The Psyche Of The Wall Street Quant

Via Ghost Exchange, excerpts from a fascinating PBS interview with former hedge fund analyst Cathy O’Neil on the culture within Wall Street:

The basic cultural assumptions were not pleasant to me. The sort of most basic cultural assumption was that as a smart person, we have the right to take advantage of the system and of “dumb people.” And that is sort of — I mean, I guess I should have known, going into a hedge fund, that’s what people think.

I was thinking of it naively, more like, “Oh, there’s a system, and we should see what inefficiencies there are in the system and add information.” I mean, I just sort of drank that Kool-Aid. But once I was inside, I realized that’s not really how people think about it. They think, “Well, of course we’re going to take advantage, because we’re smart, and we can. We have better tools, and our tools are our brains.” Take advantage of absolutely everything and everyone that we can, in any way we can.

You know, Occupy Wall Street from the very beginning was being criticized. The people in Zuccotti Park, the occupiers were being criticized for not really knowing how the system works. And what I realized was, you know what? Nobody knows how the system works. Even the people in finance don’t understand the system.

They understand their little corner of the system. If it’s securitized products, they understand how that works. If it’s, you know, arbing [arbitraging] the equities market, they understand how that works. But very few people would come forward and say: “I know how everything works.” It’s a huge black box, in other words, and they are seeing the output of that black box.

Read the rest at Ghost Exchange

38 Comments on "The Psyche Of The Wall Street Quant"

  1. Liam_McGonagle | Dec 12, 2012 at 11:04 am |

    “. . . . But I think the aspect that I ended up realizing I didn’t share was a kind of fear, and I — as sort of a driving fear, if I could describe it that way.

    When I would ask somebody, you know, “Well, what’s the point of being this ruthless to get so much money when no — why isn’t it enough money? If it’s enough money for you to retire now, why do you need more than that?” And I’d often get the response: “Well, you know, Cathy, my grandfather was a coal miner, or my father was a coal miner. I don’t want to be a coal miner, and I don’t want my children to be coal miners.”

    And it sort of seemed like this almost infinite hunger for insurance, personal insurance. It also seemed like this kind of — this concept of, you know, “my people” was very limited to my family. So it was almost like a tribal mentality.

    And at that point I realized, I mean, I just didn’t — I don’t get it. You know, when I think about “my people,” I think about everyone in the world. And that was something that really separated me, at least in my mind, from the people I worked with, and not everyone I worked with, but a lot of the people I worked with. . . . .”

    • emperorreagan | Dec 12, 2012 at 1:21 pm |

      She seems to want to accept the rationalizations for greed or at least want to downplay the greed.

      Greed buttressed by a poor rationalization is still greed. If I’m so foolish as to buy my own bullshit about my avarice, it’s all the worse.

      I also find her own rationalization for her choices pretty empty – that she wanted to be measured by this “metric,” money. But that she never really cared about money.

      • Liam_McGonagle | Dec 12, 2012 at 6:18 pm |

        I somewhat agree. I was on a different end of the system, but I still find her description as an accurate depiction of the way ordinary people get sucked into an evil system. People, most people, anyway, start out with only the vaguist binary value system, whereby you judge one existing reality against another existing reality. One is subject to official disapproval by the authorities, and is therefore ‘bad’, and the other one must somehow be ‘good’.

        But the collapse fored market players to betray the falsity and inadequacy of their ethos–but only people with the ability to abstract would notice this. Well, among pragmatists like O’Neil and myself anyhow. People not intimately involved in or aware of the system’s workings would have made true but unhelpful condemnations of the system, but they couldn’t generate any intellectually credible calls for reform because they don’t know enough about the relevant mechanisms and because they could easily be written off as partisan politics.

        It’s not the ideal situation. Ideally people should have a better balance between their mental and moral functions, to prevent things like this getting so bad. But that can’t happen in a culture of radical specialization as ours.

        O’Neil and I were participants in a culture of evil, it’s true. But it is also the logical outcome of centuries of cultural refinement.

