Why do Harvard kids head to Wall Street?(baselinescenario.com)
baselinescenario.com
Why do Harvard kids head to Wall Street?
http://baselinescenario.com/2010/05/04/why-do-harvard-kids-head-to-wall-street/
108 comments
I was also at Harvard in the 90s and was a physics major. I ended up in strategy consulting. The article is pretty much spot on, but I would add one more factor - it's a lot of fun to work with really talented people; thats one of the reasons people go to consulting/banking/law school. I interviewed with research labs and aerospace companies (areas I was interested in) and interviewed somewhat on a whim with strategy consulting firms (as the article points out, it's hard to miss them on campus). The people I met at the consulting firms were all really sharp people. The folks at some of the other places were uninspiring. So, I went to the consulting firm, and for the year and a half that I did it (before coming to my senses), it was easy to overlook _what_ we were doing, because it was great to work with people that challenged me creatively and intellectually and to solve hard problems ("hard" and "useful to the world" not being necessarily correlated).
This dynamic creates a nice positive feedback loop. Once you have a high enough concentration of sharp people, it's easy to get more. Good startups leverage the same phenomenon.
This dynamic creates a nice positive feedback loop. Once you have a high enough concentration of sharp people, it's easy to get more. Good startups leverage the same phenomenon.
I completely agree. I frequently think about leaving the tech sector and going into consulting for just this reason. No work environment (except for a small non-profit I ran for awhile) has been nearly as stimulating as the ivy-league environment I was once in.
I don't think one should judge at all. People take a very broad brush painting Wall Street these days, which is understandable but still wrong. I prefer to judge people, individuals, not categories of people, however defined.
Also, why should "we [...] as a society" think of something "better" (who defines that?) for these bright minds? Surely, they know best how to make their own choices (where I'd emphasize _make_)?
Also, why should "we [...] as a society" think of something "better" (who defines that?) for these bright minds? Surely, they know best how to make their own choices (where I'd emphasize _make_)?
Moral relativism is not the answer. By judging people you make certain careers less attractive. People from top colleges are often status-conscious, so the media can influence their decisions by painting Wall Street in a positive or negative light. This can be a good thing when if talent is indeed "wasted" at Wall Street.
> Surely, they know best how to make their own choices
People don't generally make their own choices. People tend to gather 2 or 3 options (4 or 5 if they're from top schools) and then they "decide" by picking one of those options. It's completely baffling, but people are guided by the choices in front of them, not by where they want to go.
> Surely, they know best how to make their own choices
People don't generally make their own choices. People tend to gather 2 or 3 options (4 or 5 if they're from top schools) and then they "decide" by picking one of those options. It's completely baffling, but people are guided by the choices in front of them, not by where they want to go.
But they're only going act out of their own self-interest. If society is structured as such that solving practical physics problems that could improve society through solving engineering problems and raising our standard of living is less valued than only using one's intelligence to game the system to take money from the less intelligent, then this is society's failing, not theirs.
Disclaimer: I'm of the opinion that it's better for society's best and brightest to use their skills to improve society for themselves and everyone else in the most universally helpful manner.
Disclaimer: I'm of the opinion that it's better for society's best and brightest to use their skills to improve society for themselves and everyone else in the most universally helpful manner.
I also went to college in the late 90's. Where I went to school was not in the northeast, but had a significant overlap with Harvard applicants (or so I'm told). Interestingly, I never heard of anyone talking about going into investment banking/finance. A ton of people did go into "consulting" at McKinsey and (at the time) Anderson, etc, but most of the people I hung out out with in physics/engineering went on to actual engineering jobs or grad school.
When I later heard about this supposed pipeline of Ivy League people going into finance, I always wondered what the deal was. I assume it's primarily a geographical thing. Firms like McKinsey are all over the place, whereas finance is centered on Wall St., so they go for more local recruiting.
Of course some of my college friends did eventually end up going into Wall St. stuff. One after being a physics prof at MIT, another after doing a physics post doc and not finding any other physics jobs, and another left McKinsey and got a PhD in finance. Stochastic calculus FTW!
When I later heard about this supposed pipeline of Ivy League people going into finance, I always wondered what the deal was. I assume it's primarily a geographical thing. Firms like McKinsey are all over the place, whereas finance is centered on Wall St., so they go for more local recruiting.
Of course some of my college friends did eventually end up going into Wall St. stuff. One after being a physics prof at MIT, another after doing a physics post doc and not finding any other physics jobs, and another left McKinsey and got a PhD in finance. Stochastic calculus FTW!
The takeaway line: "The typical Harvard undergraduate is someone who … is driven more by fear of not being a success than by a concrete desire to do anything in particular."
To the extent that this is true, it applies equally well to most people who excel in school, and I think there's a point there that the author leaves untouched.
And that is that it's emotionally very hard to watch your friends — especially people who appear less intelligent, diligent, or otherwise "worthy" (that's subjective, obviously) — make significantly more money than you. In the long term, that can strain friendships, and I think it's a major explanatory factor in why smart kids go "waste" their talent in finance and consulting.
In other words, appearing to be less successful than one's peers is something that few overachievers are emotionally capable of handling.
To the extent that this is true, it applies equally well to most people who excel in school, and I think there's a point there that the author leaves untouched.
And that is that it's emotionally very hard to watch your friends — especially people who appear less intelligent, diligent, or otherwise "worthy" (that's subjective, obviously) — make significantly more money than you. In the long term, that can strain friendships, and I think it's a major explanatory factor in why smart kids go "waste" their talent in finance and consulting.
In other words, appearing to be less successful than one's peers is something that few overachievers are emotionally capable of handling.
I think you miss the point that they make it very easy to go with Wall Street, they tell you exactly what to do, coach you in interviews, and constantly call you to convince you to come to them. They hound people, make them feel special, wanted and even needed. Difficult to compare that to all the companies I have interviewed at, even when they did want me to work there.
So you have the big bad world of the unknown, or this nice bunch of people, who also went to your school, and really want you to come over to New York and hang out with them.
