Liquid vs. Illiquid Careers

Note: This is the first post in a series of posts about career liquidity. Read the next part here

We're used to thinking about skills and experience in terms of their market value - how useful they are and how much employers or customers would pay for them. But  another, more subtle dimension gets less attention: liquidity.

Just like in financial markets, some human capital is easier to price and trade than others. This is not about the absolute value of your skills or experience, but how easily the market can assess and exchange them.

Consider Jim - with 4 years of experience as a management consultant at McKinsey. In the job market, potential employers have a good idea of what they are buying - someone smart and conscientious enough to be hired by McKinsey; meets a reasonably high bar on commercial acumen and communication skills; and polished enough to have managed clients and moved one step higher on the well-defined McKinsey ladder.

Jim's skills are highly legible to every potential employer. They can estimate his salary within narrow confidence intervals, given that McKinsey's pay structure is essentially public information. If Jim decides to switch jobs or move countries, all else equal, he can be relatively confident about his chances of landing a job that pays him his "market value". Much like publicly traded stocks, his legible experience and skills can be sold quickly at the prevailing market rate.

On the flip side, picture someone who's spent two years at an AI startup, followed by a stint running operations for a non-profit in Asia, and is now working on a political campaign. How comfortable would you be guessing this person's potential earnings or, more fundamentally, the value they could generate?

If I were hiring for a high-leverage, entrepreneurial position requiring an exceptional young candidate, I'd be more inclined to interview this person over most McKinsey consultants. However, I'd evaluate them more rigorously than someone with the McKinsey stamp, and might even limit my search to candidates within my social or professional network.

When human capital is built through non-linear or less legible paths, the lack of legibility increases variance from the employer's perspective. This isn't necessarily negative, but it does increase the value of additional information. If the cost of obtaining this information doesn't justify the potential upside, candidates with less legible backgrounds may be passed over in screening processes.

In essence, linear, legible paths represent liquid investments in human capital - easily valued and traded. Non-linear, "customized" paths, on the other hand, are illiquid investments. They could be accruing significant value or none at all, but they're hard to mark to market. Even with an impressive skill set, you can't easily cash out by simply applying to a few publicly posted jobs.

Given these differences in human capital liquidity, it's worth exploring what drives these distinctions. What makes some career paths and skill sets more liquid than others? 

Dimensions that drive liquidity

In financial markets, liquidity is defined as the efficiency or ease with which an asset can be converted into cash at a given price or within a given price range.

In the context of human capital, liquidity is a function of two factors: the overall demand for your skills/experience, and the ease with which others can verify that you possess these skills at the level you claim.

Several dimensions drive the liquidity of human capital:

1. Industry growth and activity: Skills that can be deployed in high-growth industries or sectors with high levels of activity tend to be more liquid. The increased "trading volume" of human capital in these areas enhances liquidity.

2. Skill specificity: Counterintuitively, more specific skills often enjoy higher liquidity. A carpenter's abilities are well-defined and easily understood, whereas "project management" can vary widely based on context. This clarity makes it easier for a carpenter to market their skills, even in a new location.

3. Testability: Skills that can be easily and quickly assessed tend to be more liquid. For instance, a software developer's competence can often be gauged through a brief coding test. In contrast, evaluating leadership or managerial skills typically requires more time and varied assessment methods, resulting in lower liquidity.

4. Context dependency: If your value primarily stems from familiarity with a specific organization or geographically limited social capital, your skills may be less liquid. However, this can sometimes correlate with skill specificity, so the net effect on liquidity isn't always straightforward.

5. Institutional brand: Larger, more established brands often provide greater liquidity to their employees' human capital. This is due to their well-known screening processes and the larger sample size of previous employees, allowing potential employers to better estimate the value typically generated by individuals from these institutions.

The Appeal of Liquid Paths is the Case for Illiquid Ones

Legible (liquid) paths offer non-monetary compensation in the form of psychological comfort and optionality. With each additional year of experience, your career capital becomes highly visible - salary increases, promotions, or clear market rates for your level. You can probably move to a different country (or even industry) and have your skills valued easily.