        • Simiantongue | Dec 12, 2012 at 10:30 pm |

          “O’Neil and I were participants in a culture of evil, it’s true. But it is also the logical outcome of centuries of cultural refinement.”

        • emperorreagan | Dec 13, 2012 at 11:32 am |

          In my opinion, someone intimately involved in the system lacks intellectual credibility because confirmation bias becomes nearly insurmountable when you’re hyper-specialized. People admit their models were flawed after they blow up – until then, you get caught in a circular trap of them being “experts,” the models “working,” etc.

          Some people admit their models are immoral when they’re confronted with evidence that really hits home – like, for this author apparently, when the end you are supposed to pursue is to front run a pension fund for profit.

          I would disagree with portraying external condemnations as unhelpful. I think it would be better to call them easily ignored. They’re not typically the sort of suggestions that anyone wants to implement – people want something easy that doesn’t fundamentally upset their business.

          For instance, I would make the following argument as someone completely removed from the system:

          A commodities exchange which enables farmers and buyers (say, wheat and flour manufacturers) to sell/buy futures is valuable to help reduce uncertainty for both parties: the farmer is protected if, say, it’s a great year for wheat and the market is flooded. The flour manufacturer is protected if a drought leads to a disappointing wheat crop – they’ll still be able to produce flour at a reasonable price.

          Allowing parties that never intend to take possession of the commodity increases uncertainty in the market. As more players with more models that attempt to predict the price of that future enter the market, they’re adding layers of complexity and stimuli and increasing both volatility and extremes.

          With increased complexity and uncertainty driving market prices, the social value (minimizing risk for the farmer and wheat manufacturer) no longer exists. The extremes, in particular, could be argued as being severely negative for society.

          To restore stability to the commodities market, a first step is to set minimum requirements on buys for accepting delivery. For instance, the buyer must accept delivery, at minimum, of 50% of all contracts over a 3 year period.

          If you’re a speculator in commodities, you’re going to reject that proposal outright – it’s nonsense. It has no intellectual credibility. They should be able to make money on the market. They’re just modeling and investing after all!

          If you’re outside of the industry speculating in that market, then it makes much more sense. You consider the social value of the market important – it’s something that should be inherently conservative, to allow produces to hedge against unknowns. You consider long term systemic stability more important than allowing people to make short term profits gaming the market.

          • Liam_McGonagle | Dec 13, 2012 at 12:05 pm |

            All good points. But I really think you express an unrealistic view of human nature here.

            Drones have next to zero options: Go with the flow or starve. Not everyone can be an ivory tower academic. Not that there’s anything wrong with academia, but that option just isn’t open to 99.999% of us.

            You do realize that as a rookie quant, O’Neil basically made a pimple on a bankster’s *ss, right? I myself would have been lucky to be classified as a blackhead on a pimple on a bankster’s *ss. Insiders, in a manner of speaking, but incredibly low level, dronish insiders.

            In light of the shallow range of very poor options here, I think it’s very wrong to portray low-level drones like O’Neil as equally culpable as the *ssholes who’ve been at this for 30 years and make multimillion dollar bonuses.

            I suspect you do not really believe there is such an equivalence, but sometimes I read your posts that way at first blush. No one is denying complicity, but there is a difference between a principal in a crime and an accessory.

            People outside the system can’t change things not because what they say is not true, but because it will never EVER be believed. This is the nature of the binary human mind. If you have no background within a system, the vast majority of people will automatically write you off as an ignorant malcontent. It’s true just often enough to make outsiders’ complaints meaningless.

            People barely response even to people from INSIDE the system. Outsiders have no chance at all.

            Systems only get changed when the lived experience of the masses makes the cognitive dissonance intolerable. For some, like O’Neil and myself, that is relatively easy. Our institutional commitments were weak to begin with.

            Making unbalanced blanket condemnations of anyone who was at any time anywhere near the system is only going to solidify their commitment to that system–not undermine it.

          • emperorreagan | Dec 13, 2012 at 1:41 pm |

            I am sometimes guilty of painting with too broad of a brush, that’s for certain. I don’t intend to imply that everyone involved in the industry is an awful person or even has any other options.

