Finance as a career option

Thanks!

Just as a clarification for those who don't realize, the title of vice president is given out much more liberally in finance than in other sectors. In particular, Goldman Sachs has 5000 VPs (or maybe 12,000?).

I've noticed Glassdoor to be pessimistic in several other cases as well (where I have hard info contradicting them). It's bad enough that I half-suspect that the numbers are made-up.

I don't know anything about the actual salary figures, but bonuses are actually not taxed much more highly. That's a common misconception. It's just the way the business has to handle the withholding that changes. Bonuses are considered "supplemental wages", so employers have 2 options for how to handle their withholding.

1. The aggregate method: Bonuses are added to your regular paycheck. This amount is then annualized (amount for pay period number of pay periods in a year) and then taxed at the rate appropriate for someone making the annualized amount every year. If you get one big bonus in a monthly paycheck by the aggregate method, you take (bonus + regular monthly salary) 12 and have your tax withheld at that rate, which is much higher.

2. The flat percentage method: Most larger employers do this. Employers who choose this method withhold 25% of any bonus under $1 million across the board and 35% of each dollar above the $1 million mark. For those who receive their bonuses in large chunks, this is beneficial to the employee. It's also easier for the employer.

However, when it comes time to file your personal income taxes, regardless of which method was chosen above, you only have one number that represents your total income for the year and you are taxed on that according to the marginal rate schedule that applies to everyone for that year. If your employer used the aggregate method and you had a giant chunk taken out of a small number of bonuses, you'll get a lot of that back.

At the end of the day, for the IRS, employee compensation is employee compensation. It doesn't matter how your employer classified it.

I've heard tell of employers going on glass door and artificially deflating the numbers, to give employees less negotiating power.

I have no evidence of this however.

Glassdoor rarely properly includes the top paid employees (those people don't fill out the survey). According to Goldman's own figures, mean compensation per employee (across all employees) is ~$400k. It'll be significantly higher if you're in front office. Your expected earnings from a Goldman job are roughly the mean earnings multiplied by the expected number of years you'll stay at the firm.

I've met Cathy, and I would largely attribute her DE Shaw attitudes to her politics.

Thanks for the information. I added a link to your comment.

Thanks! I don't have subject matter knowledge here, so this is helpful.

Thanks for your comment.

The vast majority of all finance jobs at investment banks are called operations, this includes accounting, settlements, compliance, support, etc...a very small percent is front office sales, and then there is what every single starry-eyed-naive-finance-senior in college aspires to be – an I-banker (rolls eyes).

I would be interested in statistics if you have them.

Simply put, non-operations jobs in I-banking, private equity and hedge funds are to college kids as what basketball players are to inner city kids. There are just better options.

As with basketball players, it depends on the skills of the individual. I know people who have had no trouble getting a high paying job at a hedge fund.

Um...

Job security

Job security in the more lucrative sectors of finance may be poor. At the 80,000 Hours blog, Carl Shulman wrote:

While a physician will usually remain a physician throughout her career, lucrative jobs in investment banking and management consulting often come with “up or out” career paths. Either one is promoted “up,” with incomes growing exponentially, as one can see in these links for banks and consultancies, or one is fired “out” and must seek work at a lesser firm or leave the industry. Since most employees will not be around for very long, one must take into account one’s “exit options” in deciding whether to enter.

I think that on the whole, investment probably does have more societal benefits then societal costs

That's a rather amazing statement.

Question: what would a society without investment look like? Say, some society decides that investment has more social costs than benefits and bans it. What then?

creates incentives for more intelligent people to go into investments as a career (instead of science, engineering, ect) then might be optimal for us as a society.

Tech companies (and I think startups of all kinds) routinely give large stock options to employees. It's not obvious that the tax preference for capital gains actually helps investment bankers more than it helps engineers.

but I do think there is a serious problem in the US where an unbalanced tax code (with a capital gains tax much lower then the income tax)

Phrasing it that way is misleading. Capital gains tend to come from things like corporate profits which are themselves subject to income tax.

I have also been critical of earning to give as optimal for contributing social value: last June I wrote a blog post titled Earning to Give vs. Altruistic Career Choice Revisited where I wrote

Over the past three years, I myself have shifted from the position that “earning to give” is philanthropically optimal, to the position that it’s generally the case that one can do more good by choosing a career with high direct social value than by choosing a lucrative career with a view toward donating as much as possible.

Since writing the blog post, I've updated somewhat in favor of earning to give. I don’t necessarily buy the analysis that I give below (I think it probably leaves out major relevant factors), but I think that it raises the possibility that earning to give is optimal for the typical person who's capable of making $500k+/year in finance.

There seems to be a great deal of room for more funding for cash transfers. Sub-saharan Africa has about 1 billion people and a GNI per capita of $1,351. (Note that the median income per capita will be smaller than this – I've seen estimates of $600.) About $300 billion/year is spent on philanthropy in the US, so even if all philanthropic spending were on cash transfers, there would still be many people of very low income who would benefit substantially from small amounts of cash. One can question whether scaling cash transfers dramatically is logistically feasible (GiveDirectly's model is based on a cell phone payment system that is not present throughout the developing world), but there seems to be a substantial possibility that one wouldn't run out of room for more funding.

Somebody who's making $500k/year in finance and donating $250k/year to GiveDirectly can double the consumption of 225 Kenyan families. (If huge amounts of money were being put into cash transfers, the cost-effectiveness would be maybe 2x worse.)

