Career Tips

I was asked recently to speak at an undergraduate event. Part of it was to give some career advice in the form of 3 tips. Here is what I came up with:

Many people after leaving university find adjusting to the world of work difficult and become very unhappy. Focusing on a lack of “meaning” in their job while searching for a “mentor” to guide them, they can quickly come to resent their firm and co-workers.

It does not have to be this way.

The most important thing to realise is that the workplace is not going to feel like an extension of education – it is completely and fundamentally different. For at least the first two decades of your life, focusing on your knowledge and your skills is the key and the whole environment around you is geared to helping you develop. However, the ability of a student to successfully transition into a happy and productive career has remarkably little to do with the knowledge and skills they start with.

What really matters is how well they can change their mindset.

Here are 3 things to focus on:

  1. It’s not about you any more

This is the piece of advice students generally find the most upsetting. A big change in mindset is required to succeed in a work environment compared to the one needed for education.

In education, the student is the product. The ultimate aim for a student, with the help of teachers, is to gain the skills and knowledge required to pass exams. This does not mean that students have complete free rein to do what they want. There will be various restrictions on behaviour, such as a requirement to go to lectures, prepare for tutorials, do reading, problem sets and essays – however these are all designed with the success of the student in mind. The best attitude for the student is to be focused on themselves and their own needs.

In the workplace, the business is the product. The ultimate aim for a new employee is to become useful. Many graduates find this transition to the workplace a shock. Senior members of staff may not think that a key part of their role is to educate you and make you more productive or happy. In a few years’ time, you will also be more senior too and it will be obvious to you that this is not a priority either. You will want to be productive at work, impress your boss, get promoted, get a bonus etc.

Adjusting to this new reality, the best attitude is to be focused, not on yourself, but on the needs of the people around you and of the firm – Be useful! You will then find good things will start to happen to you. Given reciprocity (see “Influence: The Psychology of Persuasion” by Robert Cialdini), people you help will also help you. Senior people will start to spend time helping you learn and improve. You will have signalled to the firm that you have the right mentality to succeed and so will be promoted more quickly, paid more and given more training.

Having a real job is extremely helpful in preparing you for work and choosing a career path. I spent my Gap year working full time as an economist, but working at McDonalds may have perhaps been even better. You need to understand what it is like to be the other side of the counter.

  1. Be flexible.

In education, a targeted focus and narrow determination are extremely helpful for excelling with high results. The world of academia is fragmented and siloed, with status derived from expertise in ever more specialised areas.

The world of work is very different. A modern and successful career will come with many parallel and some orthogonal leaps into new areas, combined with an ability to master a broad range of cross-disciplinary problems.

I could easily have become a consultant or economist and I think I would have really enjoyed it and been successful. In banking and hedge funds, my career could have gone in lots of different directions. The only way to take opportunities is by being open minded.

  1. Work with people you would like to become.

This piece of advice was given to me as an undergraduate, and it has repeatedly proven itself true as my career developed.

Don’t think that you can join an Investment bank for the money and not become like them. Either you will change to fit in, or you will not and you will hate it and leave.

You must judge it from meeting real employees, not from impressions from TV shows. Being a lawyer is not the way it is on Suits just as being a Hedge Fund manager is not like Billions (well mostly anyway). That is why internships are so useful.

Conclusion

The world of work is can be a stimulating and fulfilling experience. For that to happen you need to be able to have the right mindset to take advantage of the opportunities on offer.

Money 4 – Why does it matter?

The elimination of money from economics theory and teaching leads to major practical problems.

  1. Why did we have the financial crisis and the prolonged recession?

The Queen famously asked why economists failed to see the crisis and ensuing recession coming. What is less talked about is how they subsequently also failed to understand a) what was happening as it was occurring and b) the nature of the recovery. Once you appreciate that money and credit are central to a modern economy, and academic macroeconomists were using models without money or credit, this failure is much easier to understand.

Some policy makers did a better job of learning and adapting to the crisis. Ben Bernanke, at the US Fed, with his study of the 1930s depression years, was well placed to support the economy once the crisis was underway. The Bank of England was not so well led. Mervyn King appeared to believe in a banking model in which the lender of last resort need not exist. When this model failed to have any correspondence to reality, he acted as though reality was at fault, not his personal model.

