A Career in Hedge Funds and the Price of Overcrowding

I am prone to agree with Robert Frank’s argument in A Career in Hedge Funds and the Price of Overcrowding. 

“[The market for hedge fund talent] is what economists call a winner-take-all market –
essentially a tournament in which a handful of winners are selected
from a much larger field of initial contestants. Such markets tend to
attract too many contestants for two reasons.

The first is an
information bias. An intelligent decision about whether to enter any
tournament requires an accurate estimate of the odds of winning. Yet
people’s assessments of their relative skill levels are notoriously
optimistic. Surveys show, for example, that more than 90 percent of
workers consider themselves more productive than their average
colleague.

This overconfidence bias is especially likely to
distort career choice because, in addition to the motivational forces
that support it, the biggest winners in many tournaments are so
conspicuous. For example, N.B.A. stars who earn eight-figure salaries
appear on television several nights a week, whereas the thousands who
failed to make the league attract little notice….

A second reason for persistent overcrowding in
winner-take-all markets is a structural problem called “the tragedy of
the commons.” This problem helps explain, for instance, why we see too
many gold prospectors, an occupation that has much in common with
prospecting for corporate deals. In the initial stages of exploiting a
newly discovered gold field, adding another prospector may
significantly increase the total amount of gold found. Beyond some
point, however, additional prospectors contribute little. The gold
found by a newcomer to a crowded field is largely gold that would have
been found by existing searchers.”

more…