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Comment by lindbergh | Hacker News Reader

I'm currently enrolled in a MSc program with a thesis on portfolio optimization using statistical learning. It might even lead to a publication! But now, the question is, should I go onto a PhD in stats or CS or just settle with it. I know I probably have the chops to complete it, it's just that 4 or 5 five more years in school is somewhat risky. Sometimes it's hard to assert your worth on such a competitive market.

On a side note: omg janestreet is such my dream job. Writing functional code, working on immensely interesting problems (what is the market distribution?) and being paid for it.

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I'm not sure I understand these jobs in an economic sense and I still am not sure of the value they provide to society. Does solving liquidity or arbitrage issues a few microseconds, or even seconds, faster than someone else improve productivity? Or when it doesn't depend on speed but on seeing some tiny market inefficiency, how much does that help the world? (And I'm sure I'm overlooking other economic activities in these firms - what are they?)

There's the economic question of why the market rewards them so well (not that, in the real world, the reward is usually proportional to the value, but it's something to think about). Is it essentially the equivalent of rent-seeking - that is, they get their hands on the resource first and then sell it to others? Or perhaps it's simply the free market, but working on a timescale of microseconds, where efficieny does't really benefit a society of humans that live on timescales orders of magnitude larger.

Finally, there's the concentration of wealth that results from these activities, which is a serious concern.

(I'm not saying everything everyone does must contribute to society, or that I'm a saint who lives on nuts and berries and tends to lepers, but it's a consideration.)

This is the crux of the matter. No, there's no evidence that these activities produce economic value of a magnitude that justifies their compensation.

A certain number of "speculators" are needed to provide liquidity to capital markets. It's unclear what that number is, but it is most likely nowhere near the level we currently see.

In essence, it is gambling. These funds are supported on an ongoing basis by asset management fees. This provides a nice living for the fund managers and employees. They are structured so that the players experience all upside and no downside. If they lose millions of dollars it's not like the employees and managers are responsible for making it up (although sometimes there are clawback provisions, but not nearly as often as you would want). But if they make millions they take a cut of their gains.

This most likely leads to unnecessary risk-taking. (unnecessary in the sense that there's no net economic benefit from it).

So if this is largely a zero-sum game, who are the losers and why don't they do anything about it? Good question. Most directly it is the institutions and wealthy individuals who invest with hedge funds.

These institutions/individuals do it because as a species we have a flawed reasoning capacity and overestimate our ability to exercise good judgment.

> there's no evidence that these activities produce economic value of a magnitude that justifies their compensation

To be fair, that describes many, many jobs. Consider that a backup offensive lineman for your local NFL team probably makes more money than the General in charge of US forces in the Mideast.

I think it's the wrong way to think about things. The evidence that they produce something of value is their compensation. If you don't agree with this, then the ball is in your court to show some evidence that in fact they do not produce economic value. The value could be hard to understand for a lay person, but that doesn't mean it's zero

> they produce something of value is their compensation

Your argument 'I produce something of value to society' means 'I am fairly compensated' is a very odd one.

I think you have misunderstood; what s/he said was "the evidence" that they produce something of value is their compensation". In other words: if what they were doing were useless, no one would pay them all that money to do it.

I think this is wrong, though, at least when the question is value to society. Their compensation is very good evidence that they are doing something of value to someone, but that may be counterbalanced by negative consequences for other people.

For instance, suppose I happen to be a very skilled thief, and some acquisitive billionaire pays me to steal great artworks from museums so that he can hang them in his living room. This is a very valuable service for the billionaire, because the museums probably wouldn't sell them to him at all, and if they did they'd be incredibly expensive; so paying me $1M for each theft is a big win for him. And he really, really loves art, and loves knowing that he owns precious things* even more, and he has money to burn, so getting those artworks is easily worth the $1M/item to him.