The financial crisis and its aftermath was predicted and understood by some people however.
But they were likely to be eclectic economists, on the fringes of the mainstream, who did not exclude the views of Keynes and Minsky for their lack of “microfoundations”.

  1. Why did the enormous monetary stimulus not lead to a stronger recovery?

The answer is that the monetary stimulus was not so enormous. The numbers were large, but the transmission mechanism was very weak, and therefore the recovery has been slower than most predicted.

Another misunderstanding follows, since the recovery has been slower than expected, new ideas have been sought to explain it away, such as secular stagnation. But once you accept the idea that QE is eye-catching, but not very powerful for the economy (it may be more powerful for asset prices but that is a different matter) then the slow recovery is not so surprising.

  1. Why do we ever have unemployment at all?

The academic models we have been looking at, theoretically make the existence of unemployment impossible. Given that this is evidently not the case, the models must be augmented with ad-hoc frictions, to make them have some connection to observed reality.

If money is allowed in the model at the start then you do not run into such issues, and surely this is evidence that the theories with don’t include it, don’t make much sense.

Why do economists believe these myths?

If an economist is typical pressed on this, responses vary from claiming that the representation is broadly accurate (it is not!) or more likely that it does not matter (it does!). If the assumption does not matter, why choose such a strange one?

A more recent defence has been that the latest batch of sophisticated new Keynesian models incorporate money and credit and a banking sector. But if that is the case why not change all the teaching? Why is money tacked onto the end of a model rather than incorporated as a critical building block?

I think that they attempt to tack money onto the end of their model building because it is not possible to incorporate it at the start. The assumptions which exclude money are critically important to the complex mathematical models that the current breed of academic economists revel in building. The worry for me is that armed with them, they go on to lead to key policy and market implications. It would also be fair to say that pretty much everything I do in studying the macroeconomy would not be classed as macroeconomics by a current mainstream academic.

Modern academic economists believe that conversations about macroeconomics should be based upon General Equilibrium (GE) and rational expectations and have “microfoundations”. The most recent iteration is the Dynamic Stochastic General Equilibrium (DSGE) model. GE is a truly majestic piece of mathematics which describes an economic system based upon essentially perfect barter.

The concept of money is added as purely commodity money. Any asset can be arbitrarily chosen as the denominator in which to price all others, it is just the numeraire. This helps with the solution as it reduces the number of independent variables by one when solving a set of simultaneous equations.

The advantage of building models in this way is that you can translate many concepts used in micro economics and apply them to macroeconomic questions. This is known as “microfoundations” and many Noble Prizes have been won, tying the neat General Equilibrium theory up with clever mathematics.

After the financial crisis, it is obvious that money and credit had to be included, and so the most recent batch of Neo-Keynesian models attempt to do so. But this is an ad hoc tacking on of a couple of new variables that do not connect to the central mechanism of the model. I see these models as sophisticated in the same vein as the geocentric models used to argue against Galileo.

If we use Kuhn’s model of paradigms, then this looks like economists trying to bury “anomalies” during a period of “model drift” when their models are increasingly unable to answer the questions people think matter. The next stage is “model crisis”. Or perhaps we are already there.

Relationship to Politics and Free-market thinking

This model creates the illusion of a perfect economy in which everything works, with the practicalities of reality being termed “imperfections” such as imperfect competition or sticky wages. This links strongly to the ideology of free markets being the answer to all questions i.e. the idea is to make reality behave more like the model.

Economists of a more interventionist or left-wing persuasion can exist within this paradigm. But ad hoc elements such as asymmetric information have to be added, combined with some pretty inventive and tortuous modelling, eventually producing models which suggest intervention is the correct policy response.

Conclusion

Recent mathematical models cannot be held responsible for the birth of the myths of money and banking. In Classical economics the concept of value is separate from money and logically prior to it and so JS Mill told us that “There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money”.

We have recently seen stirrings from eminent economists that all is not well with the profession, https://piie.com/system/files/documents/pb16-11.pdf, but it is not yet filtering through to how the subject is being taught at grass roots.