            I consider O’Neil’s participation to be fairly different than the average drone, though, based on her interview. She had an academic position – she had options. The notion that she was looking for a better “metric” to judge her work and unaware of how those funds make money is simply unbelievable to me.

            The interview touches on something that’s a much broader issue for me – I have a strong negative reaction to rationalizations that are fundamentally dishonest or completely irrational. Both her rationalization and the coal miner example fall into that category.

            If you tell me that you took a job because it’s the best job you could get, that seems perfectly rational to me. If you say that if you want to keep your job, you’ve got to keep showing results – that’s perfectly reasonable, even if I disagree with the morality of your job (since my morality obviously has no bearing on yours). There are tons of explanations that don’t revert to being dishonest or irrational.

            If you make some convoluted argument that even though you have enough money to retire, but you have to keep making more money because you don’t want to end up being a coal miner, then I’m going to consider you a liar or an imbecile.

            — .

            The other element feeding into my comment: I fundamentally don’t believe people change things from within the system.

            I believe that change either comes from external pressure from other individuals/groups (e.g. through civil suits taking asbestos manufacturers to task or through government regulation of monopolies), or because a way of doing business collapses.

            Unfortunately, this way of doing business DID collapse but the external forces continued to prop it up. It’s an incredibly ugly feedback loop.

          • Liam_McGonagle | Dec 14, 2012 at 6:59 am |

            All due respect, but I think you should read more carefully:

            1. O’Neil was NOT an academic–she had a college degree she applied in banking. Having a degree does not make one an academic–working on the teaching or research faculty of a college does.

            2. O’Neil was at the firm TWO YEARS before she left. That’s not enough time in the operations department of a bank to even get your own cubicle, much less a huge bonus.

            3. In banking, as everywhere else, really outside of perhaps academia–operations department people count for sh*t. It’s all about SALES. There is a slender chance, after about 5 years or so in O’Neil’s type of job, of attracting the notice of senior department personnel and moving up towards the firm’s road team of traveling snake oil salesman, but that’s like 1/100.

            4. The fear of going nowhere in these enormous firms is incredible. They chew through people like anything, destroying their personal and family relationships with incessant demands for more, and more hours and phony extra-curricular career development events. I don’t know about quants specifically, except that they’re more high pressure than anything I’d done, and people in my end of the business were expected to be burnt out after to two years. Two years and the typical person’s bigtime banking career was over. Perhaps not coincidentally, the length of time O’Neil was at her job.

            5. As for those few who did keep going ‘after they had enough money to retire: a.). O’Neil obviously wasn’t one of them–she’s still working (albeit not as a quant at that firm)m. Read carefully. B.). No one’s saying that keeping on the treadmill isn’t pathological behaviour. O’Neil says as much when she describes it as conditioned by fear. Read the article again, carefully. It’s an explanation, not an excuse. I should have thought that was obvious by her asking why people worked long after the monetary need to do so had vanished.

            I don’t kno how anyone could read O’Neil’s take one this as approval or exhonoration . It’s clearly a description of a pathological environment.

          • emperorreagan | Dec 14, 2012 at 8:06 am |

            The interview opens and states that she was a postdoc at MIT and became an assistant professor at Barnard. She was an academic. It also states her claim for her motivation to go into banking.

            She then talks about fear and a desire for insurance as rationalization for greed. She isn’t talking about fear of losing ones job in her explanation – about someone afraid they’re going to be let go if they don’t produce. She is explicitly talking about people who are already rich. A clerk who is probably going to get burnt out and fucked over in a couple of years has a reasonable fear.

            You could potentially make an argument about the fear one develops along the way to produce playing a role in the pathology, but that’s not the arguement she makes here. If that was the argument she was trying to make she is way off the mark in making it.

          • Liam_McGonagle | Dec 14, 2012 at 9:19 am |

            Quote O’Neil: “And when I finally became that math professor, I looked around and I said, “You know, is this really what I want?” There were various aspects of the job that just didn’t suit my personality, and one of them was the feedback was very slow, and it was also very mixed.

