It’s Not Rocket Science: Why You Should Stop Learning Partial Differential Equations If You Want to Break Into Investment Banking
“Hi, I was wondering which class I should take to break into investment banking: Advanced Partial Differential Equations or Quantum Field Theory. Do you think it will ruin my future if I only learn up through Multivariable Calculus?”
No, I don’t make this stuff up: I get emails like this all the time.
Sometimes they’re from undergraduates, sometimes they’re from MBA students, and sometimes they’re from the occasional MD or PhD candidate.
But my answer is always the same:
It doesn’t matter.
You don’t do “real” math in investment banking, so stop worrying about it and spend your time more wisely.
So why is there such an obsession with learning advanced math / winning the Nobel Prize before you start working as an investment banking analyst or associate?
You’re Good at Math
If you’re interested in finance to begin with, there’s a good chance that you’re already good at math and have taken a lot of math classes. You’ve either:
- Been interested in finance for a long time and have taken a lot of finance/math classes; or
- You were an engineer or science-type who got bored of that and wanted to move into business.
Yes, there are bankers with liberal arts backgrounds as well but bankers in categories #1 and #2 outnumber them.
We Like to Blame Other People
It’s the same reason we believe so strongly in the myth of the “career path.”
If you can get into finance simply by calling hundreds of people and being very aggressive with networking, failure to break in would reflect poorly on you.
But if you couldn’t break in because you didn’t have that class on quantum physics, then you have the perfect alibi.
We Like to Stay In Our Comfort Zone
Getting out there, talking to people, and meeting them in-person is uncomfortable. It’s way easier just to sit at home watching TV…
…or to sit at home completing your math homework.
Going through dozens of advanced math classes also gives us the illusion of progress without actually requiring us to make any progress. It’s part of the 80% you should be eliminating.
The Truth About Math
There are 3 points you need to know about math in investment banking:
- You don’t use it that much.
- The math you do use is very simple. As in, arithmetic.
- Therefore, you don’t have to be a math genius – but you do have to be good with numbers.
You don’t use math that much because you don’t do that much modeling work, even in “technical” groups like M&A.
Think “administrative work,” emailing people and updating lists of information.
And when you do use math, 90% of the time you’re working with existing templates or simple models rather than creating everything from scratch.
Yes, it’s cool to be able to say you can create a hyper-advanced LBO model from a blank spreadsheet, but in the real world no one has time for that – so you use templates.
But What About Modeling?!!
Even when you are working with financial models, none of the math is complex.
There’s addition, subtraction, multiplication, and division… and occasionally built-in Excel functions like IRR, Mean, and Median.
You never use calculus or differential equations or even geometry / trigonometry. Just arithmetic and sometimes algebra.
Think about all the basic formulas in accounting: Revenue – Expenses = Profit. Revenue – Cost of Goods Sold = Gross Profit… and so on.
Notice how there are no integrals anywhere in those equations.
So Why Do You Still Need to Be Good With Numbers?
If the math is so simple, why do you need to be good with numbers at all?
Although the individual mathematical operations are simple, you can end up working with huge spreadsheets where a lot of calculations are linked together.
1 + 1 = 2 is simple, but now let’s say you have 100 similar calculations, and the input of each one is linked to the output of another calculation.
That’s exactly what you run into in investment banking, and it gets tricky to trace everything – especially when it’s someone else’s model.
Exceptions & Other Fields
In other fields of finance the math can get more advanced.
The main example is trading, where some funds may use advanced algorithms and higher-level math to make trading decisions – so, if you’re making the sales & trading vs investment banking decision, and you’re leaning toward trading, advanced math classes might be helpful.
For hedge funds, it depends on what strategy the fund uses: long-term fundamental investing has less math than algorithmic trading.
Also in trading, mental math (17 * 35) is more important because you need to make quick decisions.
Outside of those, the math in other industries like private wealth management is as simple as it is banking.
So What Should You Do About It?
Stop taking advanced math classes – especially if they hurt your GPA.
Bankers look at the overall difficulty of your major but they don’t go in and analyze every single class – a 3.8 GPA with easier classes is much better than a 3.3 GPA with “tough” classes.
Plus, taking such advanced classes takes away from time you could be spending on internships, school-year internships, networking, and activities.
When reading your resume, bankers pay attention to the school you attended, your internships, and your GPA – not individual classes.
Despite rumors to the contrary, sometimes you have to do work to get through business school.
At this level, taking “more advanced” classes is an even worse use of time because:
- At the MBA-level networking is even more important.
- Hardly any “math-intensive” finance positions hire directly from business schools – you don’t need an MBA to be a top trader. You just need to make a lot of money.
So if you’re at this stage and you’re serious about breaking into investment banking, forget about advanced statistics / financial math classes and do the bare minimum.
I also get a lot of questions on whether “finance summer school” or taking classes during the summer instead of an internship is worth it, and the answer is always “No, unless you have no better options.”
What About Your PhD / MD?
Bankers tend to look down on advanced degree holders.
They want people who can burn the midnight oil and who are aggressive enough to find ways to make or save money – and they don’t think that advanced degree holders fall into this category.
Getting these degrees is far more difficult than anything you do in banking, but most bankers don’t like to acknowledge this.
So if you’re already deep into one of these programs, cut your losses and get out early or take the path of least resistance if you’re too far in to drop out now.
Improve Your Communication Skills
If you really want to improve your skills before you start working, forget about math and focus on your writing and speaking skills.
There are tons of analysts who are good at math, but few can describe what they did and how it helped their bank make money in plain English.
And if you want to move up, you need to interact with senior bankers a lot – so getting to the point without rambling or stuttering is essential.
And If You Really Want to Improve Your Math Skills…
If you’re still set on improving your skills, forget about classes and have a friend in the industry send you a complex model with many different tabs.
Then, try to “reverse engineer” it and figure out what the key drivers are and how they affect the output.
Creating a model yourself is relatively easy because you control everything – the real challenge is looking at someone else’s model and figuring out how it works in the first place and how to modify it.
So spend some time playing around with complex models and get used to the process of tracing individual formulas and outputs.
And please, no more partial differential equations.
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