Remuneration, finance style

The WSJ (week of 5/11/09) had an article about this subject that referenced academic work by Thomas Philippon (New York University) and Ariell Resheff (University of Virginia). The WSJ touted the "long bull market for wall street pay." Using graphs from Philippon and Resheff, the WSJ article mapped events related to regulatory and deregulatory legislation to the timeline.

So, let's go to the source which is a paper titled "Wages and Human Capital in the U.S. Financial Industry: 1909-2006" and which was submitted to the Journal of Finance. Two figures from the paper tell a lot.

Figure 10: Actual and Benchmark Relative Wages in the Financial IndustryIn this Figure, we see that there is a drop in 1940 accompanied the Investment Advisors and Investment Company Acts. Then, there was a long period where the money guys were paid like the rest of us stiffs. But, notice the upshot of the finance pay after the relaxations of 1980 after which we saw bunches of supposedly creative methods come into play that mainly lined certain pockets but extracted oodles from countless pockets of the hapless.

Figure 7: Annual Income of Engineers and Financiers
An earlier Figure in the paper compared the pay of the financiers and engineers. Needless to say, those of the latter set, who do real work and cope with real problems, lags behind the ego-stroking pay given those with big egos and not much else. It's interesting that there were fewer finance graduates which could be used to explain the pay gap; yet, comparative superiority of the engineering education over the financial can be easily argued. The latter is heavily influenced by quasi-empirical issues (though, they have not awakened to this, as of yet).

In his post on the Stern blog, Philippon asks "Are Bankers Over-Paid?" and concludes that they are; Philippon says about 40% too much pay in 2006.

Remarks:

08/01/2013 -- Ben cannot unwind or taper down; he has too many Doves. We'll have to get back to the king thing (yes, the divine rights of the CEO, new royalty, in other words) and dampening of these types by a new outlook (Magna-Carta'ísh).

03/06/2012 -- 4 Myths.

02/05/2012 -- Time to update the theme of the best and brightest.

01/13/2011 -- Pay seems to be a continual issue.

09/24/2009 -- Things looking up for those who churn.

09/03/2009 -- Computational foci raise miraculous need.

08/10/2009 -- As promised, FEDaerated is here.

07/31/2009 -- Let's see, 5,000 got over $1M for services rendered. Well, that's probably a sign of being a best-and-brightest, at least to certain eyes; it's called rolling-in-the-dough.

Now, this can be used to illustrate how the game it to fill the pockets of a small set to an exorbitant amount. Does the game need to be that way? Hell no. We'll look at that some more.

07/17/2009 -- China has eaten our lunch (and dinner). Shows how silly our games are. Yet, finance can be run by people who can be non-profit in scope and who have an impeccable (oh, what quaintness!) un-interest in money.

06/17/2009 -- A fresh look will be needed.

Modified: 08/01/2013

Certainly certainty

Our every day events would have, with sufficient insight, enough meat to support very deep and prolonged discussion of the many philosophical issues suggested by the title of this post which will deal with unknown unknowns (the opposite, so to speak).

One could put it this way: we see 20-20 only when looking back. But, guess what? Even that is wrong; we never see 20-20 (assuming that pair of numbers represents some type of perceptual paragon). The problems of the world stem from several things, but cognitive mismatches are a very large one.

Case in point is the manager who has to exhibit some type of optimistic view (he or she thinks) in order to keep the troops motivated to work hard. "Oh yes," he says "we'll have this thing tested and out the door on time." Without naming names, one just has to go back a couple of years to see this.

As with any new program, we can look at both the process and the product and, of course, a lot more. But, let's look at these two. In this particular case, the process was shown to be other than was forecasted, and admitted to. Now, that in itself is not an issue, as who does not daily handle knowns and unknowns (see above). How these are handled will tell a lot about how the day develops. Being aware and able to handle curves as they are thrown by the daily life is an important part of success.

Now, speaking of the product side, there have been tests to date that have confirmed the thinking that went into functional design, which can be separated from process design. But, more tests are forthcoming which will be visible and of continuing interest. So, expect more comment.

Now, there will be knowns involved with the coming tests, such as those based upon the knowledge acquired by aerospace engineering (and other disciplines) over the years or derived from extrapolations that will be allowed by the tests to date. Of course, there are other sources of knowns.

And, unknown knowns (yes, and known unknowns) would have been handily taken care of by the advances in risk management. We saw this same discipline fail on the process side, but those delay factors may have been more management, and execution, failings rather than that of the planners. After all, the whole framework (on many sides) was new (which was gloriously touted early on). On the product side, there is more science that comes to bear which ought to help the management of this type of uncertainty if given the proper time.