            I started realizing that the idea that you could be valued for your ideas, for your theorems was kind of naive; that in fact people — and this is a general truth about the world — people sort of take you on your face value, like, do they like you? Do they think your field is important? Questions like that –”

            Quote you: ” . . . to go into banking.”

            I.e., leave academia to be a banker. I.e., not be an academic. I.e., become a banker. I.e., the whole point of this article.

            I worked as a beer delivery driver for a while after college, too. That doesn’t make me a distiller.

            I love the sh*t out of you, emperor, but I really don’t see where you’re coming from on this one. She’s describing a wildly sick culture and you see that as praise?

            There is a difference between an explanation (i.e., this article) and an excuse (i.e., your misinterpretation of this article).

          • emperorreagan | Dec 14, 2012 at 2:54 pm |

            My point about her being an academic:

            Point 1:
            She spent 5 years in a phd program. 6 years as a postdoc. 2 years and 1 month as an assistant professor.

            If she’s honest about her motivation for leaving academia, it took her an awfully long time to recognize the nature of academia – how ideas propagate, how reputations are built, etc. In that case, I would infer she’s not very observant and question the value of her observations from within the financial industry.

            If she’s either not being honest or in denial about her own motivations for leaving academia (just looking for a job where there’s a better metric to gauge myself, not looking for money!), then why would I trust her assessments of other peoples motivations?

            Point 2:

            Her doctorate is from Harvard, she had a postdoc at MIT, and was appointed to an assistant professor position. From that, I would infer that she’s driven. And obviously, she has excellent qualifications.

            She had options – she wasn’t looking for a job from a position of weakness. When she decided to leave academia, it wasn’t as though her only option was to be a quantitative analyst for a hedge fund. She could have applied for quantitative positions in a variety of industries.

            If her motivations were as she states, then she should have invested time researching exactly what she would do in these jobs and exactly what sort of feedback she would receive. If someone investigates what, exactly, a quant does for a hedge fund then it would have been no surprise what the nature of the job was. Her change of path then is a half truth – she was okay with the notion of fucking people over through the market at first, but had a change of heart.

            If her motivation was something else, then once again she’s not being honest with the audience and possibly herself. I would once again find her ability to assess motivation suspect.

            This is what an explanation for part of the pathology would look like in my opinion:
            “When you take a job with one of these firms, the pressure is immense. You work 12, or 14 hour days. Most people wash out in 2 years. So the job is both consuming your life and causing a constantly level of anxiety, because you’re afraid that if you don’t show results you’ll be on the street the next day.

            By the time you start to really see the material gains that the financial industry can offer, you’ve worked a couple of years of 12 hours days with that constant fear. By that time, you’re caught in a positive feedback loop where you’re getting more, but you have to do even better next quarter or you might be out of a job.

            And make no mistake – this industry is about skimming money off of the top. It’s about greed and taking advantage of the regular investor. No matter what your motivation was getting into it, that underlies every action you take. You can either look at yourself as a shark or try to abstract what you’re doing to make it seem like it isn’t real, but it is a corrosive influence.

            On top of that constant level of fear, you’re not just on a hedonic treadmill – you’re on a hedonic elevator. You need a nicer apartment – a nicer car – a new condo – dinner at the hippest restaurant – a vacation in Vienna – and you live in one of the most expensive cities in the world. The rate of change as you make more money just seems to accelerate.

            By the time you couple the fear & hedonic adaptation with the corrosive nature of what you’re really doing, it never occurs to you that you can just get off the ride.”

            If you’re going to describe a system, purportedly from the inside, then give me a good description. If you have an explanation as how it might cause a normal person to behave in pathological ways, outline that explanation.

            Don’t flip flop around calling redefining “greed” as a “hunger for insurance.” You’re redefining something with a generally negative connotation – the department of war – and redefining it as something with a more positive connotation – the department of defense. Don’t offer absurd anecdotes. Don’t theorize a greed-fear cycle but not bother to actual try to support it properly.

            Anyway, I’ll drop it now that I have my last rant out of the way. There’s something about this lady that strikes me very negatively and in spite of this post I still don’t think I’ve got my finger exactly on it.