So you have the big bad world of the unknown, or this nice bunch of people, who also went to your school, and really want you to come over to New York and hang out with them.
I recall Microsoft, Google, and other large engineering companies making very similar efforts (and the tech companies certainly push lifestyle factors much more directly). It's the same in lots of areas, not just finance and consulting. The main difference seems to be that these finance and consulting companies recruit across a huge variety of departments, so are relevant to many more students.
More than just preparing people for getting hired, these companies also seem to make their hiring pipeline resemble the admissions pipeline for the Ivy Leagues themselves. Despite the fact that it's a hard grueling selection process, that can still make it the path of least resistance for people who went through that process once already. It's not only familiar, it feeds your expectations of what the "next step" is supposed to look like.
This seems pretty accurate, and if so it would explain why so few of this type of student start startups after college. A startup is exactly the opposite situation: you really have to commit to something, and you are immediately and uncompromisingly judged by customers. It's the opposite of a decorous way to keep your options open. But of course risk and reward are usually proportionate.
Well, risk taking is not the forte of the overachievers: at least not the typical overachiever. They're the ones (and I say this being a member of the group) who have learned how to avoid risks, rather than take them. Consider what the continuous inflated GPA system teaches a student: don't take courses that might drop your GPA and put you below the mysterious wall-street/google-cut (which is rumoured to be 3.7/3.8. It doesn't really matter if it exists - what matters is that there's a perception that it exists). Instead, take courses that "look hard". Stay in your major. Don't explore.
Risk avoidance, ironically, is a fantastic skill for risk takers to have --- as they end up minimizing risks skillfully.
Risk avoidance, ironically, is a fantastic skill for risk takers to have --- as they end up minimizing risks skillfully.
I have not seen any data, but I don't think that's totally fair. Students from my class or those within one of mine at Harvard have started Facebook, Scribd, Airbnb, Paperless Post, drop.io, Baking for Good, and probably others that I am not aware of. Granted Facebook was not "after" college.
I am also not sure that in this regard risk and reward are proportionate. Again I have no data, but I think a random sample of 100 people from Harvard who went into finance 5-15 years ago may have made more money to date (and taken far less risk) than a random sample of 100 college students who started startups 5-15 years ago.
I think the fear of not knowing what else to do, not the money, is the primary force that leads most to finance or consulting. Anecdotally, 0-10% of my friends from college have any concrete thoughts at all about what they really want to do.
I am also not sure that in this regard risk and reward are proportionate. Again I have no data, but I think a random sample of 100 people from Harvard who went into finance 5-15 years ago may have made more money to date (and taken far less risk) than a random sample of 100 college students who started startups 5-15 years ago.
I think the fear of not knowing what else to do, not the money, is the primary force that leads most to finance or consulting. Anecdotally, 0-10% of my friends from college have any concrete thoughts at all about what they really want to do.
Considering there are IIRC 1600 students in each undergrad class that probably counts as few.
As for the risk/reward ratio, you may be right, or you may be wrong, but since neither of us have any data we should probably default to the assumption that they're proportionate.
As for the risk/reward ratio, you may be right, or you may be wrong, but since neither of us have any data we should probably default to the assumption that they're proportionate.
Despite the high risk/high reward, I think the expected value (in money) of going to Wall Street is still quite a bit higher than that of a startup.
The one place data is easy to find is at the high end-- in the Forbes 400-- and there at least that is not the case.
Well, of course, the richest people will all come from the high-risk high-reward pool. But the expected value of doing a startup could easily be lower than working in an investment bank.
If one startup in five "succeeds" and the average return is 5M after 5 years of work, then the expected annual "salary" is 200K. Not a completely unreasonable figure for investment banking (I have no clue what the real numbers are. Plus, not everyone can work in wall street or do a startup)
If that's the case, then a startup would be similar to a lottery ticket. Do it for the thrill, do it for the experience, but don't do it for the money.
If one startup in five "succeeds" and the average return is 5M after 5 years of work, then the expected annual "salary" is 200K. Not a completely unreasonable figure for investment banking (I have no clue what the real numbers are. Plus, not everyone can work in wall street or do a startup)
If that's the case, then a startup would be similar to a lottery ticket. Do it for the thrill, do it for the experience, but don't do it for the money.
Sure, the average expected value of starting a startup could be lower. Or it could be higher. But I feel pretty sure in a startup you have more control over the outcome. You don't have to pay any dues or work your way up any ladder. So if the average expected value of starting a startup was equal to that of going to Wall St, but you were convinced you were a superstar, you'd be better off starting a startup, because there is less force pushing you toward the mean.
That makes sense, but misses one important point: most people who are convinced they are superstars are wrong.
pg, unfortunately for America, in recent years most of the highest paid people (to the tune of hundreds of millions per person) have been financiers. Even fairly successful outcomes in the start-up world, such as Mint.com to take a random example, don't make founders that rich.
I suspect if you look at the new inclusions in Forbes 400 list over the past 10 years, that list (of deltas) would be dominated by Finance. This is not a good thing.
I suspect if you look at the new inclusions in Forbes 400 list over the past 10 years, that list (of deltas) would be dominated by Finance. This is not a good thing.
Instead of assuming this, why don't you check and tell us? It should be pretty easy; historical Forbes 400 data is available online.
http://news.ycombinator.com/item?id=1200488
Only one post-Bubble company (Facebook) currently looks like it has a good shot at making its founder a billionaire. Compare to newly minted finance billionaires Steven Cohen, James Simons, Peter Thiel (also the founder of PayPal, but he made his billion in finance, not software), Ray Dalio, John Paulson, Kenneth Griffin and dozens more.
Only one post-Bubble company (Facebook) currently looks like it has a good shot at making its founder a billionaire. Compare to newly minted finance billionaires Steven Cohen, James Simons, Peter Thiel (also the founder of PayPal, but he made his billion in finance, not software), Ray Dalio, John Paulson, Kenneth Griffin and dozens more.
How long do you think it will take before YC can work out an expected return for founders?
