To save Wall Street, start with better parenting.

Boy in amazement holding money on white background
by Brooke Allen 

This past February, I retired from finance. Although I intend to continue to study the markets and write about them, I have no intention of ever working in the securities industry again. This makes it easy for me to talk to you about what I think is going on and what needs to be done.

I worked at Merrill Lynch as a computer consultant in the mid-1980s, and from 1986 through 1992 I was an employee—first doing research and later creating and running trading desks in New York and Japan. After a brief stint at Credit Suisse First Boston in Tokyo, I returned to the US in 1993 to work as a consultant to a couple of large Wall Street firms. In 1995, I built and ran a statistical arbitragetrading desk for the US branch of a medium-sized Canadian securities firm.

This February, at the age of 61, I retired from that job of 18 years. I can honestly say my time at that Canadian firm was the best of my entire working career and unlike anything I experienced at any other Wall Street firm. At first I could not put my finger on the difference, but at a Christmas party an elderly co-worker from South America I’ll call Eduardo told me he’d been wondering about the same thing. “I have figured it out,” he said, “The word is ‘decent’ and my theory is that in Canada they raise their children to believe that it is more important to be decent than to be rich.”

Although I’m US born-and-bred, both of our sons went to college at McGill in Montreal. That gave me an opportunity to meet plenty of Canadian young people, and if I suggest Eduardo’s theory to their parents, a typical response would be, “Of course I want my children to be decent; who wouldn’t?”

Real engineers understand ethics in a way financial engineers do not

Andrew Lo was the keynote speaker at the 2010 annual meeting of the International Association of Financial Engineers. Lo heads theLaboratory for Financial Engineering at MIT and his talk was titled: “WARNING: Physics Envy May Be Hazardous to Your Wealth!” He explained that a mistaken belief that financial markets can be treated the way physicists treat the natural world leads economists and financial engineers to a false sense of precision that can have disastrous consequences. You will find a very watchable version of his talk here, and if you love equations then you will find plenty in his 71-page paper here.

I came ready to ambush Lo, and after his talk I held up a slide rule and said, “Despite the fact that I brought my slide rule and my pocket full of pens, and that I’ve been using math in this industry for three decades, I know I’m not an engineer. And I know people who are engineers–some of my best friends are engineers–and I don’t think there are any engineers in the world of financial engineering.” I said the distinction between us and real engineers is that we don’t take responsibility for our actions and hold ourselves to the same ethical standards. I asked, “How come the other engineers don’t say, ‘What are you doing to our name?’?”

Continue reading “To save Wall Street, start with better parenting.”

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