Tag: large portion

The Quants

Since investment bank bashing seems to be in fashion nowadays, let me add my two naya paise to the fire. I exited a large investment bank in September 2011, after having worked for a little over two years there. I used to work as a quant, spending most of my time building pricing and execution models. I was a bit of an anomaly there, since I had an MBA degree. What was also unusual was that I had previously spent time as a salesperson in an investment bank . Most other people in the quant organization came from a heavily technical background, with the most popular degrees being PhDs in Physics and Maths, and had no experience or interest in the business side of things at the bank.

You might wonder what PhDs in Physics and Maths do at investment banks. I used to wonder the same before I joined. Yes, there are some tough mathematical puzzles to be solved in the course of devising pricing and execution algorithms (part of the work that us quants did), which probably kept them interested. However, the one activity for which these pure science PhDs were prized for, and which they spent most of their time doing, was C++ coding. Yeah, you read that right. These guys could write mean algorithms – I don’t know if even Computer Science graduates (and there were plenty of those) could write as clean (and quick) C++ code as these guys.

While most banks stress heavily on diversity, and makes considerable efforts (in the form of recruitment, affiliation groups, etc.)  to ensure a diverse workplace, it is not enough to prevent a large portion of quants coming from a similar kind of background. And when you put large numbers of Physics and Math PhDs together, it is inevitable that there is some degree of groupthink. You have the mavericks like me who like to model things differently, but if everyone else in your organization thinks one way, who do you go to in order to push your idea? You stop dropping your own ideas and start thinking like everyone else does. And you become yet another cog in the big quant wheel.

The biggest problem with hardcore Math people working on trading strategies is that they do not seek to solve a business problem through their work – they seek to solve a math problem, which they will strive to do as elegantly and correctly as it is possible. It doesn’t matter to the quants if the assumption of asset prices being lognormal is widely off the mark. In fact, they don’t care how the models behave. All they care about is about their formulae and results being correct – GIVEN the model of the market. I remember once spending a significant amount of time (maybe a couple of weeks) looking for bugs in my pricing logic because prices from two methods didn’t match up to the required precision of twelve decimal places (or was it fourteen? I’ve forgotten). And this after making the not-very-accurate assumption that asset prices are log normal. The proverb that says, “measure with a micrometer, mark with a chalk, cut with an axe”, is quite apt to describe the priorities of most quants.

Before I joined the firm, I used to wonder how bankers can be so stupid to make the kind of obvious silly errors (like assuming that housing prices cannot go down) that led to the global financial crisis of 2008. Two years at the firm, however, made me realize why these things happen. In fact, the bigger surprise, after the two years there, was about why such gross mistakes don’t occur more regularly. I think I’ve already talked about the culprits earlier in the post, but I should repeat myself.

First, a large number of guys building models come from similar backgrounds, so they think similarly. Because so many people think similarly, the rest train themselves to think similarly (or else get nudged out, by whatever means). So you have massive organizations full of massively talented brilliant minds which all think similarly! Who is to ask the uncomfortable questions? Next, who has time to ask the uncomfortable questions? Every one, from Partner downwards, has significant amount of “day to day work” to take care of every day. Bankers are driven hard (in that sense, and in that they are mostly brilliant, they do deserve the money they make), and everyone has a full plate (if you don’t it is an indication that you may not have a plate any more). There is little scope for strategic thinking. Again, remember that in an organization full of people who think similarly, people who have got promoted and made it to the top are likely to be those that think best along that particular axis. While it is the top management of the firm that is supposed to be responsible for the “big” strategic decisions, the kind of attention to details (which Math/Physics PhDs are rich in) that takes them to the top doesn’t leave them enough bandwidth for such thinking.

And so shit happens. Anyone who had the ability to think differently has either been “converted” to the conventional way of thinking, or is playing around with big bucks at some tiny hedge fund somewhere – because he found that it wasn’t possible to grow significantly in a place where most people think different to the way he thinks, and no one has the patience for his thinking.