It could take 20 years to get numbers for YC specifically,
because in startups the returns are dominated by the big hits,
which (a) take longest and (b) are rare.
However, you could do a crude back of the envelope calculation now, based on average exits for series A funded companies. I believe the average (again, dominated by the big wins) is on the order of $100m. If you assume founders have 10% at exit, that's $10m. Currently 20-25% of YC funded cos raise series A. So if you ignore startups that don't raise series A (which could be an increasingly large mistake), you get a lower bound of $2m to $2.5m per founder.
Interesting. I'd never done that calculation.
The bogusness of it, of course, is evident from the fact that your expected value is so dependent on the performance of the other startups we accept. If 100% of the startups we funded went on to raise series A, the expected value would jump to $10m. And of course we have no idea how well YC funded startups will do compared to series A funded startups in general.
However, you could do a crude back of the envelope calculation now, based on average exits for series A funded companies. I believe the average (again, dominated by the big wins) is on the order of $100m. If you assume founders have 10% at exit, that's $10m. Currently 20-25% of YC funded cos raise series A. So if you ignore startups that don't raise series A (which could be an increasingly large mistake), you get a lower bound of $2m to $2.5m per founder.
Interesting. I'd never done that calculation.
The bogusness of it, of course, is evident from the fact that your expected value is so dependent on the performance of the other startups we accept. If 100% of the startups we funded went on to raise series A, the expected value would jump to $10m. And of course we have no idea how well YC funded startups will do compared to series A funded startups in general.
Would it have any meaning to deal with (a) and to some extent, (b) by considering the stock founders at their last investment after a certain number of years (say, 5 or 10)?
Side question: You seem more aware of YC contribution to startup performance. Does this mean you see YC more as competing with other investors and less with graduate programs (I think I recall you mentioning that on some old thread).
Side question: You seem more aware of YC contribution to startup performance. Does this mean you see YC more as competing with other investors and less with graduate programs (I think I recall you mentioning that on some old thread).
There is also a worry about the diminishing utility of money.
If the really big exits are dominating the figures, then that will make the odds of your startup "solving the money problem" seem larger than they really are.
But for a back-of-envelope calculation this could be a pedantic quibble.
If the really big exits are dominating the figures, then that will make the odds of your startup "solving the money problem" seem larger than they really are.
But for a back-of-envelope calculation this could be a pedantic quibble.
Present value for $2.5m received in 5 years using a 5% rate (decent, currently) is about $2m.
Present value for $2.5m received in 5 years using a 15% rate (say you are accounting for high risk) is about $1.2m.
Solved?
Present value for $2.5m received in 5 years using a 15% rate (say you are accounting for high risk) is about $1.2m.
Solved?
based on average exits for series A funded companies
Is that counting all the series A funded companies which never exit? $100M sounds about right to me as an average exit size, but only after excluding non-exits.
Is that counting all the series A funded companies which never exit? $100M sounds about right to me as an average exit size, but only after excluding non-exits.
Yes, but it's only for companies that get series A rounds from good (= top 50) VC funds. There is a huge mass of lame VC funds below that whose returns are negative. But since we don't intro YC startups to bad VCs, it seemed reasonable to use norms from the good ones.
That is a lot higher then I would have expected. Does this mean that top VC funds are making insane returns (>50%)?
From what I'm told, a good VC fund will roughly triple over the life of the fund (~ 10 years).
But of course risk and reward are usually proportionate.
In aggregate startups should actually provide greater than proportionate rewards as they're not merely more risky, but also more poorly defined and require more internal motivation.
In aggregate startups should actually provide greater than proportionate rewards as they're not merely more risky, but also more poorly defined and require more internal motivation.
An investment isn't automatically potentially more rewarding just because it carries higher risk.
Something appealing about Silicon Valley was that losers like me could bust ass and really make a big difference and get rich on the way. You just needed to hack and hustle. Apple was the model. Two weirdos building and selling really cool stuff. Relatively simple business model: make things, and sell them. If you read the history of Apple, in the early days they hired straight up nerds and dropouts and bizarre people. One of the early guys who
ended up designing hardware was self-taught and pulled in from the janitorial staff or mailroom or something like that. Finally a "legitimate" way to make a career for oddballs who would not be able to get an interview for a job cleaning toilets at Goldman Sachs.
It's a very different world now where Ivy League overachievers are writing blog posts about choosing between startups and investment banking. Google is the new model. From a weirdo outsider's perspective the Google era startup story sounds very similar to the investment banking path, with a few keywords switched here and there. Elite educations, maybe going all the way back to Montessori school. Please list your GPA and take this quiz for a chance at a week long interview hazing session. Operate under the context of "changing the world" but stay focused on maximizing return in the markets of eyeballs, clicks, keywords and ads. Complicated business models; make something which you don't sell and makes no money, but the data can be packaged into a new form of financial instrument for the online ad market. Sell off the thing in a couple years for a few mil, buy an Audi, try to do it again. Goal is to ultimately hit it big enough so that you can avoid building stuff entirely. Dream about ultimately becoming an investor yourself, coaching other type-A wunderkinds through the difficult life process of choosing one high-paying career over another one, and maybe complaining about taxes and poor service at French Laundry on your blog.
It's a little oversimplified, but wanted to bring back the notion that the startup scene also represents a path to success for creative and strange people without otherwise great career options. It's not just a way for Harvard kids to make as much money as they would in banking without having to wear a suit.
It's a very different world now where Ivy League overachievers are writing blog posts about choosing between startups and investment banking. Google is the new model. From a weirdo outsider's perspective the Google era startup story sounds very similar to the investment banking path, with a few keywords switched here and there. Elite educations, maybe going all the way back to Montessori school. Please list your GPA and take this quiz for a chance at a week long interview hazing session. Operate under the context of "changing the world" but stay focused on maximizing return in the markets of eyeballs, clicks, keywords and ads. Complicated business models; make something which you don't sell and makes no money, but the data can be packaged into a new form of financial instrument for the online ad market. Sell off the thing in a couple years for a few mil, buy an Audi, try to do it again. Goal is to ultimately hit it big enough so that you can avoid building stuff entirely. Dream about ultimately becoming an investor yourself, coaching other type-A wunderkinds through the difficult life process of choosing one high-paying career over another one, and maybe complaining about taxes and poor service at French Laundry on your blog.