In this scenario, I am providing plenty of value (as measured in dollars) to my employer, and my compensation reflects that. But am I doing something of value to society? Hell, no. Perhaps our hypothetical billionaire gets more satisfaction from looking at the Mona Lisa than most of those schlubs at the Louvre, but surely nowhere near enough more to make it better for it to hang in his house than in the museum.

Oops, sorry about the b0rked italics. Unfortunately I didn't notice them until after it was too late to edit and fix.

> The evidence that they produce something of value is their compensation

Isn't this the same argument car vendors use to justify why car sales shouldn't come straight from the manufacturer?

Basically, a lot of people's careers are based on this and if you deprecate that business, they'll be out of luck. But that's the only reason, that too many people have become too reliant on a niche that shouldn't exist in the first place.

>No, there's no evidence that these activities produce economic value of a magnitude that justifies their compensation.

The evidence of economic value is the fact that these activities are so lucrative. If they weren't producing a lot of value somehow, be it directly or indirectly, they wouldn't receive such high compensation in the market. Economic value is essentially a measure of what people are willing to pay for things (revealed preference), under the assumption that people paying for something, absent any cooercion or market distortion, means they value it.

How much did Albert Einstein make compared to Babe Ruth? Why is the highest paid employee at most large public universities not the Nobel Prize winning scientist, but the football coach?

Even in theory, many conditions are required for free markets to function efficiently. Regardless, we don't live in a free market, and many other factors determine income.

There were far fewer people willing to pay to see Einstein do what he did than to see Babe Ruth did what he did. Millions of people got regular satisfaction from watching Babe Ruth, which suggests more people valued what he did than they valued what Einstein did. Economically speaking the value an average person places on something is no less valid than the value an intellectual places on something, and there are a lot more average people than intellectuals.

Thats like saying a Landlord is producing more economic value than the low wage worker who's wages go to pay the rent. One is working, one is rent seeking.

The landlord (or whomever he inherited the property from) created enough value to buy the house. This individual would have refrained from consuming some of the value they produced in order to save money for the house, meaning this produced-yet-not-consumed value could be invested, increasing the overall productive capacity of society. The landlord could even have been a low-wage worker themselves, who saved money for years so that they could buy a house and have a more comfortable life, with the rent they're able to charge being an economic reward for the consumption they forwent.

Or more likely they inherited it.

People who start pyramid schemes create huge "compensation" for themselves, ergo they are doing something valuable for society?

This argument doesn't work.

> People who start pyramid schemes create huge "compensation" for themselves, ergo they are doing something valuable for society?

Economic value isn't necessarily "valuable for society", it's "valued by people as measured by some particular metric based on the preferences expressed in their spending behaviour". Gambling for instance is something that could be said to have little value to society, but has economic value in the sense that gamblers obviously get some satisfaction out of it or else they wouldn't put so much money into it.

Pyramid schemes generally involve fraud, and when someone is defrauded into buying something economics doesn't consider that purchase an expression of their preferences. If it didn't involve fraud and people knew it was a pyramid scheme yet still invested in it, then they'd have to perceive some value in investing else why would they do it?

There's good evidence that the losers in the hft game are retirement funds and other large, conservative beats that don't have as much access to the inside track. The secret market orders in flash boys are a perfect illustration: market manipulation makes the cheaters rich at the expense of almost everyone else.

Finance provides some liquidity to the market, sure, but is largely parasitic. Just like anyone else with a get rich quick scheme, really.

Here's an interesting question, even though I myself don't know the societal welfare impacts of trading.

Suppose for a moment the value traders create is real. Like the trader making $X a year also creates $X of value (like a farmer that works hard/smart to plant 10 times the number of potatoes as his neighbor). How would that make you feel? Would we accept that that was even possible?

If you're optimizing for total career income, talk to recruiters and headhunters, but remember that they're all trying to sell you something and are optimizing over a shorter term horizon than you are. They have a window into the income distributions for different education levels.

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