Physics versus finance: Science strikes back

After almost two decades in which Wall Street was a magnet for quantitative analysts, science is rediscovering its pull, says Stephen Blyth

On October 21, 1993, the US Congress cancelled the Superconducting Super Collider (SSC), a particle accelerator being built under Texas on which $2 billion had been spent. This was not good news for two of my Harvard roommates, both theoretical physicists approaching the completion of their PhDs: their academic job market collapsed overnight. However, both rapidly found employment at Goldman Sachs in New York, where one still works. It was their assertion that derivatives markets – whatever in fact they were – seemed “pretty interesting” and mathematically challenging that led me to contemplate a shift to finance from my nascent academic career.

The quantitatively trained analysts that moved to Wall Street in the early 1990s – the SSC generation – helped catalyse a remarkable growth in financial engineering. The next 15 years saw a flurry of technological advances, increasingly sophisticated modelling and analytical capabilities, and dramatic growth in the volume and complexity of financial markets, especially derivatives. As the financial universe expanded, so did its demand for strong, quantitatively trained students. In 2008, for example, 28% of Harvard seniors going into full-time employment were heading to finance.

Even in 2008, however, many of these students were questioning their own choice. As Harvard president Drew Faust said in her first baccalaureate address to the senior class in June 2008: “You repeatedly asked me: why are so many of us going to Wall Street?” Three months after that speech, Lehman Brothers filed for bankruptcy. The financial crisis and its aftermath significantly reshaped Wall Street. Not only did it put an abrupt end to years of largely uninterrupted expansion of derivatives markets, but it also placed the misgivings of the seniors in stark focus.

First, the edifice of quantitative finance built by the SSC generation was shaken by the empirical price action observed after Lehman Brothers. Fundamental, sound logical arguments that practitioners had taken for granted were shown not to hold. Decades of modelling advances – which had indeed been “pretty interesting” – were thrown into question.

Secondly, the mission and purpose of the finance industry, and derivatives markets in particular, were shown in an unfavourable light. Scandals broke, for example, about the construction of complex products that were supposedly designed to fail and the manipulation of rates upon which derivatives depend. This reassessment of Wall Street, coupled with ongoing regulatory uncertainty about its future form, no doubt contributed to the significant reduction in the number of Harvard graduates pursuing such a career to 17% in 2011.

The quantitatively trained analysts that moved to Wall Street in the early 1990s – the SSC generation – helped catalyse a remarkable growth in financial engineering

I observe evolving attitudes among the students I teach in my quantitative finance course at Harvard. Many are planning a future on Wall Street and are excited by the mathematical challenges and the dynamic environment ahead of them. Some students, however, take the class to explore a powerful and elegant application of probabilistic reasoning and a different mode of logical thinking. Others are simply curious about the finance industry, given all the attention it has received. As one student wrote in the course evaluation: “I had never understood why people would want to enter the finance world unless they just wanted to make as much money as possible. Now I have a little more respect... because a lot of people just like the way of thinking.”

The course may help students to fulfil Faust’s 2008 exhortation to graduates to ask questions of themselves and challenge their choices for careers. As she wrote, the liberal arts “empower you with the possibility of exercising agency, of discovering meaning, of making choices”.

One choice – that between physics and finance – may now be more balanced. Almost 19 years after the cancellation of the SSC, scientists at the Large Hadron Collider (LHC) at Cern in Geneva reported on July 4 the likely discovery of the Higgs Boson, energising – no pun – the physics community. In Krakow in September, Cern physicists proposed an even larger collider, 50 miles in diameter, to enable scientists to tackle ever deeper mysteries of the universe.

Does this mean we may see the emergence of an LHC generation – a cohort of quantitatively trained students once bound for Wall Street now heading to physics? A wholesale migration seems unlikely, given the continued compelling attractions of a career in finance: an energetic, decisive environment; engaging intellectual and mathematical challenges; and the possibility of high levels of pay. The examination of the industry post‐crisis may also have led to a clearer appreciation of the fundamental purpose of capital markets and investing. However, today’s seniors may now be in a position to make more balanced and informed choices, so no longer does the question “Why Wall Street?” go unanswered.

Stephen Blyth is professor of the practice of statistics at Harvard University and managing director at the Harvard Management Company