It's a little oversimplified, but wanted to bring back the notion that the startup scene also represents a path to success for creative and strange people without otherwise great career options. It's not just a way for Harvard kids to make as much money as they would in banking without having to wear a suit.
Agreed. The ability for an "outsider" to get in and be successful in the startup world on hustle, smarts, and hard work rather than "pedigree" has always been very appealing to me.
This is incredibly accurate.
I'm speaking as a senior at a college to which a huge number of firms come to recruit and a huge percentage of the senior class heads into banking or consulting.
I'm doing neither, but the draw was definitely there. Especially the part about lifestyle appeal over money appeal. When companies recruit, they never explicitly talk about how much they pay, but their recruiting videos and the demeanor of the recruiters and employees who come to visit say everything needed.
I'm speaking as a senior at a college to which a huge number of firms come to recruit and a huge percentage of the senior class heads into banking or consulting.
I'm doing neither, but the draw was definitely there. Especially the part about lifestyle appeal over money appeal. When companies recruit, they never explicitly talk about how much they pay, but their recruiting videos and the demeanor of the recruiters and employees who come to visit say everything needed.
"Especially the part about lifestyle appeal over money appeal."
I heard someone say that during the height of the dotcom boom, Yahoo made over a billion dollars by putting a big purple chair in the lobby. Something about social signaling to attract the right sort of people on the cheap.
I heard someone say that during the height of the dotcom boom, Yahoo made over a billion dollars by putting a big purple chair in the lobby. Something about social signaling to attract the right sort of people on the cheap.
Consulting firms actually generally pay relatively poorly for people fresh out of college. I-Banks give you a relatively low salary as well, but of course there is potential for huge bonuses.
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Another factor: the big finance and management consulting firms like to vastly overvalue Ivy League degrees. A kid leaving an Ivy League school has been told for years that he's special for going to that school, so he'll be much more comfortable in an environment where that illusion is maintained.
In this thread, it has been said that people on Wall Street aren't creating anything; they are just moving money around, making a profit on arbitrage, etc.
I would like to disagree, and recall the second paragraph of this comment by xxzz: http://news.ycombinator.com/item?id=1242980
I would like to disagree, and recall the second paragraph of this comment by xxzz: http://news.ycombinator.com/item?id=1242980
When tied to fundamental underlying assets, investing creates liquidity and capitalizes businesses over the long-term. In its current form, Wall Street "investing" is more like high-stakes short-term gambling. Somehow we got to the point where banks were so leveraged that a single incorrect "investment" nearly resulted in the collapse of our financial system. Is that sort of "investing" creating real value?
Speaking as a college freshman, what I see wrong with finance is that fundamentally, these people, who have essentially spent their whole lives learning to solve complicated technical problems, are being employed by society to essentially produce nothing.
Thats the issue I see with it. I guess only time will show if my perspective changes.
Thats the issue I see with it. I guess only time will show if my perspective changes.
Resource allocation in a modern economy is a complicated technical problem. That's the problem investment banking was invented to solve. That it has been corrupted doesn't alter this basic idea.
I could be totally wrong here, but I get the sense that despite that being the intent of wall street, that basic concept has been very much abstracted away into a complicated game of mutual insurance and risk management.
All I'm saying is that perhaps society would be better off if the resources were allocated a little less efficiently, but those "best minds" were applied to some other field.
All I'm saying is that perhaps society would be better off if the resources were allocated a little less efficiently, but those "best minds" were applied to some other field.
I currently work for an investment bank and have worked at a fortune 500 web company. From a technologists standpoint, the cultural chasm between the two is great.
This is largely because pure technology companies can succeed by culturally incentivizing good engineering, which is timeless. Banks have much shorter horizons in building systems of comparable complexity, and thus have a far greater need to constantly mobilize and change architectural direction. This is just a fact of the industry: technology advances, finance is cyclical. One of the cultural side effects, which certainly can have sinister implications, is that financial institutions lean heavily on monetary incentives to provide such mobility.
There has obviously been a lot of bad press on structured credit, but the basic concept is ultimately a great innovation in risk management.
Surely there was excess. But before ye great engineers start throwing stones, consider how much your current occupation is aided by the massive corridors of fiber optics constructed during the tech boom.
This is largely because pure technology companies can succeed by culturally incentivizing good engineering, which is timeless. Banks have much shorter horizons in building systems of comparable complexity, and thus have a far greater need to constantly mobilize and change architectural direction. This is just a fact of the industry: technology advances, finance is cyclical. One of the cultural side effects, which certainly can have sinister implications, is that financial institutions lean heavily on monetary incentives to provide such mobility.
There has obviously been a lot of bad press on structured credit, but the basic concept is ultimately a great innovation in risk management.
Surely there was excess. But before ye great engineers start throwing stones, consider how much your current occupation is aided by the massive corridors of fiber optics constructed during the tech boom.
The way I see it is: I like to solve difficult problems, which is why I became an Engineer. But now that I'm older I realize that the Wall Street guys are also solving a difficult problem, namely how to maximize your returns.
Instead of taking a wireless signal and deciphering what bits were transmitted, you take a stock market signal and decipher where the market will move next.
So, instead of solving engineering problems and getting paid decently, one can solve financial problems and get paid much much more.
If the intellectual stimulation is there in both cases I don't see why someone would choose to be an engineer any more.
Instead of taking a wireless signal and deciphering what bits were transmitted, you take a stock market signal and decipher where the market will move next.
So, instead of solving engineering problems and getting paid decently, one can solve financial problems and get paid much much more.
If the intellectual stimulation is there in both cases I don't see why someone would choose to be an engineer any more.
You miss the point were the Wall street guy gets huge bonuses when he succeeds, and you get a nod.