Where we are left is a deeply divided set of disciplines. Practitioners, both in financial markets and many Central Bankers have a different approach to pure academics. But even academia is split between macroeconomists who study an economy without money and Finance professors who study a monetary system without an economy.

Both can be seen, to borrow a phrase from Keynes, as “an extraordinary example of how, starting with a mistake, a remorseless logician can end in bedlam”.

Money 3 Banking – a money creation myth

I will again use the bestselling undergraduate textbook “Macroeconomics” by Greg Mankiw as the source for this story.


How does money get created?

In the beginning, there were bank reserves……

 

  1. The Central Bank determine Bank Reserves – this is the money that the banks have on deposit with the Central Bank
  2. Banks, holding these reserves, then lend them out to customers, who then either put that money on deposit themselves or transfer the money to someone else who does. The mountain of customer deposits is generally many times larger than bank reserves. This is known as the “reserve-deposit ratio, rr”.
    It is an “exogenous variable” in other words “the model takes as given”.
  3. There is also the currency in circulation which the central bank also determines.
    This is known as the “currency-deposit ratio, cr”. It is also an “exogenous variable”.
  4. Combining these via “money multiplier”, gives you the Money Supply.

In this way, the Central Bank determines the level of reserves, and thus controls the money supply in a predictable way.


From bank reserves to money supply to inflation……

The next stage in this story is the “Quantity Theory of Money” which “remains the leading explanation for how money affects the economy in the long run.”
This starts with a key identity or equation:




Add a few assumptions….

P * Y is also nominal GDP, so if we assume that V (the income velocity of money) is constant (or “exogenous”), then a change in M leads to a change in nominal GDP.

Via a separate assumption, the level of output Y is determined by a production function which does not include money, therefore a change in M leads to a change in P i.e. changing the money supply causes inflation.

Economists are taught this key conclusion at university:
“Thus, … the central bank, which controls the money supply, has ultimate control over the rate of inflation.”

Unfortunately, like many Creation Myths none of this is true.
As Mankiw says, this model “is simplified. That is not necessarily a problem.”
I agree, “all models are simplified”. But when causation is the wrong way around, this is a massive problem.

Banking – a personal perspective

When I left university, I became a trader at a bank, spending many years on a money markets desk. It is at the least glamorous end of trading, but I found it fascinating being at the centre of the banking system, funding the bank’s activities, and forming the link between the Central Bank and the markets. What was immediately striking was that bank operations were nothing like the models I had been taught at university.

In the story above, the driving force is the Central Bank adding reserves, causing banks to lend money. The mechanisms described are correct, just in the exact opposite order. The actual sequence goes something like this:

  1. Customer decides to buy something and uses credit card for the purchase.
  2. Transaction goes through. i.e. bank lends the customer money for the purchase.
  3. The money shows up as a credit entry on the shop’s bank account and a debit entry on the credit card.
  4. The banking system now has a debit and a credit. Banks move the money between them to square their accounts.
  5. It is important to note that the central bank wasn’t required to do anything in this process.

What if the customer takes out cash? Then the banking system is short of reserves.
This is not a problem as the central bank just adds or takes out reserves on a regular basis to make sure the banking system has exactly as much as it demands.

It is not the case that the Central Bank tells the bank funding desk it has more reserves, who then calls round the rest of the bank to tell them to do some more lending. In simple terms the central bank sets the rate of interest (Fed Funds in the US and the Base Rate in the UK) and then supplies money as demanded. The supply of money is determined completely by the demand for money.

Evidence

Correlation of money supply with inflation

Milton Friedman and Anna Schwartz “wrote two treatises on monetary history that documented the sources and effects of changes in the quantity of money over the past century.” What they did was document that money supply and inflation are positively correlated. This is a most obvious prediction from either story of money, and so I have never seen an argument that it supports one over the other. As inflation rises, then more money will be demanded in the economy to facilitate transactions. The central bank accommodates this so we see a direct relationship between money and inflation. This tells us nothing about causation. Friedman’s attempts to show causation by econometric tricks with “long and variable lags” are completely bogus.

Stability of velocity of money

An argument for why one can assume V is a constant, is that historically, over short periods, it has been. Unfortunately, this again is a direct prediction from both stories. If the central bank always supplies as much money as is demanded then there is no reason for velocity to change.

Why did QE not lead to hyperinflation?

