Financial economics

Flying home from the recent AEA conference in January, I sat next to two PhD candidates in financial economics at Wharton who had gone to the conference with their adviser. I asked them what they thought of the financial crisis and how it would affect them on the job market come the fall when they begin applying.

To my surprise, they confidently claimed the crisis wouldn't affect them. Without asking, they also volunteered their expected salaries of $150,000 starting. This is about a 50% premium over the average economist PhD, and 25% over an economist at a top school.

I was more taken aback by their hubris than their expected incomes. I would have hoped the crisis would have increased financial economists humility. Krugman notes a similar hubris with a financial economist, Eugene Fama, who doesn't believe in economic bubbles. In his defense, I think there is an argument to be made that that bubbles are based in part on rational risk taking, but this is clearly not a reasonable view when it comes to the housing market. People are not in fact as careful as he thinks when buying a house.

The Economist also has an interesting discussion of the future of the efficient market hypothesis, so well loved in financial economics. They end on a much more positive note for the future of the discipline.