Of course, this can't go on. The Wall Street guy doesn't actually create anything, just uses arbitrage to make some cream off of all the dollars these investment banks move around. Or exploit some foreign imbalance. They are the ultimate middle men.
You still need actual people to solve the problems in this world. Or will this all be moved off shore?
Of course, this can't go on. The Wall Street guy doesn't actually create anything, just uses arbitrage to make some cream off of all the dollars these investment banks move around. Or exploit some foreign imbalance. They are the ultimate middle men.
You still need actual people to solve the problems in this world. Or will this all be moved off shore?
There is a lot more to Wall St than skimming a few dollars office space style off of the stock market. Ever heard of an IPO? It's what software startups dream of!
We absolutely need smart minds to go into finance because some sort of economic system must exist and everyone will admit the current one needs improvement. Still, there's not reason to resent people who invest in companies that succeed and make a lot of money doing it. This is almost certainly good for the economy, and I would bet that the majority of people who read HN do the same thing Wall Streeters do on a smaller scale by investing in the market.
We absolutely need smart minds to go into finance because some sort of economic system must exist and everyone will admit the current one needs improvement. Still, there's not reason to resent people who invest in companies that succeed and make a lot of money doing it. This is almost certainly good for the economy, and I would bet that the majority of people who read HN do the same thing Wall Streeters do on a smaller scale by investing in the market.
An IPO is an initial public offering. Do you know what that means? Wall street doesn't create anything, it just sells stock to its clients and others. Often it sells stock to clients before the IPO, which it then sells for the clients again when the stock price reaches a certain number.
This is one of the reasons Google went for a dutch-style auction process for its IPO, and wall street was pissed, since they couldn't use their usual methods to make money from that.
The other things Wall St does is mergers and acquisitions, where they make huge amounts of money on consulting fees.
I mean, sure they do a lot more. They increase liquidity in the market, they help companies get loans, but most of it is moving money around, and getting a fee for it.
This is one of the reasons Google went for a dutch-style auction process for its IPO, and wall street was pissed, since they couldn't use their usual methods to make money from that.
The other things Wall St does is mergers and acquisitions, where they make huge amounts of money on consulting fees.
I mean, sure they do a lot more. They increase liquidity in the market, they help companies get loans, but most of it is moving money around, and getting a fee for it.
At least 20+ years ago Wall Street mostly made money by making available tangible assets to the common investor -- facilitating IPOs and mergers aka "moving money around" does provide for efficient allocation of capital which in turn creates wealth over the long-term. I can understand the argument, then, that bankers are/were providing a service that is beneficial for society. In the last 10 years, though, IPOs have more or less dried up due to Sarbanes-Oxley and M&A activity is only slowly re-emerging. As a result, big banks make most of their profits from larger and riskier trading operations and pumping out intellectual gobledeegook like the CDOs that caused this whole mess. It's this "modern" intellectualized finance stuff that REALLY is just moving around paper junk for profit.
If it wasn't useful no-one would pay them for it.
Just because someone thinks they're paying for something useful doesn't mean they are paying for something useful.
Arbitrage is useful and socially beneficial. For example:
- it ensures that the cost of goods in separate markets remain aligned,
- it creates capital, which can then be invested in other ventures.
Markets would be less efficient without arbitrage.
- it ensures that the cost of goods in separate markets remain aligned,
- it creates capital, which can then be invested in other ventures.
Markets would be less efficient without arbitrage.
The only problem with the financial industry is that after ten years or so you realize that 20% more of 80%* of the minds of people are motivated by a greed that simply doesn't exist in other industries.
*I read people's minds.
*I read people's minds.
In the other industries, people are motivated by doing just enough work to not get fired, and then reading Facebook all day.
Basically, people in general are depressing. That's not a finance thing, that's a human nature thing.
Basically, people in general are depressing. That's not a finance thing, that's a human nature thing.
Right on, this is exactly how I see it sendos (see my comment).
I'm a senior at Yale. I'm pursuing a start-up after graduation rather than a banking/consulting job.
I'm certainly afraid of what the future holds. I'd be lying if I said I wasn't. And this fear almost had me applying to McKinsey and Goldman (along with 30% of my class). But in the end I realized that doing something I'm deeply passionate about (hacking) far outweighs any of the apparent benefits of a cushy Wall Street gig. I think it's time for me to stop worrying about leaving doors open, and start sprinting through one. Maybe I'll end up choosing the wrong door, but I'm confident that I'll learn more at that pace and with that passion than I ever would have in the monotony of a chic midtown office. I've never been so scared in my life. But I've never been so hungry. We'll see how it goes.
(Btw, incidentally, my brother (one year younger) is interning on Wall Street this year. I'm interested to compare notes...)
I'm certainly afraid of what the future holds. I'd be lying if I said I wasn't. And this fear almost had me applying to McKinsey and Goldman (along with 30% of my class). But in the end I realized that doing something I'm deeply passionate about (hacking) far outweighs any of the apparent benefits of a cushy Wall Street gig. I think it's time for me to stop worrying about leaving doors open, and start sprinting through one. Maybe I'll end up choosing the wrong door, but I'm confident that I'll learn more at that pace and with that passion than I ever would have in the monotony of a chic midtown office. I've never been so scared in my life. But I've never been so hungry. We'll see how it goes.
(Btw, incidentally, my brother (one year younger) is interning on Wall Street this year. I'm interested to compare notes...)
See, now why not take that wall street job for a few years? You would have extra capital to spend time working on your startup, maybe make some good contacts, and maybe seek an insight into a world that could really benefit from a startup-wannabes insights.
All the time, you could be looking at someway to make their job easier -> there is your startup.
All the time, you could be looking at someway to make their job easier -> there is your startup.
I would say that this is a good strategy, except that sales to banks is likely to be very high touch, and they are strongly infected with Not Invented Here syndrome. They have extreme security needs and large IT/programming departments, so I think it would be hard to find a niche that they would be willing to buy.
I strongly agree with the building up capital thing, though. If you can save up 50k, and you can handle everything yourself, your runway becomes extremely long. Just have to be careful not to get addicted to the salary.
