What I Learned in Two Years’ Tech Work in Finance

It’s been two years since I started working full time as a software engineer. As I accumulated experience, I became a lot more hesitant to write, because I start to feel that I can’t contribute anything new on top of what everyone else already knows. And I even felt bad for having written some of the old posts, since they now seem quite silly and naive.

In some sense those feelings must reflect a lot of truth, but that still shouldn’t stop me from writing. Perfect is the enemy of good, and if I wait until I know everything, I’ll never write again; hence this post. Random thoughts will be laid out in no particular order.

Over-engineering

One mistake that I’ve repeated is to optimize prematurely. As a recent college grad having done a lot of brain teasers, it’s really tempting to work clever algorithms into the job. But a lot of the times, it’s just unnecessary. In coding competitions, we are only rewarded for writing correct, fast and short programs. Nothing else mattered. In professional work, we need to add a few more terms to the equation - cost of human effort (to write, test and review the code), flexibility for future modifications, and simplicity of the solution. A simple solution that gets 90% of the cases right is perhaps even better than a complicated solution that gets 99.99%, if humans can much more easily understand failure modes and be able to manually fix things in the former case. After all, the alternative is to spend a lot of time debugging when the one edge case happens, and breaks the system.

I think this is important enough to deserve an emphasis - simplicity is valuable. A prediction system that gives you a slightly inaccurate number in a predictable way is much better than one that gives you a more accurate magic number that no one understands. In financial markets, complexity creeps in wherever competition is fierce, but the simplicity of many models would probably still be surprising to outsiders (hint: it’s not all machine learning).

There’s another form of short-sighted cleverness, which is to tweak the system very slightly to achieve what I want without learning about the whole system or understanding the full consequences of those tweaks. The smallest diff isn’t necessarily the best fix. Adding a patch that isn’t well thought out and that doesn’t fit in with the rest of the code is just incurring tech debt. Perhaps we could call this under-engineering.

Don’t Pretend You Understand

One thing that is common, perhaps more so among newer folks, is to pretend to understand, whether listening to a conversation or getting answers from teammates. Having been on both sides, I believe that this is a really bad habit. Of course it is only human nature to hide your inexperience, and I’ve also heard criticism about people asking for help before spending a lot of time on the issues. But no, I think a lot of the times, asking questions eagerly is way more productive over all, especially for new teammates.

I say this multiple times to my interns: if a problem can possibly take you half an hour to figure out, and I already know the answer, then the decision here is between one minute of my time versus thirty minutes of yours. Is my time 30x more valuable? I wish! If it’s a tough question and the mentor doesn’t already know the answer, then it seems even sillier for the intern to struggle alone for a long time.

There are times when I’m answering questions from newer folks, and I know that there’s no way they understood some statements I made. However they were still nodding and reacting as if they did. Invariably they will return in a few days with the same questions. This is counter productive.

This problem is less common, although perhaps more serious for more experienced people, since the pride has built up. I’ve told myself “this is something I should know by now” multiple times and stopped myself from asking my coworkers. But the truth is no one knows every corner of the system, and everyone knows that.

There is no shame in not knowing things. People expect that. Just ask.

Aligned Incentives

One idiosyncrasy about the finance industry is that a lot of compensation comes in the form of variable and unpredictable year end bonuses, as compared to stock offerings in tech companies. Of course people like certainty. But I think there’s a case for an opaque process of reward in the form of bonuses.

From first principle, employees have different incentives, and they usually aren’t the same as the company’s goals. Whenever incentives diverge or even conflict, we can get serious issues.

There are countless examples in real life. One example in finance is the reward curve for some hedge funds. Hedge funds are roughly companies that take investor money and help them pick investments. Some hedge funds collect a fixed fee, plus a significant fraction in additional return. That means when the investments increase in value, they make more money. That’s good incentive, right? The problem is when the investments lose money, they aren’t affected - they still take the fixed fee, regardless of how much was lost. (This is not entirely accurate, since they will lose clients if they keep losing money.) Therefore the funds will tend to make riskier investments. If your investment is going to make on average 10% a year, you’d rather make 100% this year and lose ~80% next year, as you can collect a much larger fee. This is worse for the clients.

Now let’s look at employee compensation. We want to reward employees in a way that encourages them to help the company make more money (assuming making money is the goal of the company). One thing we can do is to measure the amount of contributions for everyone, and reward accordingly. For example, we could measure hours spent in the office, or number of lines of code written, or survey people for their estimations of their teammates’ contributions, etc. The problem is these are only proxy measurements, and once you start measuring them, people will optimize for the proxies instead of the actual goal. If you measure lines of code written, you’ll encourage verbose and redundant code; if you measure hours in the office, people will stay longer but not necessarily work at the same speed, and so on.

But the problem is fundamental - you can’t measure the actual contribution and hard work, and by measuring proxies you’ll encourage cynical behavior. A fix, if not a complete solution, is through obfuscating the reward function. If I tell you that I’ll give you an unknown amount of money by the end of the year based on How Well You DidTM, and let you fill in the rest, then you won’t be encouraged to write bad code, or only focus on projects that had Impact, or other things bad for the firm.

I feel that this has worked quite well in my company. But there are a lot of assumptions for this to work. One is that employees have to be OK with not knowing how much they’ll make. There also needs to be a lot of trust between employees and managers, so that employees can trust that they’ll be evaluated fairly by the end of the year.

And More…

This post is getting long and messy, so maybe I’ll call it a day for now. There are a lot of smaller lessons that come from trading and recruiting. Trading is arguably the best arena to hone one’s rational decision making skills, and interesting stories come up every now and then. Maybe I’ll write a follow up some day.