – That’s probably true too. Then again, all that easy money is afforded by the biggest bank of them all, the Federal Reserve. 😉

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Squirrelers April 19, 2011 at 12:45

I like this perspective the post brings, JT.

Really, I suspect much of the bashing of financial services is due to that industry being the cast as the public villain of the moment, so to speak. The reality is that it can also be viewed as one of our great exports, I agree.

I wonder where people who complain about “Wall Street Brain Drain” were when they themselves were making money hand over fist back in the late 1990’s, with specatular growth in the “dot com” group of stocks. Were these people angry about it then? Or, has it taken the recent economic downturn for them to get up in arms about things?

There’s a free market at play here, and if Wall Street is able to do a better job and snagging super bright people than some other sectors, it is what it is. I might like the best and brightest to be finding a cure for every known cancer – for example – but they won’t do so unless they want to. For better or worse, a motivator for many people is money and lifestyle.

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JT McGee April 24, 2011 at 17:01

@Squirrelers – There is a free market at play, and the free market says that the best money is still in number crunching, no matter how much John Q. Public may hate it. I think it’s great, and we should be playing into our strengths as the world’s best financiers.

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