It will be the final class, whose cardinality may be larger than we allow (that is an issue being addressed by truth engineering), that we'll have to watch, namely the unknown unknowns. You see, all along this program there have been mathematical and computational methods used that are more new than not. Just the fact that these have to slide along with advances in computer hardware speaks to that.

So, in a sense, the residue related to risk handling coverage (its incompleteness, if you would) will be a continuing subject of study. Too, some of these issues which can raise the philosophical conundrums do have a way of being unmanageable.

What? Yes, we need to recognize that and reward managers (the engineers already know this) that allow truthful handling of this phenomenon. In short, more of these things are influenced by basic undecidability than has been admitted, to date.

That we have a program with which to review and discuss this topic is something that is too important to just overlook. However, from the outside, there are always limitations in trying to accomplish such analysis.

But, it may be that the emergence of the internet-based information sources will help overcome some of the constraints that were formerly very difficult to surmount.

Remarks:

05/28/2012 -- Can we tell if we're on a limb?

09/14/2010 -- Must and may. Two important concepts.

09/02/2009 -- Lets face it, folks, undecidability needs to be discussed and adopted in any complex situational setting, especially if computers are involved. Only hubris pushes us to make loud exclamations about what we're going to do in the future.

07/14/2009 -- Nope, confounding continues.

05/18/2009 -- Testing in flight is within sight.

Modified: 05/28/2012

Best and brightest

Gosh, haven't we heard a lot of those folks lately?

If we start from first principles and re-visit issues related to smartness (or idiocy) and rewards (or not) thereof, a more solid view could be attained. The principles are varied and many (despite notions that we can start from the simple).

Here are some truisms offered in the sense of disclosure. Comparative analysis will always show that money is not as high in scale as many believe; it cannot be eaten (it can buy what we need to eat; it allows efforts at generating food to eat; so, it, its varied looks, and its theoretical basis have necessary functions). But, it's not just money, as many abstracted view are not really conducive to anything positive; of course, that we've excelled in abstract nonsense (used generally, but the specifics apply, too) since the turn of the 20th century (yes, 20th and little before) is one key factor to consider here. We could list a few of these.

This theme will continue across several posts.

That those with the algebraic talents can learn new ways does not give them any more stature than any other of the planet's inhabitants. It especially does not give them the right to foster means that are unstable in their pursuit of big pockets to the detriment of the hapless. Hopefully, the new day will see some of this addressed.

Note: That the Treasury is run by a New Yorker (Wall Street experience) means that we'll have to be more watchful. That the President was in Chicago for an extended period of time and not roped in by casino capitalism (CBOE, etc.) tells us something, to boot.

Remarks:

09/19/2013 -- To some, evidently, grabbing oodles of money, without due consideration of ramifications to others or to the common weal, is the smartest thing; but, we do know that virtue is smart, to boot. Even the secularists are trying hard to show how their worldview can lead to right living (as in, they do not need God to have a conscience). And, what virtue might be prime important to this discussion? Prudence (see Remarks, this day).

08/01/2013 -- Ben cannot unwind or taper down; he has too many Doves. We'll have to get back to the king thing (yes, the divine rights of the CEO, new royalty, in other words) and dampening of these types by a new outlook (Magna-Carta'ísh).

02/05/2012 -- Time to update this theme.

02/03/2011 -- This is a place holder, for now, for Lewis' article. The Irish people (where is the rage?) there were screwed over even more than the Americans. Now, one could argue oops; but, the truth is that certain minds need much more restraint than they are willing to admit. Unfortunately, other people bear the effects of these idiots (who, by the way, may, in many cases, test well - too bad there is not an effective arse test).

11/30/2010 -- Finance and pay, always problematic.

10/22/2010 -- We need more like Perelman in order to have a fair economy.

07/27/2010 -- The Boston Globe had an interesting op-ed, recently, about these types. Of course, there are several types, including the quants. We'll need to address this topic again using what we know of the new kings. Ah, such confidence when underdetermination reigns, especially when systems are the main tool.

01/27/2010 -- It's really ca-pital-sino.

11/30/2009 -- No one climbs above our neuropeptidergic limitations.

11/08/2009 -- The gigantic chimera needs proper attention.

10/11/2009 -- Discussion has gone over to FED-aerated. Note the 10/11/2009 Remarks about the Business Week article on India's progress' inhibitors. 'Near zero' recognizes that some always suffer more than others, especially in win-win situations, as the whole notion of characterization minimizes visceral reactions by diminishing the real in favor of the abstracted (ah, the modern world, you say?).

09/24/2009 -- Things looking up for those who churn.

08/10/2009 -- As promised, FEDaerated is here.

