ETHICS

Finance Can Be a Noble

Profession (Yes, Really)
by Mihir A. Desai
JULY 17, 2017

When I ask students graduating from Harvard Business School what they’re doing next, I often get
some version of “I’m going into finance but…” Then they quickly explain that finance is just a way
station on the route to nobler goals. I seldom, if ever, hear that apologetic tone from students
choosing technology companies or consulting. Recently, I asked a few students how people react to
their choice to go into finance, and I was greeted with nervous laughter. When pressed, they
explained that most people conclude that someone choosing finance cares only about money — and
cares little for others or for society.

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 As graduates explain their career choices to family and friends, they will confront the idea that our
best and brightest are wasting their talent in an industry that doesn’t do anything worthwhile. This
reflects a historic bias against finance, as well as current anxieties on the loss of “real” jobs and
justifiable concerns over widening income inequality. But this anti-finance sentiment is detached
from the reality of the profession and obscures the promise and peril of a career in finance.

Financial services is one of the most robust sources of employment in the U.S., with high average
wages, and it attracts talented young people from beyond the narrow set of Ivy League schools. To
give one example of this, in 2016 18% of Harvard undergraduates and 28% of Harvard MBAs went
directly into finance, while 29% of the undergraduates of Ohio State’s Fisher College of Business did.

The typical hand-wringing about young people going into finance also obscures the reality of how
rewarding those jobs can be. I know many people who find finance intellectually rich and a source of
lifelong learning. They often start a finance career not for the money but because they know that
many other bright people go into the profession, and they want to be surrounded by them. Or, in
later years, many migrate toward finance — even doctors and lawyers — as they discover that
thinking hard about the value created by a business is fascinating.

And it is truly fascinating. Why is Amazon worth close to half a trillion dollars (twice the value of
Walmart) when it has barely generated any profits? Should a subscriber of Snap.com be valued the
same as a Facebook user? What is the impact of scalable 3D printing or artificial intelligence on the
future of manufacturing? How will the crisis of problematic loans in Italian banks be resolved? These
are rich questions that do not yield to simple analysis. The questions in finance can be as intriguing
and as challenging as the diagnostic problems facing doctors, the logical puzzles facing lawyers, the
unresolved questions facing scientists, and the strategic challenges facing executives.

Finally, the global financial crisis has taught us about the havoc that finance can wreak — and how
central the industry is to our lives. Our educational trajectories, our family circumstances, and our
quality of life are dictated in part by financial logics. Am I saving enough? Too much? Is that investment
in my education worth it? Why do my spouse and I always fight about money? How do I get out from
under this mountain of debt?

As much as we begrudge finance’s power in society, the reality is inescapable: Finance plays an
enormous role in all our lives, and many of us find it deeply interesting and challenging.

The real dilemma posed by careers in finance is why and how some of the people who go into it
— including some of our best and brightest — end up behaving poorly. Even those of us who enjoy
thinking about finance can see that the practice of it is broken.

The usual reactions to misbehavior in finance are outrage or regulation. Regulation is part of the
answer, but it is not a panacea: Blunt regulatory instruments carry unintended consequences that
can create as much havoc as what they are designed to solve. Moreover, many regulators and

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 legislators are captured by the industry, so we can’t hope for much from them. Outrage about finance
can also backfire. In fact, the low reputation of the profession only means that people in finance are
held to an ever-lower standard.

Bad behavior in finance results, in part, from the unique way in which participants, particularly
investors, understand their own performance. Finance is different from other fields in two ways:
Financial markets provide near immediate and easily quantified feedback, and the consequences of
decisions can be inflated by leverage. Humans in all fields typically make sense of the world’s
feedback by attributing positive outcomes to themselves and bad outcomes to situational factors, but
finance creates these attribution errors on a more massive scale and at a higher frequency than any
other field. As a result, it should come as no surprise that finance features more than its fair share of
unsavory characters with an inflated sense of self-importance and invulnerability. And the sharp rise
in markets-based compensation — including high-powered incentives for money managers and
equity compensation for CEOs — has further fueled the depth and breadth of these errors.

The irony of this situation is that the discipline of finance warns against precisely this pattern.
Finance teaches us that it is nearly impossible to isolate the effects of luck and skill in financial
markets. It teaches us humility, too: Risk is omnipresent, difficult to measure, and hard to price, so as
a result, true skill is hard to isolate. Only over long horizons, if at all, might we come to understand
what skill is — and who the truly skillful are.

This is part of a broader pattern: The practice of finance has become divorced from its underlying
ideas. For the profession to recover its reputation, its practice needs to be anchored again in the
underlying ideas — and the central ideas in finance are actually quite noble. Insurance, leverage, risk
management, value creation, asymmetric information, and options are all concerned with exactly the
same philosophical question that many of us are concerned with in our lives: what is most valuable to
us and how to create and measure it.

As a result, the core ideas of finance have humanity and nobility embedded in them. Take insurance.
For most of us, insurance is about as mundane and uninteresting as it gets. But the founder of the
philosophical tradition of pragmatism, Charles Sanders Peirce, became preoccupied with insurance
companies. He ran around giving lectures saying “We are all insurance companies.” He understood
that the problem facing humans and insurance companies is fundamentally the same: We live in a
world filled with randomness and chaos and must decide about the risks we undertake. And
his solution for insurance companies and human beings was the same — go out and gather data,
experience the world, sample what it has to offer, and understand the patterns in the chaos so that
you can navigate the seeming randomness of life. Insurance is not only fascinating but profound, if
you think about it this way.

Will the next insider trading scandal be avoided by the simple prescription that practitioners should
hold true to the ideas of finance? Perhaps not. But over the longer run, it is only by anchoring the

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 profession’s practice in noble ideas that we can expect people in the industry to behave in an
aspirational way.

So, graduates entering finance, take heart. You will wrestle with deeply interesting problems with
very bright people in your careers. We are trusting you with consequential questions: how we save,
how we manage risk, and how we, as an economy, allocate capital. Hold your head high — but realize
that the rehabilitation of a broken industry is your responsibility.

Mihir A. Desai is the author of The Wisdom of Finance: Discovering Humanity in the World of Risk and Return and a
Professor at Harvard Business School and Harvard Law School.

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