What about direct work? Carl Shulman points out that a boost to global GDP of $n would raise logarithms of income by 30x less than an $n GiveDirectly cash transfer, so that one would have to contribute $7.5 million to GDP per year to have an impact similar to that above.

Somebody who we know in common estimates that machine learning contributes $1 million to GDP per year per researcher. With this assumption, somebody who's 10x better than the mean (not median) machine learning researcher beats out the finance worker. But somebody who's 10x better than the mean machine learning researcher may be able to earn substantially more than $500k/year in finance in expectation.

Now consider entrepreneurship. Assuming that a tech startup founder contributes 1/5th of the value of the startup, and spends 5 years working on it, and that the increase to GDP is proportional to earnings, the startup valuation would have to be ~$200 million for the founder to beat out the worker in finance. Some startups contribute more to GDP than they internalize as profit, but probably not by a factor of 10x, so that creating a startup of valuation < $20 million probably doesn't boost GDP by enough to beat out making $500k/year in finance via earning to give. Startups of valuation $20 million or higher generally get venture capital funding, and it's been said that only 1 in 400 new businesses get venture capital funding. (Of course, it's equally true that very few people make $500k/year in finance.)

Carl Shulman gives another argument in favor of earning to give.

When GiveWell or Giving What We Can change their recommendations based on new data or arguments and explain their reasoning, the donations switch rapidly and en masse. EA donations have very little inertia.

Building an organization in a specific field, accumulating field-specific human capital (experience, CV, education), these involve putting years of effort into a particular project or vision. If you later find out that cancer biology was a bad move and you think that renewable energy is more important, your years doing a PhD in that area are now substantially wasted. Careers have very high inertia and investment in cause-specific capital, while earning power is flexible and donations can be highly responsive to new inputs."

I have a few thoughts on this:

1. The way to get into finance is to go to a top college and major in either business, economics a hard science or engineering discipline. There are people who take other paths, but that's the main way to go. Financial firms are typically not overly concerned about specific college majors. I personally did Physics + Econ, but Comp Sci + Econ would have worked just as well. The point is that you can pick a major that is valuable outside of finance and still pursue a job in finance. That way, if finance doesn't work out you will still be fine.

2. You don't generally go to business school straight out of college. Typically, you work for a few years first. So, the "sunk cost" of a finance career is only the cost of college. That compares favorably with being a doctor or lawyer, and is similar to becoming a software developer or something like that.

3. If you can get an elite finance job (like analyst at Goldman) straight out of college, it will look good on your resume no matter what you do afterwords. If you can't get an elite finance job, but can get some sort of finance job, things change a bit because different areas of finance have different levels of transferability of skills. If you go into a particular niche and then wash out of it or just want to do something else, you might find that your experience is not that valuable.

4. My particular niche in finance (trading) has fairly crappy transferability of skills. What I do does not teach a lot of general "business" or management skills. There are 2 ways to deal with this issue. One is to only go into trading if you are very confident that it is your true calling. That way, being able to do something else is a moot point. The other is to start out as a quant or programmer. Learning how to program and how to do data analysis are very valuable skills in lots of fields. Finance is one of the best paying fields for programmers and working as a programmer will allow you see how trading works. A lot of traders worked as programmers first. Here is an article about it that features a friend of mine.

5. I am not a huge fan of "earning to give" and I'm not sure that finance is the best place to engage in that activity anyway.If you want to save lives you could become a doctor and save lives all day and still make enough money to donate to saving more lives. Most people who succeed in finance are intensely interested in money. We have to spend all day thinking about minute details related to making money. Most of the spouses of my colleagues (including my own) have almost no understanding of what we do. They just find it too boring to think about. Having a career that you find boring is a good way to be a miserable person and mediocre at what you do.

It's simply the case that the vast majority of even very smart people aren't making "middle 6 figures" in their late 20s.

I already mention job security, though I acknowledge that the section is very thin.

If one restricts oneself to people who are able to work the hours and who give very high priority to making money, the proportion rises.

Thanks, I added a link to your comment.

Large but irregular income may be less valuable than lower-on-average but more regular income, e.g. because it makes planning more difficult and because it leads to paying more tax.

Shouldn't matter much for earn-to-give.

The vampire squid is not looking to gift you with the means to do good in the world, it is out to devour minds and turn them into more tentacles with which to suck the lifeblood out of the world.

I know people who have worked and are working on Wall St. Your overactive imagination is better suited to writing gothic horror than to speaking about reality.

The claim in the article is not "finance people earn a lot, therefore their work is socially valuable". It is "finance people earn a lot; earnings generally correlate with social value to some extent; so we should at least consider the possibility that what they do is valuable, even if at first glance it doesn't look like it". The argument that follows merely observes that some of what happens in the finance sector is socially valuable, which I don't think is controversial. No one is claiming that everything or even most is socially valuable, though it might turn out that way despite the obvious big examples where it hasn't.

(One could argue, though I'm not sure I would, that the fact that financial crises can have such severe consequences is evidence that a properly-working financial sector is very valuable: if it weren't, it wouldn't matter much if it underwent a crisis. The weak point in this argument is that something not very valuable in itself can work its way into a position where its failure can cause disaster; a ruptured appendix can be a medical emergency even though we don't need our appendixes much these days.)