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September 29, 2008

In Defense of the Pointy Heads

Paul Glasserman
Jack R. Anderson Professor of Business
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An article in the New York Times on Sept. 28 (“Wall Street R.I.P.: The End of an Era, Even at Goldman”) which proclaimed the death of Wall Street, refers to the growth of “pointy-headed” quantitative analysts in the industry. It is an epithet that fits well with the roll-your-eyes-and-don’t-even-try-to-understand-it angle of much coverage of the financial crisis. Derivatives are invariably “arcane” or “dizzyingly complex” and, worst of all, unwelcome in Omaha. The geeky dad went to work at a bank, and now we’re all living “Honey, I Shrunk the Credit Market.”

Rewind to just a few months ago. Alarms were being raised about New York losing its prominence in the global financial services industry. Mayor Michael Bloomberg and Senator Charles Schumer commissioned a study on how best to buttress New York’s leadership position. A key finding of the 2007 Bloomberg-Schumer report (PDF) is that New York needs to expand its supply of quantitative talent to keep up with global competition. London may already have edged out New York in some markets, and increased competition from Asia is inevitable.

The current crisis does not change the logic of the Bloomberg-Schumer report. A complex industry requires a highly skilled workforce. Whereas a high school diploma may once have been sufficient for work as a trader, you’re now more likely to find someone with a graduate degree making markets. Risk management needs to be at least as sophisticated as the trading it monitors. Financial intermediaries are modern factories, producing products to manage and transfer risk. Yes, we need new measures to guard against toxic waste, but we especially need people who understand the machinery.

If Wall Street is drained of its quantitative talent, the effects will be felt within months, not years. And as the industry recovers, the consolidation wrought by the current crisis will open the way for new and smaller firms. Technology will be critical to financial innovation, while more routine work may move off shore. Will the sequel be “Revenge of the Nerds?” No, New York’s competitive advantage will rely on a base of highly educated professionals with a combination of quantitative and managerial skills, heads that operate in both pointy and broad modes. The opportunity and challenge for business schools is to develop this talent.

Photo credit: Mario Klingemann