On doing a PhD in Finance after a few years in the industry – some tips and thoughts

This is a personal opinion. I write this because I am often approached by people with say 10-20 years of industry experience, about doing a PhD in Finance. Their stories are similar: I’d like to think more deeply about things, be in an intellectually challenging environment, do research, be more rigorous, have time to think, I like to teach…, and all this practical experience I have accumulated should make it easier for me to write a dissertation (it is kind of a low hanging fruit for me),…, I would have a degree from a renowned university etc. — that basically is the email I receive. Almost always.

Importantly, I am talking about PhD in Finance in about any top 50 business schools in the world. This is important because the objective of these schools differ from that of other schools. It is not better or worse, it is different. The objective of these top-50 schools is simply to place PhD students into the best business school possible upon graduation. The problem then moves to knowing the recruiting criteria at these top schools. It is a simple one: hiring a person with the highest probability of publishing in the top 3 (or perhaps top 6) Finance academic journals. That’s it. A thesis is not a book, nor a dissertation…, it is three papers. Three potentially unrelated papers which are to be submitted (separately) to academic journals. In fine, this means that schools want to hire PhD students who can publish in these top journals. PhD students do not join a team, do not receive real training, they are at best informed that this is what their thesis should look like. They spend about four-six years just trying that, and on their own (basically).

Historically, the practitioner profile described above has seldom made it. Why?

Myriads of reasons of course. Main reason is that academics are often interested in different things than practitioners (or than the broader public) and more importantly they value things differently (e.g. they value the density of a mathematical solution to a problem a lot more than the rest of society). Rather than me caricaturing academics, it is easier and safer to offer an objective experiment. If you are considering a PhD in Finance, then grab the top 3 Finance journals and read them. Do you find these papers interesting? Did you read them from beginning to end? You do not need to find them all interesting but you should see yourself as a happy and capable contributor to, say, a quarter of these. The work involved with any of these papers you’d be reading is about one year FTE. When you are a PhD student it will be 50 weeks at 70 hours a week for a year. Is that appealing to you? Working on that single paper, i.e. on that single question, largely on your own, hours and hours, with a high uncertainty about whether in the end it will be accepted or not in a top journal, and that outcome determining your career, is that appealing to you? The probability of answering yes to this question is inversely related to age / working experience. This gives a first and fairly objective answer to your question.

Nowadays, after five years in a Finance PhD program, I observe that people have two, sometimes three papers fully written. That’s it. Papers are taking an increasingly high amount of time it seems, and that is because there is an increasing amount of literature to master before being able to make a marginal contribution. At least this is one potential explanation.

Note that the PhD is not the end, but the start of it all. You will have to revise these papers many times still. This gives an idea of how long one spends on a single idea. You better like that idea! It is not like you come in every day and you can think about something new (as mentioned in the opening email). Quite the opposite. Research is extremelly repetitive. Again, this is something younger people, straight out of a master program or undergraduate program, find easier to cope with.

People who have been working for a number of years often think: why would I do this to myself? And that’s the whole point: It is not clear at all why anyone would do such a thing (willingly).

Often, people believe that academic papers are not very interesting and that is why they want to do research, because they want to do things differently, to show it can be done differently. But, academia is a peer review system. The limits of that system is that you have to do 95% like others do and 5% is left for your innovations.

If you do a PhD in Finance, you have to start from scratch, you should not come in with a research agenda all written down. The reason is that it is unlikely to be one that coincides with what top academic journals want. You need to start fresh, catch up with all the techniques used in the field (econometric, programming, the databases, etc.), you need to read all the articles in the top journals, attend presentations by senior researchers… the role of your supervisor is primarily to tell you whether a given idea or finding of yours has the potential to make it to a top journal. In 95% of the cases the answer will be no. You will be outstanding if you have three good ideas during the five years of your studies. But even if it does have the potential for a top journal according to your supervisor and you execute that paper, you are facing a 90% rejection rate at the top academic journals. The odds it gest published in either of the top three journal is higher though – obviously.

An academic job in a top school, which is what we want for our PhD students, is relatively well paid but remains below what most people obtain in the Finance sector ($150k to $300k p.a.). Yet, there is obviously intense competition for these academic jobs. PhD students in Finance work long hours for many years and face major uncertainties as to their potential success.

Even if they obtain that top job, there is a so-called tenure clock of 6 to 10 years long during which they need to publish as many top papers as possible, papers that will be noticed and remembered positively by fellow academics. And only then, if successful, they secure a position. If you are 35 years old and undertaking a PhD, it means that you can expect tenure when you turn 50 and you will have worked full steam for fifteen years. Not many people are really up for such a path. And that is why 35 years old is already quite late for a PhD.

The problem I see is that there is a discrepancy between expectations and reality. Practitioners may picture that academic life as a paradise, just like academics fantasize on the beauty of life without a peer review system, with plenty of money, and with more certainty. Academia is a tough life and, historically, candidates fresh out of school have found it easier to stomach. But there can be an exception and that exception can be a home run. The ideal candidate masters the techniques (statistics, programming…), has a deep understanding of practice, is mature, hard working, really understand what would work for an academic audience, and agrees to the rules of the game. That candidate seldom shows up. As a result, when it comes to recruiting PhD students, schools usually play safe: take many youngsters, let them struggle for the first three years on their own, then pick up the one or two that seem good and push these. If you think you can prove that model wrong, then go for it. You may be that home run.

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