16. Friends Don’t Let Friends Get Into Finance

I recently heard that a group of friends of mine is busy working on a new startup, that will find and utilize inefficiencies in markets to perform micro-trading: buying and selling frequently, based on complex stochastic models of markets behaviors. I don't know if this can work or not. Secretly, I hope it can't. There's something inherently wrong, in my opinion, in investing your time and efforts in an endeavor whose sole goal is to take some percentage of market trades without putting anything back into the system. What is the contribution of their startup, besides (perhaps) making money for their customers? How does it help the economy, human prosperity, people's well-being, or any other ideals? In other words, what value do they create, as opposed to the value they extract from other traders?

This is the same group of people who created a successful hi-tech company 10 years ago, based on novel ideas of data protection and replication. Their product enables small business to protect their vital data against corruption and disaster, and gives a real, quantifiable value to their customers. They're very smart and very talented. Isn't this game a waste of their talents?

The same is unfortunately true for a lot of what's going on in the finance world. In the US, Finance grew to  be the biggest sector in the list of GDP components. But Finance is all about moving money from one hand to another, not about creating anything. Yes, some amount of finance is necessary: to help people and institutions raise money, protect and grow their savings, and to add liquidity to the system. But should it be more than 1-2% of the economy?

All these resources don't come for free. As Vivek Wadhwa points in his excellent post, Friends Don’t Let Friends Get Into Finance, the human resources invested in the Finance world come on the expense of academic research, technology development, science, medicine -- in short, all those boring productive disciplines that are not focused on getting some Wall St sharks rich quickly. Let me quote his last paragraph:

Paul Kedrosky says that the virus that infects scientists and engineers and causes them to go to Wall Street rather than create something of societal value is “economic Ebola”. He wants to be an “economic virus hunter”. Let’s all help him. Let’s save the world by keeping our engineers out of finance. We need them to, instead, develop new types of medical devices, renewable energy sources,and ways for sustaining the environment and purifying water, and to start companies that help America keep its innovative edge.


I would add to that my opinion that every billion dollars earned by a hedge fund or an Investment bank is a billion dollar taken away from private investor, pension funds, enterprises, factories and every other part of the economy responsible for our growth and success.

The big question is how to cure this "economic Ebola". Any ideas?