Finance Professionals: Black Box or Glass Box?

Posted by Peter Orr on Dec 26, 2008

"Appreciation is a wonderful thing: it makes what is excellent in others belong to us as well."

- Voltaire

Many very talented finance professionals are out looking for work these days. If they want to stay in finance they may need to move more towards seeing the box as glass instead of black. Let me explain…

A long way back a friend of mine told me that finance is really just the marriage of economics and math. In that vein, I sometimes think of finance professionals in two flavors: black box people and glass box people. This often informs my sense of their ego/ability ratio. Some practitioners don't have the desire or background to ever look behind the curtain and see the inner workings of the math inside the "box". These are black box people. Most finance professionals are black box people and they don't need to have built a model or application from scratch in order to use it effectively. For example, only a small percentage of people in the field can derive the Black-Scholes-Merton formulas from first principles. That said, many, many more can use them profitably without this detailed knowledge.

To be truly effective as bankers/advisors dealing with clients, however, these black box people need to be skilled enough to convey insight about what's going on inside the box and why. If it's a well designed box relevant to its audience, it can shed unique light on the risks faced by institutions or individuals. Good black box people are efficient translators, educators, and consultants. Training black box people requires developing interesting, relevant, digestible materials for a non-quant audience. To put it gently, this is often not a quant's strong suit.

Glass box people on the other hand can get their hands dirty building powerful, relevant models that are intuitively easy to use. They must know or extract from users (usually black box people) the cares and concerns that would drive high quality, high impact, and accessible analytics. Further, a good glass box person can see when additional features will add another two weeks to development and only 1% more utility. Those types of bells/whistles don't survive a good glass box person's planning process. Perhaps most importantly, a good glass box person knows a bit of the perspective of the black box thinker – and it is this skill that makes her/him most valuable.

Good glass box people are rare, though their numbers are growing. Many black box people would aspire to become glass box people if the managers to whom they reported cultivated the development of the requisite glass box skills. Unfortunately, most senior finance professionals were never glass box people themselves and as such don't really know how to manage or encourage the growth of the glass box group. Look around as the financial services industry necessarily reinvents itself – more and more of the ones who survive and thrive will be of the glass box variety.