A WOMAN IN THE CITY

It is a truth not universally acknowledged that there are two main categories of people that are paid to speculate, philosophers and traders.

When one thinks about it, we owe these two categories a lot in human history. Mesopotamian traders of grains probably invented accounting systems, and maybe writing. Philosophers from Greece to the Middle East, from Andalucía to China and from India to Japan, can probably be held responsible for a wide ranging set of human concepts that shaped and are still shaping our societies.

But who wins, philosophers or traders? or are they actually the same? and having encountered a lot of traders in the financial system, have I actually encountered any philosophers?

I have to admit I never actually thought about this before listening to an episode of StarTalk, when Neil Tyson de Grasse said philosophers are paid to speculate and very few other people are. And this is what inspired this post.

A quick internet search lands me on the excellent “Stanford Encyclopedia of Philosophy” and its page on Money and Finance (see [1]), which is an excellent introduction to all what there is to philosophize about in the financial system.

Is money a social construct or a commodity? what is risk? is there a correlation between interest rates and instability?

I really liked the philosophical take on intrinsic value, which would effectively make of every trader an actual active philosopher.

The encyclopedia outlines two main factors that determine the price of a financial asset: ” (i) the credibility or strength of the underlying promise (which will depend on the future cash flows generated by the asset); and (ii) its transferability or popularity within the market, that is, how many other investors are interested in buying the asset.”

And of course buying or selling an asset means it has a price. As the encyclopedia puts it: “The philosophically interesting question is whether there is such a thing as an “intrinsic” value.”

For example, an “asset bubble” is a situation that happens when certain assets trade at a price that strongly exceed their intrinsic value, think about a tulip at thousands of guilders.

What to buy, what to sell, at what price and when, and based on what information, are trade-offs traders, and I include active investors in this set, have to constantly make.

Many philosophies have been about trade-offs: effort vs. flow, utility vs. freedom and longevity, logic vs. literalism, gratification vs. duty…

So traders could be actually making, consciously or unconsciously, philosophical considerations everyday.

But have they shaped corporate life in the way philosophers and philosophies have shaped social life?

It is obvious that traders are everywhere in the corporate universe, but are the large management consultants and the so-called strategic advisors the new philosophers as they sometimes claim to be?

Let’s narrow the lens to the financial system.

Traders have indubitably shaped some aspects of corporate culture. Performance in corporations remains measured by tightly defined results, risk taking, speed, drive and to some extent, displays of power.

All these traits were prominent in the early days of men-dominated trading floors, and still remain pervasive in how performance is assessed to this day.

Then, what does popular culture tell us: the financial system professions most shown in movies and TV are traders, hedge fund investors, and to some extent investment bankers and brokers.

Who can remember a movie on a compliance officer or on a back-office operations manager, both essential and critical roles in any financial institution? who can cite a TV show on the second-line risk management? And who has watched a series on a product control specialist (aka accountant) or a core quantitative modeller?

These characters might appear in the background of some known stories or, in case of dramatic known failures, in documentaries. But they rarely feature more than a passing mention.

And yet, “front office” staff i.e. those working in direct money generating roles, represent between 5 to 10% (accordingly to my estimate , see [2]) of the total staff in the top ten investment banks, for example.

The focus on traders in popular culture is often a reflection of the dramatic and visual narrative they are perceived to provide. Unfortunately, one of the subsequent drawbacks is a deep misunderstanding of what actually constitutes the “financial system” and its components.

On the other hands, Western philosophers – and two or three Eastern at best – are very prevalent in our popular culture, from quotes to books, to youtube videos to podcasts, to sci-fi and fantasy, and the occasional movie reference.

However, it is not clear how much philosophers have impacted modern corporate culture as compared to traders’ values.

Management consultants have indeed attempted to call themselves the modern corporate philosophers but I don’t think this reflection went very far. A selling point of deep thinking about issues, and carefully weighting implications for decision-making can only be seen as a liability for a corporate culture driven by fast visible impact and bold risk taking.

In fact, some consultants use the philosopher label as a marketing tool. They were conscious that if they truly acted like a philosopher, for example dwelling on ethical and moral considerations in delivering a deal or a re-organisation, they would be simply seen as an obstacle, and not fulfilling their primary role: supporting decisions already made.

So where does this gets us? Traders shaped corporate culture, and in some ways impacted directly how many of our societies have evolved in the recent years, in a context where corporations act increasingly like sovereign powers.

Philosophers have been laying out their visions of wrong and right, of reality and illusion, of equality and justice, since humanity’s first written records.

Sometimes they have been ones and the same, with some prominent philosophers known for their business activities and others being from merchant families.

But overall, who wins in shaping corporate culture?

Well, one thing to say in conclusion is that “Philosopher” is the new trending role in many AI firms. Many advanced technologies companies are now hiring “Resident Philosophers” to weigh the pros and cons of developing complex AI models, on an existential scale. These philosophers often work on ethics related issues, or alignment questions or establish AI “constitutions”.

I asked an AI (giving it the context of my article): What do these philosophers do?”. Its answer: “while the financial system relies on a massive back-office to manage risk, these philosophers are being hired as a ‘moral back-office’ for front-line tech.”

The cynical lesson from the financial system is clear: philosophers are not the ‘traders’ of this new tech world. They occupy a cost-centre, not a revenue-centre, their role is not speculate, pause and reflect. They may not be able to influence anything.

[1] Philosophy of Money and Finance (Stanford Encyclopedia of Philosophy)

[2] This article cites 51000 front office (FO) staff: Investment banks’ headcount holds steady after years of cuts

Using wikipedia, the top ten investment banks employ roughly 1.2million staff, so I used that ratio to estimate ~4%.

Another ballpark I used is that often, trading floors in large banks are literally 3 or 4 floors out of ~20 floors. Assuming also another 10 floors of staff not in the same building, that’s an estimate of ~10%.

Finally, a common stat and ratio I found through searches and AI is 1 FO for 3 non FO staff in banks, and 60:40 ratio in hedge funds.

So even with a conservative assumption, and adding in all the other actors of financial system incl. rating agencies, auditors, regulators, exchanges, clearing houses, index providers, etc etc, well over half the financial system is not front office, and definitely not in the dramatic roles (nor with the outsized salaries) depicted in popular culture.

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