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Taking the Alpha Out of Finance

Would the world be better off if most financiers weren't such alpha types?

Do we really need our bankers to be among the smartest, best-educated people around? Or, would society as a whole make out just fine - even be served better - if the finance sector were populated by and large by run-of-the-mill individuals?

Bankers' compensation is in the news again. Lately the focus of attention seems to be shifting from how to punish bankers' excesses, to a more two-sided conversation about long-run consequences that might flow from the seemingly inevitable turn toward stiffer government oversight of financial activities.

In a research paper dated December 2008, NYU's Thomas Philippon and University of Virginia's Ariell Reshef examined a century's worth of data on bankers' pay and found that regulation was one of three major drivers. Increased regulation discourages innovation in finance, in turn removing financial institutions' incentive to pay up to get the best and brightest talent. Thus, the paper's authors conclude, "Tighter regulation is likely to lead to an outflow of human capital out of the financial industry. Whether this is desirable or not depends on one's view regarding economic externalities."

What is your view? Are bankers overpaid? (Philippon and Reshef's paper asserts that they are.)

More important: If more and better oversight does narrow the gap between compensation in finance vis-a-vis other sectors of the economy, is that a winning scenario for everyone except bankers? If the most creative, talented, hard-driving minds stop crowding into financial occupations - thereby bringing about a simpler and less innovative financial sector - will society as a whole be unambiguously better off?

AUTHOReFinancialCareers News Insider Comment
  • Da
    6 February 2009

    "What I enjoy most about the environment of the front office is that I only interact with the highest quality people - tall, athletic, attractive, ambitious alpha men and women who share the same qualities and mindsets."

    What are you smokin? my front office is filled with overworked, unhealthy, unathletic, nerdy, ambitious but greedy men and women

  • Al
    4 February 2009

    Irrespective of how much money you make, if you work for an investment bank owned by third parties you are still just an employee operating in an externally imposed framework. There are plenty of talented people in banking but if you are willing to take risks and know how to create opportunities you can do much more with your talent.

  • Os
    4 February 2009

    Is not the fact that all these talented smart intellegent individuals failed to understand the instruments they created and the implications of their inadequate modelling proof that the business has indeed already been populated by second or third tier people.

    Look up the John Bird and John Fortune credit crisis clip on youtube. That was from August 2007 and a lot more credible than the supposed titans of finance ever were.

  • Kh
    3 February 2009

    What I find amusing is that you continually find people on these web forums that firmly believe their contribution to society as a Banker justifies being paid such huge sums of money, for what, at the end of the day, generates very little value for the greater good - & in many cases destroys it. Unfortunately the compensation structure inherent in the industry reinforces that self delusion. Thankfully the day of reckoning for the industry is upon us & some of these egos will be deflated when they have to get by on much more meagre pay packets...

  • th
    3 February 2009

    Since when has banking been populated by the brightest? The most ambitious yes, and the most motivated by position and money, yes. The brightest - not a chance. Since I left banking, I have met far more intelligent, thoughtful and insightful people than your average banker. M&A, finance etc. aren't remotely intellectually challenging - most of it is extremely dull and repetitive in fact.

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