  2. Anarchy Pony | Dec 12, 2012 at 11:54 am |

    Water; wet, sky; blue, film at eleven.

    • Liam_McGonagle | Dec 12, 2012 at 12:24 pm |

      Do you have any opinion as to whether the antisocial character of their greed is an immutable law of nature or the logical reaction to a specific set of ephemeral social conditions?

      • Anarchy Pony | Dec 12, 2012 at 12:47 pm |

        Eh, Half and half.

        • Liam_McGonagle | Dec 12, 2012 at 12:53 pm |

          Sounds reasonable. Wall Street types were always gonna be *ssholes, but they never needed to get this powerful or this *ssholey.

          • Anarchy Pony | Dec 12, 2012 at 3:30 pm |

            It’s true that everyone does have self interest built into their genetics, but there seems to be different degrees to which it influences behavior. Obviously capitalism favors the greedy and clever, and fosters an atmosphere in which such traits are in higher demand. Culture can certainly influence to what degree this trait is expressed, but it’s unclear by how much. You get into the old “nature versus nurture” debate.

          • Capitalism is anarchic you should be for it!

          • That depends on what kind of and how much capitalism you’re talking about.

          • Well, the idea of anarchism is that in a power vaccum all evil will disappear. I am becoming convinced, more and more that in a power vacuum psychopaths take over.

          • Anarchy Pony | Dec 12, 2012 at 7:15 pm |

            Are you eleven? That’s not the idea of anarchism and you should be ashamed for saying so.

          • Anarchy Pony | Dec 12, 2012 at 7:14 pm |

            No it’s not you brain dead halfwit.
            Read this and stop being an imbecile:

          • If anarchy had any legitimacy you would possess inherent civility.

          • Jin The Ninja | Dec 13, 2012 at 12:39 pm |

            that is complete and utter bullshit.

          • Liam_McGonagle | Dec 13, 2012 at 12:43 pm |

            Indeed. Capitalism is defined by its heierarchy–capital over labor.
            I think Ted is conflating ‘Anarchy’ (big ‘A’) with chaos.

          • They are getting less powerful as robot intelligence takes over.

          • Wall street is controlled more and more by Robots. That’s not a joke. If you are’t aware of it you are misinformed.

      • VaudeVillain | Dec 12, 2012 at 6:21 pm |

        Not directed at me, obviously, but I’d argue it’s a positive feedback loop.

        Those with the ability and the drive to dominate others under whatever circumstances they live do so, then impose systems by which they can continue to do so with increasing efficiency.

        For what it’s worth, despite all the horrors of the system which is now imposed by our directing sociopaths, it at least gives the fairest chance yet to anyone who possesses the requisite skills and lack of compassion. Not so long ago, it didn’t really matter how big a prick you were unless you had the right parents. Now even the children of serfs can claw their way to the materialist top.


      • Simiantongue | Dec 12, 2012 at 7:10 pm |

        Whole and whole, rather than half and half IMO. The specific set of ephemeral social conditions are a result of immutable greed.

        “When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it. – Frederic Bastiat (1801-1850), French economist

        In this specific instance of the inner workings of wall street, we see a financial system that authorizes immorality, with a moral code that glorifies it, rewarding its success. They have created a process one step removed from actually stealing money from people, even in this article, making a distinction that it’s immoral but not illegal to do so.

        The only real difference between it being immoral and not illegal is because of their convoluted definitions and complex rules which are made up whole cloth. From any objective point of view doing such is just waving a magic wand and giving permission to steal by fiat of some imagined argument from authority, where they are allowed to do so because they are smart enough to do so. Why do they make these “immutable” definitions and rules to separate immorality from illegality?

        At a basic level to avoid any kind of culpability when acting immorally. But on a deeper level it’s more important that they settle any cognitive dissonance, dispelling any personal discomfort by committing acts that in larger society would not only be immoral but illegal.

