I wanted to blog on this article because of its relevance to us as seniors and econ majors. Harvard professor Sendhil Mullainathan believes that students taking jobs in finance post-graduation is, while a good thing for the individual, possibly not good for society at large. He takes an economist stance to look and the costs and returns of taking a job in finance.
Of the cons, for example, he writes that job titles don't tell you whether someone is primarily a rent seeker. He also discusses the concept of arbitrage, a common way to make money in finance, and how it is lucrative and mainly rent-seeking. Real problems, such as poor people trying to pay expenses or people saving for college, are disguised by rent seeking behavior in finance and banks finding clever ways to hide fees. We certainly could do better to take care of real problems such as these, perhaps by finding creative ways to lend to the poor. However, finance is washed with rent seeking behavior and arbitrage.
He concludes, "So how should I feel about my students going into finance? I hope they realize that they have the potential to do great good and not simply make money. It may not be how the industry is structured now, but idealism and inventiveness are two of the best traits of youth, and finance especially could use them."
Like I said, I thought this was a cool article to talk about since we are all looking at jobs and could potentially land in finance. While there is great opportunity to make money in the industry, does taking a career in this route sacrifice some of the greater good in society? His stance is interesting and understandable; financers could do better. What are your thoughts on this stance?
Yes, I'm sure the majority of our class are looking for jobs. I don't believe a career in finance is necessarily a sacrifice of the greater good. To me, finance is like any other profession such as doctor, consultants, etc. Although it may be true that certain individuals seek a career in finance for its rewards but then there are individuals who pursue this profession simply out of passion.
ReplyDeleteI think it's the same thing for every career. We all seek jobs for personal needs (money, passion, self-fulfillment, etc.), and for some people these needs overrides the betterment of society. So I think that the responsibility to balance between personal and social benefits should lie in every individual and every career.
ReplyDeleteI agree with Philip and Hang that this article and the idea of rent seeking can apply to many careers outside of economics, and particularly finance. I think Mr. Mullainathan is quite narrow in his scope in that regard. I think that the rent-seeking and arbitrage behavior that Mullainathan is more so a product of the structure of our financial institutions. Many of the articles we have read and the class discussions have talked about the complete lack of adequate regulation as leading to many of the problems in the financial crisis.
ReplyDeleteI also have to agree with everyone above that this article can also apply to many other careers outside of just economics and specifically finance. When looking at this article I have to agree that while we are seeking jobs as we graduate college, I think that sometimes a person's needs as Hang pointed out are more important that those of the overall society. Although sometimes individuals take a financial job out of personal motivation such as monetary rewards, I do think that some still find this profession a passion that can help them feel fulfilled in their chosen career path.
ReplyDeleteTo echo what everyone else has said, I do think that this is a super relevant article for us as our job search may soon turn from idyllic to more desperate. As someone who had been looking strictly in the non-profit sector, yet has recently looked more at classical economic major jobs, I certainly feel the cognitive dissonance in choosing a job. And while I figure in the short term I'm more likely to end up waitressing somewhere than working a "real job," when thinking in the long term I still debate what I want to do. Do I care more about making money? About gaining power as a CEO or top government official? Especially considering that historically, and still to a large extent currently, those occupations are under filled by women? Or do I want to sacrifice a higher income for potentially being able to do more good in the non-profit sector? After all, we have all had the privilege of somehow or another attaining a good higher education, shouldn't we put that to use in a way that benefits someone besides only ourselves?
ReplyDeleteMostly this article still leaves me with more questions about my future than answers. But I find it comforting that it is not just students, but also professors who struggle with striking a balance between traditional success and benefiting larger society. It gives me the hope that I will never fully grow out of wanting to do good.
I agree with Hang in that we all choose a career based on our personal desires, which don't always include earning a higher wage. However, I don't think that being slightly selfish is bad for the the entire economy. I believe that if we are more competitive and hardworking to achieve our personal desires, then the economy as a whole can benefit.
ReplyDeleteWhile everyone would love to have a job where they get to do something they love everyday and get paid well for it, I really don't think it's realistic for a lot of students coming out of college, unfortunately. And that's apparent here...many people may be going into finance, just because they know it's a lucrative business, and they could potentially make more money, quicker, than other fields of employment, which means they're not there to help improve society. And that's a bummer...but I also suppose I can't really blame them. Money is enticing, no doubt.
ReplyDeleteFirst off, the author uses an incorrect example of arbitrage. Buying an undervalued stock for $10 and then waiting for it increase in price is called capital appreciation. There's a lot of risk in that. Arbitrage, however, involves zero waiting as the trades are instantaneous. So instantaneous in fact, that it results no cash outflows, yet at least one cash inflow, for the arbitrageur. Thus, there is no waiting or worrying on behalf of the arbitrageur. Since risk can be conceptualized as a function of "waiting and worrying," arbitrage, then, is essentially risk-free other than transaction costs. Buying a stock and then WAITING for capital appreciation clearly involves waiting and worrying, or rather risk (stemming from market conditions, and the capital structure of said firm).
ReplyDeleteAside from that, I somewhat agree with the author's claim that finance conveys more rent-seeking behavior, but I found his argument was difficult to follow. Personally, I think the field of finance has a very real and powerful potential to corrupt individuals and organizations. I actually plan (dream) on going into finance and sometimes I do struggle with this decision, because the industry on the whole is quite monstrous. Private equity companies dissolve entire established businesses, laying off hundreds or even thousands of employees if necessary, only to benefit an extremely small group of already well-off individuals. It would be remiss to say that anyone who goes into finance is a bad person; however, if you're restructuring a business in which your firm bought using extremely high leverage, and the only way to get a return is to dissolve the company what are you going to do?
I agree that job seeking can present a moral dilemma, but I think that there are ways to create value for society in finance jobs. Financial professionals are a necessary part of the workforce and can help individuals and organizations meet their financial goals. However, there is definitely potential for (and a history of) corruption in the Finance industry. I think that for this reason, it is important for people going into the field to be educated on business ethics. I know that exams for financial professionals like the CFA exam have ethics portions to ensure that people going into the field are morally sound. Maybe educating economics and finance majors on ethics would be a good idea as well.
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