08/02/2009 -- Wait! More exposures: "computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else's expense." To anyone who isn't at Goldman Sachs or the like, does that appeal to you as the way that we ought to be handling our beans?

07/31/2009 -- Let's see, 5,000 got over $1M for services rendered. Well, that's probably a sign of being a best-and-brightest, at least to certain eyes; it's called rolling-in-the-dough.

Now, this can be used to illustrate how the game it to fill the pockets of a small set to an exorbitant amount. Does the game need to be that way? Hell no. We'll look at that some more.

07/17/2009 -- China has eaten our lunch (and dinner). Shows how silly our games are. Yet, finance can be run by people who can be non-profit in scope and who have an impeccable (oh, what quaintness!) un-interest in money.

06/20/2009 -- Yes, rent can go to labor (new look at capitalism), and finance can have a higher calling.

06/17/2009 -- A fresh look will be needed, including a newer look at the hapless.

Modified: 09/19/2013

Math and theories

At the Woodstock for Capitalist (WSJ 5/4/09) last weekend, Buffett and Munger waxed forth, with musings, about things related to business and finance (with its silliness). Topics included Insurance, Housing, Moody's, the Future, and that subject named in the title.

Disdain is the term used for the opinion of these two guys for those modern contrivances that have been brought on by advancing computational prowess (which will necessitate truth engineering among other things).

Well, anyone reading this blog will see that its view agrees, in part, with these two gentlemen, as addressed in these posts are topics related to the modern conundrum (quasi empiricism, economics/engineering, etc.), and more.

Buffett seems to suggest that an application of understanding (is that a diminishing factor?) is needed. Ah, we have John von Neumann to thank for this quote in regard to mathematics: you don't understand it, you just get used to it.

Perhaps that is true in mathematics, yet engineering practices, and success in the 'real' world (especially people interactions), stress understanding.

So, we can say that we have let the computer take over too much which is problematic from several views. For one, those talents we honed (as a species and as individuals) have not adjusted themselves yet to the new paradigm.

Too, there are modelers who dare (or without sufficient thought) to take output from a program as being equivalent to a naturally based measurement, even in an engineering framework where physicality is paramount. We'll be watching for this as data is collected from the 787 flight testing (two-year wait for this validation attempt).

That the "false and nutty" (Buffett's words) in the realm of finance takes this big step is serious foolishness indeed. Especially, as the actions of the few impact all of us.

Remarks:

11/02/2010 -- Over a year later, the message is the same, except some changes have occurred. But Big Ben continues in his ways. Of real note is that the jobless rate is high; out-housing really set up for that. Also, we need to re-look at that learned from the 'vons' guys, Ludwig and Friedrich. See Near Zero.

05/06/2009 -- Spooky science (in conjunction with truth engineering) may have an application in keeping the silliness contained.

Modified: 11/02/2010

I M F

Idiots managing finance? Joking! No, the IMF, as in International Monetary Fund.

These people oversee the global financial system and just picked up $.75T (thereabouts) at the recent G-20 for them to do globally something similar to the financial bailouts that we've seen in the US and EU.

Who are these guys, and gals, beyond a bunch of harpers who can go into a country and attempt to tell them how to run their economy? Many times these efforts had very unpleasant consequences for the citizenship. Must be nice to know so much as to run the world.

Note that the US is not a client. No, the US is a founder.

Well, Shelton (Gab Standard, et al) sees some issues (WSJ 04/27/2009) that bear to be noted. There is some pressure for another international currency, like a Euro for the world.

How would this be valued? That is, what new insights and knowledge would prevent those same types of things we see with the dollar and the American economy?

In terms of gold, the IMF has 12.9M ounces. How much is in Fort Knox? 147M ounces, or so.

What other approaches are there besides gold?

Remarks:

08/17/2009 -- As promised, FEDaerated is here.

08/10/2009 -- Near-zero will be looked at more closely.

Modified: 08/17/2009

Testing Finance

That financial engineering can be problematic, for several reasons, has been a theme here. The Econ/Eng focus is to look at this.

In his WSJ op-ed (In Finance, Too, Learning Entails Risk), L. Gordon Crovitz makes some valid comparisons using Merton's talk at MIT (Why The Financial Train Went Off the Rails).

However, in Engineering, we don't find live tests, like the following: a new airplane, such as the 787, being tested with a bunch of passengers aboard. No.

It's nice that Crowitz brings in the test metaphor, yet the reality is that the testing mainly is how effective the instrument is in providing opaque cover for extracting money out of the pockets of the hapless into the funnel leading to gigantic bonuses. These guys haven't begun to understand their fudiciary duties or have they?

Oh, that isn't fair, I know. Yet, what tests do we see in finance other than that which rates the instruments power in generating leverage and the accompanying fees? Oh, yes, we have those who provide ratings. Ah, what science do we find there?

