Lately, we’ve been talking a lot about how to break into finance and what a finance career entails, and during that discussion there is a big issue we still haven’t addressed at all: the kinds of big mistakes financiers make.
Of course, there are the well known errors—the bad trades, the poor analysis that turns into a big loss, the strategic approach to markets that turns out to be the opposite of what works. These grab headlines, like when a bad move causes billions to disappear from a fund in days. They also grab the attention of lawmakers: many errors in finance can result in lost fortunes and jail time. It is a serious industry with serious consequences.
But these mistakes only tell us about rare major failures, when in reality there are many more tiny mistakes that are easily made and result in smaller losses.
Today, let’s talk about that kind of mistake.
These “small” errors tend to result in a fundamental misunderstanding of what finance really is. Such errors are natural; finance is a massive undertaking with many nooks and crannies, so any description of the entire field is going to fail. What a credit analyst at a ratings agency and what a venture capitalist investor do, for instance, are very different, and any overarching description that fits both is going to be imprecise and misleading at important points. We have to accept that any definition of the field is going to be imperfect.
Still, we can say that finance as a sector tends to focus on coordination problems. There is, for instance, group X that believes a and group Y that believes b, and the financier’s job is often about understanding what X and Y believe, how a and b are different, and what is likely to happen because of those differences. That is a very different job from adjudicating between “a” and “b” and saying that one is right and one is wrong.
Finance is more about coordination across tribes than about discovering a ground truth.
When we understand the field from this perspective, three very common error modes become almost inevitable.
First consider the financier who senses she could have earned more if she had networked enough. This is self-evidently true of all financiers if it is a coordination problem. Theoretically, the person who can coordinate every person on Earth will make all of the money there is to make in finance, but such a coordination is impossible. So no one in finance ever networks enough and everyone could have earned more if they had.
Of course, this points to a second problem: how much money there is to make in theory is never the same as how much money there is to make in practice. Combine this with the fact that the big money makers tend to change over time, and things get even messier. Sell side research was a potential path to a multimillionaire career and superstar status in the 1990s; nowadays sellsiders face significant pressure from shrinking research budgets and, as a result, limited growth opportunities and pay in that part of the sector. Similarly, mortgage bankers at all levels of the sector in the 2000s earned much more than they do today for obvious reasons. As the ball moves, so do the key players.
The problem with the ball moving is a classic one, and it isn’t limited to finance. Since the locus of where high earnings are easiest to get constantly changes, preparing to get the highest earnings is a losing strategy, since you’ll most likely be playing yesterday’s battle instead of tomorrow’s. This is also why, in general, entering finance just because one wants to make a lot of money is insufficient—it lacks sufficient strategy to break out.
The real approach to a financial career is a bit different, and requires you to ask a different question. Instead of “how much can I make?” the real question to ask is “what unique value do I create inside a system that rewards coordination?” And that forces some deep introspection. There are many kinds of coordination problems and many kinds of solutions to those problems: which are you best at finding, which do you enjoy finding the most, and how can you communicate your personal skills in finding those solutions to people who need them?
When you ask that, you are likely to end up in a pocket of finance that fits your personality, your interests, your skill set, and your temperament—and that’s a winning formula for a lifelong career. Of course, it does mean you might find yourself in a sector that doesn’t pay as much as you’d expect. Continuing with the sell side example above, there are many sell side analysts who enjoy that kind of work and are good at producing it and solving coordination problems between buy side analysts and the companies those analysts cover. They may not get the 7 and 8-figure payouts that sell side superstars could command in prior epochs, but they still can earn a good living doing work they love with people they enjoy working with.
And that, ultimately, points to what a really successful financial career is all about. It isn’t about getting absurdly wealthy. It’s about finding your place within a broader system in which you are well rewarded for making that system operate a bit more smoothly, with less friction and less mistakes along the way. From bank tellers to hedge fund billionaires, that’s ultimately what we’re all doing: making the financial system work better as a whole. And that’s important, because a financial system that works allows people to do whatever it is they want, from buying a car to financing a civilization-changing new technology like AI. Financiers play an important role at each level of that coordination problem, and when good financiers play that role well, they are rewarded with a great career while they reward humanity with a better future.