Over the last 35 years, Wall Street grew into an outsize part of the American economy. The financial sector now accounts for one fifth of U.S. corporate profits, which puts it neck and neck with manufacturing, an industry that employs twice as many workers.
During its transformation in the 1980s, Wall Street also turned into a top recruiter of graduates from fancy colleges. This is still true. Despite the humiliations of the financial crisis, which revealed how Wall Street's complex dealings had undermined the public interest, it remains the most popular destination for Harvard and Yale students entering the workforce.
In October, President Obama scolded banks and hedge funds for gobbling up so many of America’s top students. “Too many potential physicists and engineers spend their careers shifting money around in the financial sector, instead of applying their talents to innovating in the real economy,” he said in an editorial for the Economist.
Obama is hardly the first to complain about the Wall Street brain drain. But the concern is more urgent now that algorithms are increasingly executing investment strategies. The financial sector hungers not only for highly-credentialed workers, but also for those with technical chops. Science and engineering programs have sent a startling number of students into banking and investment careers over the past decade. Right before the Great Recession, when demand and supply were at their peak, almost a third of MIT engineering majors entering the workforce had jobs lined up in finance.
So in that sense, it would seem Wall Street has deprived the nation of thousands of scientists and inventors.
But according to recent research from Pian Shu, an economist at Harvard Business School, the kinds of students who end up working for Goldman Sachs or Merrill Lynch aren’t always the best, the brightest — or the most innovative.
Shu finds that MIT science and engineering majors who took their first jobs in finance had more modest academic achievements, on average, than the high-flying types who pursued research careers right after school.
“The two groups seem very different even at college entry and pursue different activities in college,” Shu said in an e-mail. Students destined for Wall Street tended to arrive at MIT with weaker high school records, and later graduated with lower college GPAs. They were also more likely to be members of a fraternity or sorority.
In addition to confidential academic records, Shu also analyzed the self-evaluation surveys given to students at graduation. People going into finance were less likely to say they gained an “in-depth knowledge of a field” or that they better understood “the process of science and experimentation” after their four years at MIT.
Looking at MIT science and engineering graduates between 1994 and 2008, Shu found that those higher GPAs were far more likely to end up with patents, which is a crude sign that they were “innovating in the real economy,” as Obama put it. In contrast, during the run-up to the Great Recession, it was precisely the opposite kind of MIT student — the low achiever, the struggler — who most gravitated toward jobs in the financial sector.
Outside of MIT, Shu discovered a similar pattern when she analyzed at the careers of American college students who participated in an elite math contest known as the Putnam competition. Students with the top Putnam scores were more likely to work in research after graduating. Students with lower Putnam scores were more likely to work in finance.
“There is a widely held concern that the financial industry, given its lucrativeness and increasing demand for quantitative skills, is diverting the best and brightest STEM talent away from creating innovations,” Shu said. But her research suggests that doesn’t seem to be the case. The people best prepared for science and engineering careers, she said, aren’t usually snatched up by Wall Street.
There are two possible explanations here. One theory is that the financial sector looks for people with a different mix of skills; maybe it's less important that you're a scientific genius, and more important that you have highly developed social skills from all of your fraternity activities. But this would contradict the defining ethos of modern Wall Street, which prides itself on hiring the "smartest people in the world," as University of Minnesota anthropologist Karen Ho describes it. "The 'culture of smartness' is central to understanding Wall Street’s financial agency, how investment bankers are personally and institutionally empowered to enact their worldviews, export their practices and serve as models for far-reaching socioeconomic change," she writes in her study of investment bankers.
Many top math and science students do receive offers from Wall Street, but pursue research careers instead. So another theory is that the most academically talented people simply have other motivations. Terence Tao, one of the world's most celebrated mathematicians, has said that his students are often tempted by finance jobs. He's turned down recruiters himself. "I don't know, these things never sort of really interested me," he told the Sydney Morning Herald.
In any case, the news should come as some relief to policymakers who are skeptical of the financial sector’s value to society. The next Einstein will probably not spend her life fiddling with code at a Connecticut hedge fund.
The story has one interesting wrinkle. Shu noticed that since the Great Recession, after Wall Street careers had lost of some of their luster, newer classes of MIT students became more likely to major in science and engineering subjects — and their grades were better, too. This effect was most pronounced among the weaker students. Shu has a hunch that some students had been slacking off in their classes because they anticipated working in finance, not science, after graduating. The financial crisis seems to have changed people's aspirations, and may have motivated them to work harder in class.
Shu’s research offers a fresh angle on an important question: Why do people end up on Wall Street anyway?
According to sociologist Amy Binder, who has studied the career choices of Harvard students, few freshmen enter Ivy League colleges dreaming of being spreadsheet jockeys; it’s the recruiting apparatus that sucks them in. Firms like Goldman Sachs and Merrill Lynch spend lavishly on Ivy League headhunting, tempting students with fancy dinners, promises of prestige — and, most importantly, the idea that there exists a safe template for their post-grad lives.
“The recruiting process saturates almost every aspect of campus life from the very first day of the academic year,” Ho writes. In her book, she describes how companies teach students at name-brand colleges to desire finance jobs by portraying a Wall Street career as the natural "next step toward continued upward mobility." It's the next badge to collect.
MIT is clearly different from an Ivy League college, but students arrive with a similar levels of apathy toward finance (disclosure: I was an MIT student myself) and face similar recruiting pressures. It’s easy to say that Wall Street’s eye-popping salaries lure people into finance jobs. But maybe what's equally important is that Wall Street promises a sense of purpose. Shu's research suggests that the top students, who are likely laser-focused on their goals, rarely land on Wall Street unless that was their plan to begin with. Those who are less academically inclined, however, might pursue finance as a second choice, after they’ve given up on a different dream — a career in science or engineering perhaps.
One problem is that this backup option doesn’t present itself to just anybody. Wall Street has been heavily criticized over the years for its snobbish recruiting practices, which focus on name-brand schools. Critics say that firms aren’t really interested in what students have learned in college — only their educational pedigrees. According to Binder, Wall Street chases Ivy League graduates chiefly because, as the industry was expanding in the 1980s, firms had “developed business models that relied on the appearance of brainpower in order to win clients.”
If that caricature is true, it's definitely changing. Goldman Sachs recently promised to focus less of its recruiting efforts on the Ivy League. Instead of interviewing candidates on a few elite campuses, it will invite students from all over the country to submit video introductions over the web. The goal is to make the hiring process more meritocratic. But the company also recognizes that Ivy Leaguers haven't always been the most loyal or well-suited employees. Recruiters “want to make sure they’re getting a higher likelihood of people being here longer and having a strong career,” one Goldman executive told the Wall Street Journal in June.
This could be a win all around. The people who truly get excited over Excel macros and Seamless desk dinners will have a better shot at landing their dream job. And any dispossessed Ivy Leaguers might have to figure out another way to contribute to society — this time without a recruiter breathing down their necks.