Such a test does not exist now, except, perhaps, in some academic framework.

But, having said that, truth engineering will continue to be making an effort to deal with just this requirement.

Remarks:

08/31/2009 -- We're going to look at this, again, from the finance view as we expand theoretics and technicals via an econoblog.

04/24/2009 -- More on Merton's stance.

From the rest of the Merton talk at MIT, he claims that financial engineering is here to stay. MIT claims some influence there. No doing these types of structures is like saying that we don't need cars. But, we need people who understand, at all levels. Too, these things progress, like any artifact. We need a NTSB type of oversight. Also, perhaps, a SWF to be the ultimate liquidator to manage the 'realness' of assets. Interesting thoughts.

On risk, yes, it can be passed around. Merton thinks that collateralizing is better than rating (well, yes, realness versus some hyped review). We also need to have clearing of these things (like swaps, via OTC) when financial firms are involved.

At some point, things come to roost. And, it's not just badboys, like those doing the Ninja loans, etc., who are to blame.

Merton says that the alpha that looks good for all (or about all) hedge funds don't consider liquidity shocks.

04/21/2009 -- On the Merton talk at MIT, and after stopping at the 53:14 point, some comments about his message:

Sounds like Merton is proposing an extension to the Modigliani theorem to lessen some of the stench from innovations like the CDS which, like other derivatives, were supposed to not needing any oversight. These issues are still open. Yes, only 1 or 2 of many innovations may work; yet, those who are proposing these things take big payouts while the rest pay up.

As many have said (see the comments), using 'science' (well, it is a social science that is involved) does not make the 'engineering' any more sound than gaming.

Merton is right to talk down complexity in one sense, yet the innovative thrust seemed to optimize opaqness thereby allowing payouts that were not justifiable or sustainable.

Modified: 08/31/2009

Two sides

A recent opinion in the WSJ (Europe is No Model for Our Banks) looks at two sides of the issues as they relate to the political views covered by the Democratic Party. If other party views are brought in, there will be even more sides.

So, the split mentioned in the opinion is between Krugman, a Nobel winner, who is supposedly of the staid side and Summers who is for innovation. Of course, posts here may appear to be more in line with Krugman's view for good reasons.

Minsky's view would warn that financial innovation can be mostly ponzi-like, almost by nature.

As well, one could argue that innovation ought to go against problems of real contextual substance and not to mere gaming for financial gains.

It's nice that we can have these two sides to discuss as a good balance between these two sides would be workable. So, expect such a theme to recurr here.

Remarks:

04/20/2009 -- Summers' view notes that some financial instruments have been shown to be of importance to risk management, hence they ought to be allowed. The main issue is what control is necessary plus how to test finance in the many ways that will be necessary

Modified 04/20/2009

Minsky anew

There have been several references to Minsky in the posts concerning finance; there will be more.

Today, the USA Today reports on the many Ponzi schemes that have been uncovered since the Madoff revelation. One prime cause for the exposures is the downturn that some compare to the depression.

These (see USA Today's list) are out-and-out fraud, perhaps. But, as finance is a game, we ought to keep Minsky's ideas in mind that Ponzi comes about by necessity.

The Economist, recently, had a report on the growth of the pockets of the rich, the supposedly best-and-brightest, to where a very small percentage of the populace held the vast majority of the combined value. An article (titled Minsky's Moment) in this report reviews a book that uses Minsky's ideas.

We need to, and will, take the discussion further.

The label of 'best-and-brightest' has had several uses. Of late, it applied to those who were smart enough to pull the wool over our eyes enough to riffle through our pockets (and to do so with gigantic bonuses). An earlier application of the concept was to those techies who gave us the OS's that fail with the BSOD; this state of affairs resulting from the techies seemingly rushing after features (for showing off) without due consideration for security or safety or stability or other important properties.

Remarks:

08/27/2009 -- Madoff exemplifies (albeit somewhat indirectly) systemic risk.

Modified 08/27/2009

Valuing assets

How does this subject apply to oops ? Well, measuring progress is similar to determining value.

Too, plenty have argued that 'mark to market' has exacerbated the downturn.

We'll get back to this problem as one thing to do will be to document the effects of the recent relaxation of the rule.

Remarks:

08/17/2009 -- As promised, FEDaerated is here.

07/30/2009 -- Well, all of the bailouts from Ben and friends plus account rule changes sort of motivates the need for an econoblog that looks at things like what is necessary to support savers, those perpetually sacked ones. Where does the money go? Indeed.

04/17/2009 -- Minsky and the facts of ephemeral value are a couple of topics on the list.

Modified 08/17/2009