Is a Ph.D. important for succeeding in finance?

by on November 8, 2013 at 7:24 am in Books, Data Source, Economics, Education | Permalink

There is a new paper by Ranadeb Chaudhuri, Zoran Ivkovich, Joshua Matthew Pollet, and Charles Trzcinka, the abstact is this:

Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s’ publications in leading economics and finance journals further enhance the performance gap.

For the pointer I thank Samir Varma, whose teenage daughter has a new book on iTunes here.

1 Z November 8, 2013 at 8:26 am

There is a confusion of terms here. To know if a PhD is an asset, you would need to compare earnings of people with and without a PhD, not the relative performance of their funds. The point of finance is to skim money from the accounts of the marks. If you establish that the relative performance of the funds directly results in higher or lower earnings, then it makes sense to use fund performance as a proxy. Of course, the fact that 99.6% of managed funds are outperformed by the S&P means the fund manager with a PhD is less of a grifter than the guys with only an MBA.

2 wiki November 8, 2013 at 8:37 am

There is a less cynical version of this reply. In many areas, the big win is convincing someone who’s reluctant to invest to put money into a fund in a first place. While some people might do better in S&P 500 index funds, there is no way many would make such an investment on their own. In contrast, a smooth talking salesman charging a 2% load to get them into a diversified stock fund that underperforms the index would still constitute a win-win, especially if the alternative is to leave their retirement money in the money market for 40 years or to invest in gold fads. This is true for the less educated who fear all investments as well as professionals (a financial consultant I know says that medical doctors are susceptible to this) who think they’re too smart for index funds and “expect” greater than normal returns. Ph.D.s might do better with clients who are financially sophisticated and need less handholding.

3 Z November 8, 2013 at 9:04 am

Oh, I don’t doubt you are correct or at least offering a plausible scenario. I would also expect quants with a PhD to outperform those with just a BS. My point is they are measuring one thing and them claiming something unsupported by the measure. People do not become fund managers out of altruism. They want to get rich. Therefore, the value of the PhD is measured with their tax return, not the performance of the fund.

4 Willitts November 8, 2013 at 10:36 am

Since i work in the field and dont have a PhD, I hesitate to be too critical of the result. I tjink, though that there might be some selection bias. My initial thought is that PhDs are more likely to believe in EMH, less likely to hype superior picking skills. So they get sophisticated investors with a lot of money, conservative goals, and hence low fee rates (but high absolute fees). With the volatility in the markets, buy and hold a diversified portfolio (especially since 2008) has done pretty well.

5 Ricardo November 8, 2013 at 12:25 pm

Good points.

Also, to get a PhD you need to be able to tolerate long periods where things look bleak: similar to buy-and-hold.

It would be really instructive to compare ABD vs. PhD. Both groups would meet your criteria (belief in EMH, disbelief in hype) so we could see how much of it is belief and how much is raw persistence.

6 JW November 8, 2013 at 8:44 am

This paper should be a slam-dunk in the Journal of Finance–I mean, what editor would want to turn down a paper that validates the skills of the entire academic profession!

7 Joseph Ward November 8, 2013 at 9:35 am

Exactly… its like, “We’re great… just ask us!”

8 J1 November 9, 2013 at 12:18 pm

An alternative conclusion would be that the smartest and most capable PhDs aren’t in the academic profession.

9 Hugh November 8, 2013 at 8:44 am

There are many successful traders that have no more than a high school education; trading requires intelligence but it also demands the ability to admit to mistakes and to keep emotions under control.

I question whether Ph.Ds have these additional qualities.

10 D November 8, 2013 at 9:57 am

Having an analytical PhD makes you rational. Rationality keeps emotions under control. And you seem to imply that PhDs = intelligence. That is not the case; most can do it with hard work.

I know of some college dropouts that founded successful companies, but that doesn’t disprove the idea that graduation increases your chances.

11 Z November 8, 2013 at 10:03 am

Ted Kaczynski has a PhD in mathematics and he certainly is rational and under control.

12 Bernard Guerrero November 8, 2013 at 2:12 pm

Well, for certain bounded values of “rational” and “under control”, I suppose he was. Lord knows he managed to stay at his personal craziness a lot longer than your typical “I think I’ll haul a rifle to LAX/ bomb to the Boston Marathon” dimwit.

13 D November 8, 2013 at 9:22 pm

I don’t think he is rational. But in case you were joking, I’m curious, do you have a position you would like to state, or are you just an idiot who thinks that one counter example can disprove a correlation?

14 Wimivo November 8, 2013 at 11:17 am

“Having an analytical PhD makes you rational.”

Did… did he really just say that?

15 dead serious November 8, 2013 at 11:23 am

Hopefully not with a straight face.

16 D November 8, 2013 at 9:25 pm

Teaches you to be think rationally. Is that better?

17 D November 8, 2013 at 9:26 pm

Exercising and eating right makes you thin.

18 Michael November 9, 2013 at 7:35 am

Ph.D. and one-time stock/options trader here. I have done pretty well in the market, at least outperforming the S&P when active, but I have done substantially worse than I could have done if I had two personality traits that I lack: 1. Patience and 2. Emotional discipline. This is why I have scaled back my trading.

Success in the market isn’t just about intelligence–it involves risk management, emotional control, patience, and the ability to stick to a plan and have a clear exit strategy. Many traders are smart people, but they still won’t make it in the market if they don’t have the other skills.

19 8 November 8, 2013 at 8:57 am

The period ends in December 2007. I searched for a mention of LTCM: how to quantify when Nobel laureates cause losses in the whole world’s portfolios?

“Other fields” is quite large. Biotech firms hire biology PhDs, for example. I wonder to what extent the performance comes from non-financial fields.

What is the correlation is between PhDs, confidence and leverage. If people are more confident with PhDs, they may be comfortable with more leverage or in holding less cash.

20 A November 8, 2013 at 9:42 am

12/2007 is an interesting choice because both 8/2007 and the year 2008 were anomalous. I think both 12/2006 and 12/2008 would produce very different answers. 8/2007 was very bad for phds. I’m not sure if 2008 was good our bad for phds, but it was volatile and probably showed a big difference between phds and others.

21 Wimivo November 8, 2013 at 11:26 am

Translation: “We PhDs do better in normal times, but as soon as some unexpected shock hits the economy, we’re f***ed. So let’s just stop paying attention at 2007.”

22 zbicyclist November 8, 2013 at 9:16 am

I am reminded of Mike Royko’s annual columns on the “ex-Cub factor”, in which he explained past winners of the World Series by noting that the losing team had more ex-Cubs on their roster — the idea being that the “training” provided by the Cubs contaminated the player and the future teams they played for. Royko, of course, bent the definitions to suit his theory, but these were comic columns not meant to be taken seriously.

I have not read the entire paper. Life’s short. But I note: “a product is regarded as managed by a PhD if a key role in the firm is performed by a PhD”, and there are 17 key roles listed in footnote 5 (similar in magnitude to the 25 players on a major league roster).

23 albatross November 8, 2013 at 9:54 am

Is the finance PhD in this case mainly a way to learn something about the person’s IQ and determination?

24 Brad Calder November 8, 2013 at 10:03 am


25 dearieme November 8, 2013 at 10:15 am

How did they control for IQ?

26 paul November 8, 2013 at 10:52 am

yet another example of the intellectual prowess of modern finance. I’ll start a fund that goes long stocks picked by PhD’s in finance and short stocks picked by clueless people. its a money machine!!

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