This is the real failure in investment banking (markets) culture that has led to innumerable crises. The screwing over of clients and loss of “culture” in terms of ethics is a problem that has existed for a long time, and nothing new, contrary to what Greg Smith (formerly of Goldman Sachs) has written. The real failure of banking culture is this promotion of one-dimensional in-line-with-the-party thought, and the curbs against thinking and acting contrary to popular (in the firm) wisdom. It is this failure of culture that has led to the large negative shocks to the economy in the years gone by, and it is these shocks that have led common people to lose money rather than one off acts by banks where they don’t necessarily act in the interest of clients. And irrespective of how many Business Standards Committees and Risk Committees banks constitute, it is unlikely that this risk is going to go away any time soon. And I can’t think of a regulatory cure against this.

Offshored

Two of the four full-time jobs that I’ve done have been “offshored”. They’ve both involved working for the Bangalore office of American firms, with both jobs having been described as being “front end” and “high quality”, while in both cases it became clear in the course of time that it was anything but front end, and the quality of work depended on what the masters in the First World chose to throw at us.

In between these two jobs, I had done a “local” job, at an India-focused hedge fund based in India, which for the most part I quite liked until certain differences cropped up and grew. While doing that job, and while searching for a job while looking to exit it, one thing I was clear about was that I would never want to do an offhshored job again. Unfortunately, there came along an offer that I couldn’t resist, and so I ended up having not one but two experiences in offshored jobs.

Firstly (this was a bigger problem in the second job), I’m a morning person. I like to be in at work early in the morning, say at eight. And I like to be back home by the time the sun in down. In fact, for some reason I can’t fathom, I can’t work efficiently after the sun is down – irrespective of when I start, my productivity starts dipping quickly from 5 pm onwards. Huge problem. People say you can take calls from home and all that but that blurs the line between work and life, and ruins the latter. You are forced to stay in office even if you don’t have anything to do. Waste of time.

Then, there is the patronizing attitude of the “onshore” office. In both my offshored jobs, it turned out that an overwhelmingly large portion of the Bangalore offices actually consisted of employees who were there because even the stated reason for their existence in the firms was labour cost arbitrage. It was simple offshoring of not-particularly-skilled work to a cheaper location. I don’t know if this was a reason, but a lot of people in the “main” offices of both firms considered Bangalore to be a “back office”. And irrespective of the work people here had done, or their credentials, or record, there was always the possibility that the person in the foreign office assumed that the person in the Bangalore office existed solely because of labour cost arbitrage.

And then you would have visits by people from the onshore office. Every visitor who was marginally senior would be honoured by being asked to give a speech (without any particular topic) to the Bangalore office. In the first offshored company I worked for, people would actually be herded by the security guard to attend such speeches. The latter company was big enough to not force people to attend these talks, but these talks would be telecast big-brother style from television sets strategically placed all over the floors.

And these onshore office people would talk, quite patronisingly, about how Bangalore was great, and the people here were great, and they were doing great work. Very few of them would add actual value  by means of their lectures (some did, I must mention, talk concrete stuff). Organizing this lecture was a way for the senior “leaders” in the Bangalore office (most of whom had been transplanted from the firms’ onshore offices) to etch their names in the good books of the visitors, we reasoned.

Then there was the actual work. Turn-around time for any questions that you would ask the head office was really high, unless of course you adapted and did night shifts (which I’m incapable of). In the earlier offshored firm, there would be times when I would do nothing for two or three days altogether because the guy in the onshore office hadn’t replied! Colossal waste of billable time! Also, if your boss sat abroad, there would be that much less direction in whatever you did. In my second offshored job, there were maybe two occasions when I was on two-hour phone calls with my boss (in the onshore office), where he patiently explained to me how certain things worked and how they should be done. Those were excellent sessions, and made me feel really good. But only two of them over a two year-plus period? Apart from which, most one-to-one interaction with the boss was with respect to “global” stuff. Yeah a local boss can get on your nerves by creeping behind your back every half hour, but at least you get work done there, and can learn from the boss!

Then there is training. Because of the cost-arbitrage concept on which most offshored employees are hired, the quality of training programs in the offshore offices are abysmal. During my second offshored stint, I happened to attend one training program in Hong Kong, in common with people from onshore offices in the rest of Asia. None of the numerous training programs that I attended in the Bangalore office attained even a tenth of the quality of that program in Hong Kong. The nature of employees in Bangalore meant all programs had to start at an extremely basic level, so there was little value added.