I strongly agree with the building up capital thing, though. If you can save up 50k, and you can handle everything yourself, your runway becomes extremely long. Just have to be careful not to get addicted to the salary.
Speaking from anecdotal experience, this is not true. As an example, I heard some employees from the company I worked at left to start a company to make messaging software. They ended up with a half-broken IRC client with a terrible UI and no features. They then sold it to the bank for millions of dollars.
If it's expensive, banks like it. Quality is a plus, but not required.
If it's expensive, banks like it. Quality is a plus, but not required.
It was my impression when I was interning at Citi (quant/strategy/trading) that they weren't very experimental buyers, and frequently liked to reinvent the wheel. They certainly didn't redo EVERYTHING. Besides that, there aren't that many big banks to sell to. I'd say it's trickier than average to get a market fit. But maybe you're right that they'll buy any old crap.
And surely having worked at a bank is a huge advantage. Especially if you go in there with the intention of finding some area to help them out with, and network like hell.
Can someone please explain to me why HN readers dislike Wall St so much? There are honestly a lot of interesting things to be "hacked" and a hell of a lot of money to be made if you're good at finance. The personality traits that make people a success at startups (perseverance, critical thinking, people skills, creativity, analytical skills, etc) are the same ones that make people a success on Wall Street. A Wall Street job is not a wrong choice, and neither is doing a startup, in fact there are a lot of similarities.
Primarily because most of these people aren't really creating things. They're moving money around, but as we've clearly seen in the last few years, they're doing a very poor job of optimizing capital placement in the economy.
There's no question that there's lots of money to be made on Wall St., but such activities don't really seem to improve the world or anybody's life other than the bankers. Compare that to people who form startups that can literally change the world for the better.
Wall St, with its massively inflated salaries and bonuses creates a huge brain-drain which attracts bright students away from more socially-useful activities. I think anger about that is the primary source.
There's no question that there's lots of money to be made on Wall St., but such activities don't really seem to improve the world or anybody's life other than the bankers. Compare that to people who form startups that can literally change the world for the better.
Wall St, with its massively inflated salaries and bonuses creates a huge brain-drain which attracts bright students away from more socially-useful activities. I think anger about that is the primary source.
can literally change the world for the better
There is plenty of software that does not really make the world a better place. How much of the time do we engineers spend complaining about crappy code that doesn't work? Or take video games, sure they provide entertainment, but do they have a net positive impact on society? It's dubious at best (not that I don't love SC2).
I don't want to sound too negative, but maybe a lot of finance people aren't adding much value, but neither are most programmers. And there are clearly counterexamples in both industries.
Furthermore, try to imagine our economy without the stock market. It would be very different. That's a clear indication that there is some value there. Granted the market is surely not an optimal system, but that's a hard problem that smart minds absolutely need to be working on.
There is plenty of software that does not really make the world a better place. How much of the time do we engineers spend complaining about crappy code that doesn't work? Or take video games, sure they provide entertainment, but do they have a net positive impact on society? It's dubious at best (not that I don't love SC2).
I don't want to sound too negative, but maybe a lot of finance people aren't adding much value, but neither are most programmers. And there are clearly counterexamples in both industries.
Furthermore, try to imagine our economy without the stock market. It would be very different. That's a clear indication that there is some value there. Granted the market is surely not an optimal system, but that's a hard problem that smart minds absolutely need to be working on.
Entertainment is essential to every civilization as the Romans discovered with their bread and circuses.
Of course you may have a point when games like World of Warcraft ruin people's lives, but from a monetary (and thus time) magnitude, wall st. has wiped out people's savings that have taken decades to build.
Of course you may have a point when games like World of Warcraft ruin people's lives, but from a monetary (and thus time) magnitude, wall st. has wiped out people's savings that have taken decades to build.
Why do people think Wall St took their savings? It's your own decision what you do with your money, and if someone invests in something they don't understand then it's their own fault if they get burned! The stock market has rebounded astonishingly. The people who lost their life savings panicked and that's their own decision. In 2008 I had about 2k which was invested in two stocks (my entire portfolio, everything else was going to tuition). I sold out at the bottom of the market for a 40% loss. If I held them today I would have about a 45% _gain_, not bad for 2 years! Even if the market had not rebounded that is the risk you take for investing in stocks instead of something else. Remember, Wall St is a lot more than consumer investments anyway.
Also, I didn't say there wasn't value in entertainment, I said that it probably doesn't provide more utility than Wall Street's activities although really it's comparing apples to bowling balls.
Also, I didn't say there wasn't value in entertainment, I said that it probably doesn't provide more utility than Wall Street's activities although really it's comparing apples to bowling balls.
Can you honestly say that to the people who were buying triple A investments that turned out to be junk thanks to credit default swaps? Who's fault do you think that is?
Do you blame sick people for not being smarter than a doctor in diagnosing their own sickness?
Do you blame people for dying in a bridge that collapsed because they weren't smart enough to see it was poorly designed?
I could go on and on. The point is that Wall Street has somehow become the only place with no accountability, and everyone is supposed to be an expert.
Do you blame sick people for not being smarter than a doctor in diagnosing their own sickness?
Do you blame people for dying in a bridge that collapsed because they weren't smart enough to see it was poorly designed?
I could go on and on. The point is that Wall Street has somehow become the only place with no accountability, and everyone is supposed to be an expert.
Models and Bottles. I'm dead serious. A couple of friends of mine became bankers because of that and I can't say that I haven't been jealous at times.
So, if I'm reading between the lines correctly:
* working in finance is bad
* working in corporate law is bad
* working in consulting is bad
* working at a startup is bad
* working as a college professor is bad
* working a "public interest" job is good
I don't see anything here that makes me want to take this person's point of view seriously.
* working in finance is bad
* working in corporate law is bad
* working in consulting is bad
* working at a startup is bad
* working as a college professor is bad
* working a "public interest" job is good
I don't see anything here that makes me want to take this person's point of view seriously.
