Gabriel Sherman’s New York magazine article about Wall Streeters and their pay is full of gems. But, partly because I’ve got efficient markets on the brain as I prepare to flog my anti-efficient-markets book, this passage interested me most:
A few weeks ago, I had drinks with a friend who used to work at Lehman Brothers. She had come to Wall Street in the mid-eighties, when the junk-bond boom spawned a new class of globe-trotting financiers. Over two decades, she had done stints at all the major banks—Chase, Goldman, Lehman—and had a thriving career directing giant streams of capital around the world and extracting a substantial percentage for herself. To her mind, extreme compensation is a fair trade for the compromises of such a career. “People just don’t get it,” she says. “I’m attached to my BlackBerry. I was at my doctor the other day, and my doctor said to me, ‘You know, I like that when I leave the office, I leave.’ I get calls at two in the morning, when the market moves. That costs money. If they keep compensation capped, I don’t know how the deals get done. They’re taking Wall Street and throwing it in the East River.”
Now, a lot of people in New York have BlackBerrys, and few of them expect to be paid $2 million to check their e-mail in the middle of the night. But embedded in her comment is the belief shared on Wall Street but which few have dared to articulate until now: Those who select careers in finance play an exceptional role in our society. They distribute capital to where it’s most effective, and by some Ayn Rand–ian logic, the virtue of efficient markets distributing capital to where it is most needed justifies extreme salaries—these are the wages of the meritocracy. They see themselves as the fighter pilots of capitalism.
Actually, they may more closely resemble the bumper-car drivers of capitalism, spending more time tangling with each other than doing anything useful. When their numbers are relatively few, Wall Streeters probably do perform something like the capital distribution function outlined above. But as the financial sector gets more crowded and more frenetic, it always seems to reach a point where more activity—those calls at 2 a.m.—leads to a less efficient allocation of capital.
There’s evidence for this, of a sort, in the computer market simulation that Brian Arthur, Blake LeBaron and John Holland ran at the Santa Fe Institute in the early 1990s (pdf). They found that when the “agents” in their market were slowpokes who adjusted their views only infrequently, the market settled into something close to a rational equilibrium. But when they upped the “learning speeds” of their agents, the market was much more prone to bubbles and crashes. So we might actually all be better off if Wall Street weren’t populated by quite so many bright, hardworking (and highly paid) people.