I can go on, there is a lot more. But I’ll stop here, and let you tell me about your stories of working in an offshored environment. And I certainly won’t make the same mistake third time round – of working for an offshored entity.

Making BRTS work

(yet another post that is a few days late, but what the hell)

In the recently delivered Karnataka State Budget, the government has budgeted funds for developing a Bus Rapid Transit System (BRTS) in Bangalore, in order to supplement the Metro and help ease the city’s traffic woes. The problem is that it’s a small amount that’s been released and the budget states “for providing BRTS between Hebbal and Silk Board”.

Commentators (including some traffic experts like MN Sreehari (not able to find the Deccan Herald link on this topic) ) have criticized the move, claiming it is going to once again choke the outer ring roads which have now been set free because of the efforts to make it signal-free. So the commentators have used this as an argument against the BRTS.

On the contrary, I argue that we need more, and not less, BRTS. The whole purpose of an integrated urban rapid-transport system is to encourage people to leave their cars at home and instead use public transport. And for that to happen, really good quality public transport has to be available in all areas (with autorickshaws providing last-mile service). Else there is no real incentive for people to abandon their cars.

The problem with initiatives like the Metro is that it takes way too long to construct. The cost involved in terms of intermediate inconvenience and lead time are enormous. Which is a major point in favour of systems such as the BRTS. So what needs to be done is that the BRTS needs to be introduced on several routes simultaneously, thus bringing a larger area of the city under the integrated public transport system.

The network effects here are huge, and the more the portion of the city that is served by high-quality public transport, the more the incentive for people to not use their cars. On the contrary, introduction of BRTS along one or two lines benefits few and causes inconvenience to a really large portion of the population (all users of the BRTSed routes).

We have already seen in Delhi the impact of a badly-implemented BRT scheme (along one road in South Delhi, if I’m not wrong; deeply unpopular and resented). I’m surprised the guys in Bangalore haven’t learnt from that.

Women’s Reservation and Roving Bandits

There are two kinds of bandits – stationary and roving. Roving bandits (eg. Mahmud of Ghazni) attack an area, plunder it to the fullest and then abandon it and move on to another area to rape and pillage. They seldom attack the same area twice, at least not in quick succession, because of which they don’t really care about the medium-term consequences of their actions. Similarly you have shifting agriculture.

Stationary bandits, on the other hand are interested in plundering an area over a longer time period (eg. British in India). They too pillage, but given that they know that they will stick on for a reasonable amount of time, they make sure that they don’t kill the goose that lays the golden egg. And it is a possibility that they will feed the goose well, take steps to increase production of eggs and so on. In other words, they do contribute to general development of the area (though they tend to take away a large portion of the benefits), build institutions, etc. This is more like settled agriculture.

Now, it is clear that given a choice, it is in the interest of the region for it to be attacked by stationary bandits rather than by roving bandits. Yeah, the stationary bandits do stick on for longer and pain you for longer periods of time, but the damage inflicted by roving bandits is usually so severe that it will take a longer time to recover from this.

In democracies like the UK or India, what keeps the legislators honest is the possibility of re-election. It is the possibility of re-election which incentivizes the incumbent to do good for his constituents, rather than just plundering away the region’s funds (in whatever ways possible). In other words, legislators do try to act like stationary bandits, because of which some good does happen for the region.

Now, with the new women’s reservation law in the process of coming into force, what will happen is that once in three elections, constituencies will get reserved for women by rotation. The implications of this are severe. In two out of every three parliaments, the incumbent knows that there is zero chance of him/her retaining the seat in the following election (yeah, women can still continue to get elected from their constituencies when it becomes general by rotation but I’m sure parties won’t allow that). With the possibility of re-election being taken away, this will play havoc with the incentives.

There will be more incentve now for legislators to maximize their benefits in the one term they get rather than to try and put gaaji on the constituency and take benefits off it for the rest of their lifetime. This, I think will lead to overall poorer performance by legislators, irrespective of gender of the legislator and whether the constituency is reserved or not.

This is unfortunate.