According to this monetary theory in the textbooks, the vast increase in reserves caused by Quantitative Easing should have led to an explosion in bank lending and a rapid rise in inflation.

This clearly hasn’t been the case, and in fact, the taught theories really struggle with reality here. They are forced to rely on ad hoc and non-quantitative explanations such as “animal spirits” or a reduction in confidence. Since this “confidence” is not directly predictable or even observable, it requires a leap of faith, equivalent to “magic”.

It’s a wonderful coincidence that a model which predicts a MASSIVE stimulus finds, in reality, an unseen counterbalancing force which is of EXACTLY the same magnitude. But still, I read that MV=PY holds and the miraculous drop in V to exactly offset the rise in M, was a bizarre coincidence and that once the velocity of money rises back to “normal”, inflation will come.

There is a much simpler explanation. The amount of loans created by banks was never constrained by reserves and so increasing reserves has no effect on the behaviour of banks or their clients.

What do central bankers say they are doing?

Central bankers involved in monetary policy and the oversight of the banking system must understand how banking works. What do they say is going on?
They agree with my model and say that “the reality of how money is created today differs from the description found in some economics textbooks” and describe the model that is taught as “some popular misconceptions”. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

Conclusion

Money is simply not exogenous and does not cause inflation.

Amongst practitioners, including bankers and central bankers, this is obviously well understood. Bagehot famously described it perfectly in 1873. What is striking is the contrast to academic economists who persist with a very different mythical version of banking and continue to educate our bright, young minds with a story of pure fantasy. So why do they do it? I will speculate on that in the next post.

Feedback

As a member of many teams over the years, both leading and contributing, I have learned a lot about feedback. How it is dealt with is a core aspect, not only of work culture, but also in all our relationships. In this post, I will deal with the kind of feedback which is meant to have a purpose, that of improving performance, often thought of as coaching.

Coaching is at its most useful when it is an active exchange of mutual learning. On the one hand, I find I learn so much trying to explain concepts to others, whilst on the other hand I very much enjoy the experience of being coached myself. Effective coaching is rarely dominated by telling people what to do.

Encouraging self-reflection and evaluation within a context of mutual respect and desire for improvement are critical to achieve progress. You cannot presume that someone wants a coaching relationship with you, and they may perceive attempts to coach them as unwarranted criticism.

I think it is helpful to break feedback down into 3 types: praise, encouragement of self-reflection and evaluation, which can be either objective or subjective. It is also important to make a distinction based upon the type of relationships or power dynamics involved.

This leads to a grid, similar to the one used in “How to Write”.

Type 1 – Praise

Very often when people say they want feedback, they only want praise and it quickly becomes a vacuous form of feedback. We have all heard the disparaging stories of “millennials” who are conditioned to expect it. Indeed, I have come across this problem with juniors but I feel anyone adjusting to the world of work, especially straight from university, may find the real-world environment a challenge. I probably did myself.

People who have had a career in a more protected environment, or who have low self-esteem, may also need frequent reassurance that their work is valuable. We see that praise is the only form of feedback that Donald Trump can tolerate. Whereas seasoned and successful professionals tend not to seek praise as much. They know that when validation of their work comes, it is well deserved but their self-esteem is strong enough not to require it.

Like most people I enjoy being praised, but If I am highly praised for something I do not consider particularly worthy, then it has very little meaning to me. My greater desire is to learn and improve, so I actively seek other types of feedback. However, I do believe that praise is underrated as a feedback tool and it can be a very effective form of teaching, positively reinforcing good behaviours if used selectively. This is the way that I like to use it and to receive it.

As parents, praise is totally natural, we proudly clap our children at the slightest provocation. Children are naturally experimenting with behaviours and desperate to learn through new experiences, so selective reinforcement is very powerful. Genuine strong praise for a child who has tried hard at something is mutually rewarding and comes very naturally.

Overall, my approach is to try to use praise genuinely, but it is not as easy as it sounds. At work, I often start with praise but mix in other forms of feedback. This often carries the risk that the recipient may not hear the praise at all, and in fact perceive the whole conversation as pure negative criticism, especially given our power relationship. Furthermore, where the need for praise is too strong, then validation becomes an obstacle to learning in itself. If they receive a lot of praise, then why change behaviour?