I don't think he said that. He says that your goal may be to save the world by being a public defender, but when you start working as a corporate lawyer with a nice apartment, you stop caring about the goal.
What he's implying is that it's "bad" to throw away your life-long ambitions for a bit of extra money. If your life-long ambition is to be a kick-ass corporate lawyer or investment banker, then there's nothing bad about that at all.
What he's implying is that it's "bad" to throw away your life-long ambitions for a bit of extra money. If your life-long ambition is to be a kick-ass corporate lawyer or investment banker, then there's nothing bad about that at all.
My only friend who became a lawyer who didn't "sell out" is the one who never planned to become a lawyer. He was an electrical engineer who was hired as a technical expert at a big IP law firm. They eventually offered to pay for him to go to law school. Everyone else I know wanted to save the world and now works for The Man. What the blog author writes is very true in that regard.
Without those kids on Wall Street there would be far less kids on startup street. Limited liquidity (no IPOs, no financing of takeovers), no high-risk investment funds, high FX spreads killing international customer and supply chains, etc.
The IT industry is not very representative. Most of the economy is in rather quiet industries like construction, manufacturing, retail, refining, etc., where it usually takes about 100 years to get noticed.
It doesn't matter, most firms of any signicant size require financing sooner or later, and generally that tends to come from wall street one way or the other.
Go down to your local franchised fast-food shop. Chances are the kitchen equipments been leased from the franchise and financed by a finance lease from an investment bank. The impact of risk-tolerant financing on the economy is huge, it's pretty much everywhere when you scratch under the surface.
The same applies for FX spreads. If you're importing or exporting any goods (pretty much everyone these days) then you're benefiting from the tighter spreads created by investment banks that are market making.
Go down to your local franchised fast-food shop. Chances are the kitchen equipments been leased from the franchise and financed by a finance lease from an investment bank. The impact of risk-tolerant financing on the economy is huge, it's pretty much everywhere when you scratch under the surface.
The same applies for FX spreads. If you're importing or exporting any goods (pretty much everyone these days) then you're benefiting from the tighter spreads created by investment banks that are market making.
Fundamentally, what he nails is the recruitment question.
People make decisions based on their sense of what is possible. We hang out on HN and join things like YC to be surrounded by people who reinforce the possibility of our big crazy dreams.
College career offices are the single most antiquarian institution on college campuses, and the institution most letting a generation of people into the embrace of the only external groups who are willing to pay for the privilege to be there.
Still, there is massive movement against this tide. Teach for America is outrecruiting these firms at many of the best schools - which demonstrates the opportunity for alternative organizations and just generally alternative thinking.
But most schools are not Stanford, and most students don't think in terms of startups yet. Finding ways to spread an entrepreneurial culture on campus and connect it to the broader movement towards a new shape of the American business landscape has huge potential to shift what is at the root of this story.
People make decisions based on their sense of what is possible. We hang out on HN and join things like YC to be surrounded by people who reinforce the possibility of our big crazy dreams.
College career offices are the single most antiquarian institution on college campuses, and the institution most letting a generation of people into the embrace of the only external groups who are willing to pay for the privilege to be there.
Still, there is massive movement against this tide. Teach for America is outrecruiting these firms at many of the best schools - which demonstrates the opportunity for alternative organizations and just generally alternative thinking.
But most schools are not Stanford, and most students don't think in terms of startups yet. Finding ways to spread an entrepreneurial culture on campus and connect it to the broader movement towards a new shape of the American business landscape has huge potential to shift what is at the root of this story.
This article has a few weak points.
First of all, not everyone at Harvard is going to law school or pursuing law in any manner (including graduate students there).
Of my friends who attended Harvard, surely some have moved into the finance field but I think part of it is that it is one of the few fields that can (and will) compensate and challenge them properly. Others have gone to work for Google and Microsoft. Others have gone into consulting firms and others have struck out on their own and ran their own consulting firms and companies. By no means is it a clear pipeline that funnels everyone over.
From MIT I see a lot of people going into defense related areas, and not Wall St (more so than Harvard).
And while some Harvard (or any) undergraduate students have little experience at 'life' or getting things done, just look at last weekend's ROFLCon for an example of what a handful of recent Harvard undergrads can do in their spare time.
First of all, not everyone at Harvard is going to law school or pursuing law in any manner (including graduate students there).
Of my friends who attended Harvard, surely some have moved into the finance field but I think part of it is that it is one of the few fields that can (and will) compensate and challenge them properly. Others have gone to work for Google and Microsoft. Others have gone into consulting firms and others have struck out on their own and ran their own consulting firms and companies. By no means is it a clear pipeline that funnels everyone over.
From MIT I see a lot of people going into defense related areas, and not Wall St (more so than Harvard).
And while some Harvard (or any) undergraduate students have little experience at 'life' or getting things done, just look at last weekend's ROFLCon for an example of what a handful of recent Harvard undergrads can do in their spare time.
Sutton is famously (and probably falsely) known for answering a reporter, Mitch Ohnstad, who asked why he robbed banks by saying, "because that's where the money is."
http://en.wikipedia.org/wiki/Willie_Sutton
http://en.wikipedia.org/wiki/Willie_Sutton
Given the financial crisis of the past few years and the reasons behind it, I think the magnetic draw of Wall Street has lessened to some extent. Smart students still have the same fears of not being a success and the same draw to something that promises the possibility of greatness, but they're looking into other outlets. Anecdotally, I've seen a pretty big handful of my non-technical friends applying to Google and similar places. Googlers seem to have a nice lifestyle and the company has done a good job at fashioning their image such that they're seen as an instrument of social change (google.org), innovation, and ethical consistency.
My biggest question from this article is "What is the alternative to Wall Street?" What else should our best and brightest students be doing?
I feel like the passion and creativity required to do a startup aren't any more common in the ivy league population than they are in the general population. Every intelligent person doesn't have the ability to make things happen. And job in the public sector or for a non-profit doesn't seem appealing, especially not to competitive people. So if you're going to get a regular job, Wall St seems like it's as good a place as any, especially if they're actively recruiting you.
