From: andrew@rentec.com (Andrew Mullhaupt)
Newsgroups: sci.math
Subject: Rocket Science on the Street
Keywords: Wall Street Greed Mathematics Risk Employment Fear Career
Date: 17 Nov 92 16:25:06 GMT
Organization: Renaissance Technologies Corp., Setuket, NY


I`ve got a lot of people asking me the following questions so
I thought I'd post the answers as I see them.

There was some talk on here a while ago about "rocket scientists"  --
specialists in mathematical finance who make, I am told, a million
dollars a year working for investment banks and securities trading
firms.  If you have time for some questions...

1) Is there any truth to this?

Yes, but that $1M is more like $100K. To make $1M, which is possible,
you have to be exceptionally good, and you will not be doing math at
that point any more, but running an important business group. Very few
analysts make this kind ($1M) of money - mostly these guys are _former_
analysts.

Note: The large salaries on Wall Street are not fixed numbers. The more
you make, the more of it is discretionary, or uncertain in some sense
(it's bonus or commision, etc.) Very, very few people who make a million
or so in a year make it as salary. This means that although you may make
$100K in a year, this is likely to be composed of $70K salary+guaranteed
stuff and $30K bonus. With the same compensation package, a very good
year might get you up to $70K salary+guarantee + $80K bonus = $150K. In
a poor year, you might get the $70K.

Note: There can be a lot of risk working in this field. There is _no_
job security whatsoever. I worked for one of the more recognizable firms
on the street, and part of the offer letter they sent me made words to
the effect that 'at any time, your employment may be terminated, with or
without any reason whatsoever.' If you come to the street, keep the resume
sharp, and if you aren't strong in some way, don't bother coming.

2) Is mathematical finance a bona fide field?

Yes and no. It's just like any other applied math. There is this field
(finance) and lots of heavy duty math can be brought to bear. Nobody
gets paid to prove theorems per se, but on the other hand its hard
to do the job without having that kind of ability. One of the problems
is that there are a lot of different fields at work here, and you may
be interviewed by someone who thinks mathematical finance is derivative
pricing (options) and nothing more. On the other hand, there are quite
a few other highly profitable problems than this (the most common) one.

Job interviews tend to have a component like the oral Ph. D. exams but
the difference is that in the orals they think they are trying to find
out what _you_ know, but in these interviews they realize that they are
trying to find out if you know what _they_ know.

Oh by the way - anything that makes millions of dollars will not be soon
appearing in the open literature unless somebody goofed.

3) What kinds of mathematics are used in mathematical finance?

Whatever fits the problem. A great deal of Probability and Statistics is
obviously useful, and almost everything in Signal Processing (including
nouveau stuff like wavelets) is found somewhere on Wall Street. I think
the majority of math guys do derivative pricing, which leans heavily
on Stochastic Processes, Partial Differential Equations and Numerical
Analysis. Then there's a large amount of Linear and Nonlinear Optimization.

4) Does a person need to know much outside of mathematics to do this
kind of work successfully?

Eventually, yes, but initially no. What you need to get going is some 
basic stuff like you find in Sharpe's _Investments_ and John Hull's book
on Options and Derivative Pricing. You need to be a very strong programmer
and you have to be willing to take a lot of personal risk and work in
a very stressful environment.

I should mention that a Ph. D. from a strong school in Mathematics, (Pure
or Applied) or something much like it (Mathematical/Theoretical Physics,
Electrical Engineering Science, etc.) is required to have a career. You
should also have a postdoc and maybe some work as a Professor. This gets
you to just a little past entry level on Wall Street.

Later,
Andrew Mullhaupt