        “the slave of the passions, and can pretend to no other office than to serve and obey them.” This is the first rule of moral psychology: feelings come first and tilt the mental playing field on which reasons and arguments compete. If people want to reach a conclusion, they can usually find a way to do so. Formation of social conditions based on those morals which allows certain people who are knowledgeable of the inner process’ of economics to plunder without the psychological consequences to themselves which would result from ordinary immoral acts.

        So in essence the convoluted rules people in the financial sector have created are the mirror of the “set of ephemeral social conditions”. A result of the antisocial character, which is an immutable law of human nature, or character. At least in the financial sector where an inordinate amount of people of that nature are drawn. Or to put it bluntly, immoral people are drawn to that type of work, where they make up all these rules so they can steal from people without reaping any of the consequences and also so they don’t have to feel guilty about it. They rationalize that they deserve that money because they were smart enough to steal it from others who were “dumb”.

        If Cathy O’neill et al want to make a better banking system I’m wondering if it could turn out any other way. Or if in the end it will inevitably come back to this again. Given the type of people drawn to those types of jobs.

        • Liam_McGonagle | Dec 12, 2012 at 7:32 pm |

          The ideal society is one that balances the rights of the individual against the rights of the collective. Any other is just a different flavor of tyranny.

          Greed is an inescapable byproduct of individuality. I agree with Frank Zappa’s observation that without deviation from the norm, progress is not possible. Therefore some level of greed is necessary for a progressive, balanced society.

          O’Neil’s problem, and mine, too, is that we had radically underdeveloped moral faculties. This is no surprise. Ninet-nine point nine-nine-nine per cent of us are also poorly educated morally. That’s an inevitable consequence of a society with such a narrow, materialist sensibility. If even your Jesus Freaks can’t imagine a world without a literal, tangible hand of God running the show, you know you’ve lost the plot, spiritually.

          Normals in such a society, then, have this fierce animal instinct for physical survival, but little or no moral refinement. Are you surprised that 80% of us line up and drink the kool aid at any institution that offers us a meal? I think O’Neil deserves far more credit for her evolution than people give her.

          She’s being a lot more realistic and anti-authoritarian than people who don’t appreciate the ineradicable centrality of greed to the human condition. There’s more than one communist eutopian who lived to see his dream turned into a nightmare.

          • I’m of the opinion that greed (for material objects) is a pathological misfire of psychologically healthy selfishness (for personal growth and well being, self actualization, loving relationships, etc.), most likely resulting from childhood neglect and/or abuse.

          • Something to that probably, reminds me of the continuum concept.

      • My point was that anarchism seems to rest on the idea of the inherent goodness of humanity. Since everyone is basically good, there doesn’t need to be any leaders, everyone can take care of themselves and refrain from causing others harm, simply through their good nature. So how can you believe in the existence of congenital evil doers(psychopaths) and be for anarchy? I think its a fair question and anarchists responding by say “Fuck you” basically proves my point that anarchy is not the answer and that people aren’t inherently good (Nor polite)

        I think rather than no leaders We need to figure out what makes a good leader.

        • Jin The Ninja | Dec 15, 2012 at 10:36 am |

          that still isn’t anarchism in a nutshell. you’re missing some big concepts. and that was the problem initially.

  3. The Stock market is controlled more and more by Computer software.

  4. BuzzCoastin | Dec 12, 2012 at 8:53 pm |

    > Nobody knows how the system works. Even the people in finance don’t understand the system.

    I was a VP at Citi back in the day and even I didn’t know how it worked until I was outa the Matrix.

    Once, when selling a private label credit card to a major retailer, the retailer’s CFO asked me how much I would pay him if he let us have the biz. I said, we don’t have free money and therefore we have to charge a fee. He laughed and said, you don’t understand how banks work. He was right.

    It’s the SYSTEM itself that creates the worker bees and their elites and not the other way around.

  5. I blame this on what is called “White Flight”. The exodus of white society and the effect it had on the Metropolitan cites. [White society thought Black people brought down the property values of their homes.] The “balloon” or “sub-prime” mortgages to the poor! [They knew the poor couldn’t repay those loans!] Yeah, the “Banksters” knew what they were doing. Classic blueprint for destruction. They can play “dumb” all they want. 🙁

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