A general principle is that people tend to give out the type of feedback they like to receive themselves. If I am managing a person who only wants praise, I struggle to manage them and these relationships have not worked for either of us

Type 2 Encourage self-evaluation

This is simply asking someone their thoughts on what they did or how they feel something went.
This is a type of feedback that may not register as feedback to many people, it does not involve any praise or criticism, no evaluation or active coaching.
The idea is to encourage reflection and to start a conversation from which you both can learn.

This style of feedback comes naturally to me and is most enjoyable if the other person wants to participate. Receiving this type of feedback from investors, it led to the most enjoyable and engaging conversations and I think I learned the most.

Remember the most common source of this form of feedback is yourself!

Type 3a Evaluation – Objective

This is a very important type of feedback if you can get it.

In modern sport, virtually every facet of the game is reduced to statistics which can be measured and help form the development of training drills to enable a player to improve. Purposeful practice requires a solid feedback mechanism.

Learning without a reliable feedback mechanism makes objective evaluation much harder. Learning to trade for example. A market making environment lends itself to objective evaluation as the number of transactions is likely to be high and the speed and accuracy of pricing can be easily observed. But it is one of the reasons that learning to trade by taking risk in markets is difficult, as in the short term the element of luck is large enough to create noise in the consequences of your decisions.

If evaluation is clearly objective and applied transparently to all staff, then it is likely to be accepted. But the attractions of this type of feedback are also its drawback. It is appealing to generate objectives which are measurable, but not necessarily relevant to the goals of the organisation. Think of the Blairite obsession with targets in health and education, which created distortions in incentives.

Type 3b Evaluation – Subjective

Subjective evaluation is the most overused form of feedback, and most people seem to think this is what feedback is. If you look at the forms that HR demand you fill out for conversations with your staff, you will see the word evaluation everywhere. This is often combined with a requirement to assign scores or rankings to various aspects of the employee, creating the illusion of objectivity but they are actually the opinions of the manager.

Subjective evaluation may have a place. If your intent is to make a complaint then this can take the form of a negative evaluation, for example if you want to complain to a hotel you can give a low rating on TripAdvisor. But there is wide variation in the quality of such comments. In large firms however, negative evaluations are used almost exclusively as part of the process of firing employees.

When I ran a large fund, I had hundreds of investors, old and new, continually evaluating me. If I agreed with the evaluation, it was likely it became an experience of being berated rather than a learning point. If I did not agree with the criticism, I still had to take it.

In close work environments, the giving and receiving of such feedback can be a minefield. It can be hard to receive emotionally, especially when the receiver doesn’t accept the view or worse the right or competence of the person to evaluate them. Unsolicited feedback is pure criticism – no one likes to be criticised. This is why, in practice, most work evaluations turn into exercises of giving praise, even when it is not genuinely deserved.

The relationship matters

What is striking about the workplace is how little useful feedback is given and/or taken.

If you are the in a position of authority, care must be taken not to blindly hand out feedback that could be construed as pure criticism. Remember anything you say has a magnified impact, given the nature of your relationship. Consider layering in the various forms of feedback I mention, remember the idea is to help your employee, not to add unnecessary strain or distance.

If an employee receives feedback that they don’t like, it can often be seen as confrontational or rude, and instead of trying to work out what was the purpose of such feedback the employee is more likely to grumble about them behind their back. A very poor outcome for both parties.

If you are a person who wants to improve, you need to actively seek out feedback from people you respect, this is key to improving performance. Avoiding criticism is an ingrained social habit, so bear in mind you need to be prepared for an honest evaluation. Keeping any defensive reaction in check is important as if you react defensively, you are likely not to hear honest feedback again. You should thank the person for the feedback and do your best to understand it. If you think it is completely wrong, then you still have an important learning point, that someone you respect perceives it to be true.

Conclusion

How to manage feedback is one of the most important aspects of work culture and defines whether your organisation is going to merely stagnate or rather learn and develop.

As a giver of feedback, it is important to recognise what kind of feedback the person wants and will be able to process.

As the receiver of feedback, you have the main power. You can be defensive and only accept praise, or you can actively solicit opinions which you can incorporate into your learning process.