I feel like the passion and creativity required to do a startup aren't any more common in the ivy league population than they are in the general population. Every intelligent person doesn't have the ability to make things happen. And job in the public sector or for a non-profit doesn't seem appealing, especially not to competitive people. So if you're going to get a regular job, Wall St seems like it's as good a place as any, especially if they're actively recruiting you.
Did Jeff Bezos answered this question?
http://www.youtube.com/watch?v=jwG_qR6XmDQ
http://www.youtube.com/watch?v=jwG_qR6XmDQ
I think the basic motivation for why Harvard kids head to Wall St. are clear enough (and decently explained in this article). What would be more interesting though would be to explain why an ever increasing greater proportion of Ivy League students go into finance/consulting today (as opposed to 20 years ago).
All companies are about making money. Wall Street is more honest about it, and does a better job of rewarding its employees. The ridiculous money culture ends up centering around stealing money rather than fulfilling real societal needs. Next, the money gets wasted in conspicious consumption..
If you've always been a success it's really hard to do something that carries the risk of failure.
This is exactly why, in hindsight, I am extremely thankful I did not go to an ivy. I would almost certainly be stuck in a well-paying, soul-sucking finance job.
Whew.
Whew.
ive personally found finance is the complete opposite of a soul sucking cushy corporatre gig and infact working in a sme or larger company in the valley the real cubicle soul sucking el dilbert gig. yes your card says * famous web company but in reality all companies primary function is to make money, its just the branding is change the world vs lets make a ton of cash.
im going get downvoted like hell for this but saying all finance jobs are soul sucking cushy jobs is like saying your startup, yes YOURS, is the next google/facebook/twitter/blah
im going get downvoted like hell for this but saying all finance jobs are soul sucking cushy jobs is like saying your startup, yes YOURS, is the next google/facebook/twitter/blah
If it makes the author feel any better, the kids that went off to "save the world" are mostly doing much less good than they imagine.
Because stockbrokers are salesmen, and posh Harvard kids sound posh and make great salesmen.
Money + Motivation
Because of the money . . .
because it pays?
I can explain in under 200 words how to bring a lot more bright people into technology startups.
The following program, sponsored by VCs: VC firm takes you on as a protege. You don't know anything; you're not expected to. There's no guarantee of funding, although the door is open, and you draw a meager stipend (if needed) rather than a salary. You work for startups for the next 7+ years, possibly in the VC firm's portfolio companies, possibly elsewhere. At the end of the 7-year period, you choose between (1) partnership in the firm as a businessman, (2) the same but as EIR, or (3) to remain in startups as a serial entrepreneur. You spend a day per month at the VC firm, shadowing senior partners, but most of your time you spend with your head down coding.
I would have loved to have had such an opportunity coming out of school, and would have easily been one of the few most qualified applicants in the country... but this program didn't exist when I was 23 and, as far as I know, still doesn't.
VC firms out there need to make this happen for the next generation of young people.
The following program, sponsored by VCs: VC firm takes you on as a protege. You don't know anything; you're not expected to. There's no guarantee of funding, although the door is open, and you draw a meager stipend (if needed) rather than a salary. You work for startups for the next 7+ years, possibly in the VC firm's portfolio companies, possibly elsewhere. At the end of the 7-year period, you choose between (1) partnership in the firm as a businessman, (2) the same but as EIR, or (3) to remain in startups as a serial entrepreneur. You spend a day per month at the VC firm, shadowing senior partners, but most of your time you spend with your head down coding.
I would have loved to have had such an opportunity coming out of school, and would have easily been one of the few most qualified applicants in the country... but this program didn't exist when I was 23 and, as far as I know, still doesn't.
VC firms out there need to make this happen for the next generation of young people.
I don't think it's all together clear that startups should be trying to recruit bright young people just out of college.
This is a good point, actually. The quality of person required by a startup is much higher than what an investment bank needs, and most of the people going into IB/MC wouldn't be qualified.
Also: analyst programs are designed to filter for the people with an unconditional work ethic-- people who will cut corners and work 100-hour weeks but simply will not miss a deadline, no matter how arbitrary, and people who will take the most awful work with a smile on their empty faces. This is a bad employee from a startup's perspective, because startups need people who write quality code (hard to do if you're working till 3:00 am) reliably and are willing to question others' decisions.
Also: analyst programs are designed to filter for the people with an unconditional work ethic-- people who will cut corners and work 100-hour weeks but simply will not miss a deadline, no matter how arbitrary, and people who will take the most awful work with a smile on their empty faces. This is a bad employee from a startup's perspective, because startups need people who write quality code (hard to do if you're working till 3:00 am) reliably and are willing to question others' decisions.
It was a good times 10 years ago, but now it is finished, and we (the ordinary people) must somehow deal with all the results of their activity (mounts of debt backed by junk or toxic assets, flawed financial instruments, like CDOs, etc.)
So, 15 years ago smart people were making money on Wall Street, while smart techies making money in Mobile and Communication sectors.
They were a good opportunities to those, who was smart enough to see them, while the rest of us were coded PHP and HTML (or J2EE - the luckiest ones) for food. =)
So, 15 years ago smart people were making money on Wall Street, while smart techies making money in Mobile and Communication sectors.
They were a good opportunities to those, who was smart enough to see them, while the rest of us were coded PHP and HTML (or J2EE - the luckiest ones) for food. =)
I think a lot of what this says is accurate, but I think it downplays something important. It's not just that there's a lot of money in Wall Street, it's that it's not a great time to be (for example) a physicist in this country, or at least it wasn't when I graduated. I remember a friend of mine telling me how you were typically looking at two postdocs after your PhD, and then your options were either to be an academic or to build weapons. (That guy, ironically, is the one who stuck with physics.)
So apparently a lot of people took the money. Those kids could grind, and it all must have just seemed too easy. I find it hard to judge too harshly. A part of me feels like we failed them as a society, in the way we collectively assign value to human activities. Because their minds are capable of things I can only imagine, but we couldn't think of anything better for them to do than this.