How an Economics degree can be useful for Investment Banking

Economics and finance are not one and the same. So there is no way in which economics and investment banking are one and the same. While this point is mostly clear, many people choose to study economics because they are convinced that doing so will help them adequately prepare for a career in finance or banking.

Of course, there is merit in this argument, although not because of a commonly popularised reason, which is that an economics degree covers content that is useful for finance and banking, such as macroeconomics and financial economics.

The reason why an economics degree can be useful for investment banking is that the former helps students develop certain skills that prove invaluable for the junior banking role.

For example, economics is all about constrained optimisation. A certain individual has a budget and seeks to maximise her satisfaction or utility based on the constraints imposed by her budget.

Companies face the same problem. For instance, a retail company seeks to maximise its growth within a sluggish economy subject to the capital at its disposal - this capital may be used either for internal investment or for acquisitions.

Moreover, when raising debt in the capital markets, companies seek to raise as much capital subject to two main constraints:

First, the actual cost of that debt capital, which is mostly cheap at the moment. And second, their credit rating, which typically shares an inverse relationship with the amount of debt raised.

Judged by these terms, economics is important for better understanding how to make wise choices when faced with few resources. In fact, the best banking advisors are those who are able help companies to either acquire targets at the lowest cost, all else being equal, or raise capital at the lowest cost, again all else being equal.

So having the Lagrange method at the back of one's head when running a financial model on excel should help one think: 'Okay, I am able to get X return using Y resources, but can I achieve the same return with fewer resources?'

By thinking like an economist (or micro-economist, to be more precise), the junior banker not only helps generate solutions for the client, but also seeks to update, improve, and enhance those solutions wherever possible.

This point is incredibly important in business, since companies always try to squeeze every ounce of profit or return out of their assets. On the other hand, students, such as myself, are less concerned with such an idea, probably because we are not yet accountable to anyone other than ourselves.

In ending this post, I wish to clarify that studying for an economics degree is not the only way in which one can become successful in finance or banking. In fact, nothing could be further from the truth. Financial services companies strive to attract people from all stripes, and they should continue to do so.

However, for those of you, like myself, who study economics and aspire to pursue a banking career, it might prove helpful if we think about our degree less superficially and more in the manner outlined in this post.