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Twenty years ago, on October 19, 1993, the US House of Representatives voted 264 to 159 to reject further financing for the Superconducting Super Collider, the particle accelerator being built under Texas. The government had already spent $2 billion on the Collider, and its estimated total cost had grown from $4.4 billion to $11 billion; a budget saving of $9 billion beckoned. Later that month President Clinton signed the bill officially terminating the project.
This was not good news for two of my Harvard roommates, Ph.D. students in theoretical physics. Seeing the academic job market for physicists collapsing around them, they both found employment at a large investment bank in New York in the nascent field of quantitative finance. Their assertion that derivative markets, whatever in fact they were, seemed mathematically challenging catalyzed my own move to Wall Street from an academic career.
This cohort of Ph.D.s in science, technology, engineering and mathematics (the STEM disciplines) sparked a remarkable growth in the sophistication and complexity of quantitative finance. They built models which enabled banks and hedge funds to price and trade complex financial instruments called derivatives, contracts whose values derive from the levels of other financial variables, such as the price of the Japanese Yen or a collection of mortgages on apartments in Florida. A brand new career path was created, that of financial engineer or quantitative analyst (“quant”), a vocation that became so popular—for its monetary rewards certainly, but also for its dynamism and innovation—that by June 2008, according to the Office of Career Services, 28 percent of graduating Harvard seniors going into full time employment were heading to finance.
However, just as some investors in 2007-2008 were questioning the inexorable rise in house prices and the potential for a market bubble, so too were many students questioning their own career choices, sensing the possibility of a career bubble. As President Drew Faust said in her first address to the senior class in June 2008, “You repeatedly asked me: Why are so many of us going to Wall Street?”
Three months later, both market and career bubbles collapsed as Lehman Brothers filed for bankruptcy. In the midst of the financial crisis, on October 3, 2008, the House of Representatives voted 263 to 171 to pass the Emergency Economic Stabilization Act, authorizing the Treasury secretary to spend $700 billion—roughly 65 Super Colliders—to purchase distressed assets.
What went wrong? While the causes of the financial crisis have been widely debated, it is clear that many financial engineers were caught in what I have termed the “quant delusion,” an over-confidence in and over-reliance on mathematical models. The edifice of quantitative finance built over fifteen by the “SSC generation” years was dramatically rocked by the events of 2008. Fundamental logical arguments that practitioners had taken for granted were shown not to hold. Decades of modeling advances were revealed to be invalid or thrown into question.
It is hard to prove a direct causal link between the cancellation of the SSC, the rise of financial engineering, and the chaos of 2008. However, if some roots of the financial crisis can be traced, however distantly, to October 1993, might one consequence of the financial crisis itself be a healthy reassessment of career choices amongst our brightest graduates?
I encounter evolving attitudes among students in my class Statistics 123: “Applied Quantitative Finance.” While some still plan a future on Wall Street and are motivated by the mathematical challenges and dynamic environment ahead of them, many appreciate that they have a broad range of equally compelling career options, whether in technology, life sciences, public health, climate science, or fundamental research. So, as we experience a rebalancing of an economy that was over-levered to the financial industry, a similar rebalancing is occurring with career choices, in particular amongst graduates in STEM disciplines. For example, according to The Crimson senior survey, the number of Harvard graduates pursuing a finance career fell below 10 percent in 2012.
One can still see the abandoned buildings of the Super Collider near Waxahachie, Texas. The Lehman Brothers tower, meanwhile, on Seventh Avenue in New York, has been renamed and rebranded with Barclays blue. And in July 2012, 19 years after the cancellation of the SSC, scientists at the Large Hadron Collider in Geneva reported the discovery of the Higgs Boson, a landmark for the academic physics community. Perhaps one legacy of the financial crisis will be that we see the emergence of an “LHC generation,” a cohort of quantitative graduates engaging in fundamental science.
Stephen Blyth is Professor of the Practice of Statistics, and Managing Director at the Harvard Management Company.
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