– written by Chitra Venkatesh (IIM Lucknow class of 2016) and edited by Karthik Palaniappan.
Hollywood has possibly given us an unrealistic impression of what it means to work in finance. While the extravagant lifestyles on display are definitely motivators, we also get to see the wrong aspects of what it means to make good financial decisions. How many times have we heard the hero go – “I’ve got a good feeling about this…”, and make a cocky bet no one else in the world had the courage to make – only to see the screen fill up with millions a few slides later.
However, any legitimate student of finance will tell you that this ‘gut’ is precisely what we ignore in finance. The words “feel” and “courage” do not fit in a financial context – simply because good financial decisions should not driven by emotions. Warren Buffet has for a long time been a critic of greed and fear driving market prices. He makes it a point to distinguish between business value and stock price – ascertaining that stock prices (especially in bull and bear markets) are not good indicators of the value of the underlying business. To quote Mr. Buffet, “Bull markets can obscure mathematical laws, but they cannot repeal them.”
This is perhaps why a branch of finance has been entirely devoted to study the impact of psychology on decision making. This branch, popularly known as “behavioural finance” explores why we make irrational financial decisions owing to personal biases (also known as behavioural biases). Making decisions free from behavioural biases is necessary for one to succeed in a finance job. Very often, when we are successively losing while gambling, we assume that the probability of winning the next game is higher (since we have already lost so many times) and we continue playing. But finance gurus would tell us that each game is an independent event and the probability of winning remains the same. This bias or error that we make while gambling is known as “gamblers’ fallacy” and examples of this can be seen in situations that date back to the age of Mahabharata when Yudhishthira lost to Duryodhana. This is why it is imperative to understand behavioural biases such as the one explained above.
Contrary to popular belief, numbers are just for calculators. Finance is rather for those with a structured and logical thought process. In fact, finance also requires its own share of networking skills.
Quality of the ‘number’ matters
At this juncture, we advise readers to not muddle ‘gut’ with qualitative factors. In fact, firms often times look for the qualitative factors driving the numbers. And this is why perhaps, finance is not just about numbers, but about being observant and rational.
For instance, a bank offering a loan to a Multinational will never sanction it based on merely the financial health of the company. Banks look beyond financial statements and they might even evaluate something seemingly irrelevant like the firm’s HR practices. This is because even seemingly irrelevant HR policies could drive a company’s winning or losing streak. In fact, companies like Google are known to encourage super-productivity amongst their employees only because of their congenial work place atmosphere – which in turn shows up positively on the top and bottom lines.
- Private equity, portfolio management, venture capitalist, investment banking are popular functions (in descending order of pay scale, not necessarily so in all cases) and they offer base salaries in the range $125,000 – $150,000  in tier 1 schools
- Although demanding, offers in financial sector are generally more lucrative
- Huge variable component with minimal leeway on the cap
- For instance, hedge fund managers in certain firms are offered 1% of the asset under management (AUM) as a variable component. If a fund manager has an AUM of $100 million, the manager gets a straight cut of $1 million. Also, fund managers receive an additional bonus if their fund performs better than their peers.
- However, for a fund to become popular thereby attracting a large AUM, the fund manager needs to be immensely experienced
- owing to which they get absorbed in any industry quickly
- Financial sector is not the only one that offers jobs; Several fortune 500 firms also offer roles in corporate finance
CFA is in itself is a qualification that offers countless opportunities. CFA is a way of letting the world know that you have got your concepts right. Many from financial sector write the CFA exams these days. Nevertheless, CFA and MBA cannot be compared as they cater to different needs. MBA degree irrespective of the major, trains one for leadership roles. This, coupled with the financial acumen of a CFA adds great value. For instance, an associate with an MBA (Finance) working in a consulting firm might take up CFA to shift to a Private Equity (PE – discussed later) firm. However, a plain CFA candidate might not get the same offer. All said, a candidate eyeing an MBA may not be able to satiate his/her thirst for a leadership role through a CFA.
Although it is hard to answer this riddle, the following observations might help students take an informed decision.
MBA is a broad spectrum program unlike MSF
MSF coursework is centred on topics like portfolio management, modelling, Mergers & Acquisitions, etc. whereas MBA coursework covers broad topics like marketing, organizational behaviour and finance.
|· Switching flexibility is higher for MBA grads and it’s a better option for students unclear about their career paths.
· Students applying to MSF programmes are expected to be comfortable with intensive mathematics
· Students with financial know-how have a brighter admission prospect to MSF programmes however, it is common knowledge that MSF programmes pick students from all disciplines
MBA requires prior experience unlike MSF
MBA programmes usually require 2-5 years of work experience. Also, students with lesser odds of gaining admission to top MBA programmes have better prospects in MSF programmes of the same schools.
|· Lower entry level salaries for MSF grads (however, a focussed curriculum ensures higher odds of breaking into the investment management sector)
· Students are younger in MSF programs.
Course of study is shorter in MSF
Full time MBA could be a two year course unlike MSF
|· MSF is cheaper than MBA|
Career prospects are different for the two programmes
Owing to the differences in coursework, career prospects vary across these two programmes. MSF programme although focussed are gaining momentum.
|· As mentioned earlier, MSF candidates have higher odds of entering the financial sector. Functions like portfolio management, banking are banal here however with reduced salaries (survey at a leading university reported 43% lower salaries).
· An MBA can help a student gain an entry into investment companies, media giants, consulting firms, fortune 500 firms.
About the author:
Chitra is a graduate of IIM Lucknow (PGDM, batch of 2016). She enjoys traveling and loves eating local delicacies. She earned a PPO to the TAS programme and will be joining them after her vacation.