There's another reason these liquid paths are in high demand. Sure, competing for a McKinsey job isn't easy, but everything from recruiting to promotions is structured and streamlined. Job seekers and employers are cushioned from uncertainty and ambiguity in a way that only becomes obvious when you consider the counterfactual. Moreover, one can also more reliably predict future income and gain psychological security  (or at least perceived security) around one’s career trajectory.

Given these hidden benefits, you'd expect these paths to be crowded. That’s one argument in favor of pursuing non linear, illiquid paths instead. You should expect “alpha” in these paths precisely because lots of smart, conscientious people are terrified of uncertainty. Maybe you can afford to be less of those things if you're willing to be brave?

In financial markets, illiquid assets often command a premium - investors accept lower liquidity for the prospect of higher returns. I can't prove empirically that this is replicated in human capital markets but that's a reasonable prior.

Costs and Constraints of Hierarchies and Standardization

Another source of alpha comes from avoiding the costs that hierarchies and standardisation impose, especially on the “weird” amongst us.

The most obvious “weirdness” that comes to mind is neurodivergence. Navigating the politics and bureaucracy of a more institutional set up requires skills that aren’t always made explicit in job descriptions. You can’t have no filter. Or boycott team bonding events because they’re dumb. Or even openly challenge someone’s obviously wrong ideas in a meeting. Some liquid paths, such as academia, may be a bit more forgiving on these aspects. But linearity and structure almost always necessitate soft skills that come less naturally to some of us. 

Another source of weirdness is your innate distribution of abilities, relative to peers. Communication skills and strategic instincts are probably both incredibly important to a business leader’s success. However, a young person who clearly outperforms his or her peers on these abilities probably won’t make it up the corporate hierarchy to become CEO if as an entry level executives, they fail to excel in a role that tests their attention to detail and ability to process high volumes of routine tasks to perfection . As someone who struggled with this early on, I’m convinced that cultivating a minimum amount of organization and attention to detail is important no matter what one wants to do, but the degree to which this can be emphasized to the exclusion of almost everything else may not predict future success. Be that as it may, your boss probably won’t care that he’s failing to see the flashes of brilliance in you that could transform the company 15 years from now. 

While charting a non-tradition, illiquid path, the strengths of weirdness can be leveraged and its downsides managed. As I detailed in one of my previous posts, in early stage startups, you’re more likely to be judged on your ability to add direct value in some tangible way. And you can pick roles that are likely to allow you to showcase your relative strengths, and where your relative weaknesses have less of an organizational and thus personal impact. If you’re good at talking to investors and negotiating term sheets or at synthesizing customer insights, people won’t care that you struggle with formatting powerpoint decks perfectly or organizing and retrieving documents meticulously.

More generally, avoiding linear paths means the ability to choose roles based on the skills that you want to work on and develop at any given point in time. This flexibility aligns well with Scott Adams' concept of a talent stack. In non-traditional paths, you can strategically select roles and experiences that allow you to build a unique skill set based on your situation or their future value when stacked together, which might be larger than the sum of the parts. 

Navigating Illiquid Paths: Psychology, Career Management, and Social Capital

All that said, one disanalogy between financial market participants and job seekers is that the latter is both the market participant and part of the asset being traded. As a result, the market participant's psychology and personality is endogenous to the success of each strategy. Illiquid paths demand both psychological resilience and active management. 

It's not enough to simply make an illiquid investment in your career. You have to be holding an illiquid investment that someone is willing to pay for. Acquiring and refining valuable skills is just one part of it. One has to define and communicate one’s value proposition. In a structured corporate environment, the value creation structure is already in place and you’re the missing piece of the puzzle that can be plugged in to create value. On illiquid paths, you need to figure out how to cash your skills out in value or find people that will help you do that.

As a result, success in illiquid paths almost always flows through people and social capital (and to some extent, ideas). Perhaps AI will change this, but for now, very few people can generate value without coordinating with others. The breadth and quality of your network will be a much larger driver of success in these illiquid paths.

Choosing an illiquid path doesn't guarantee good social capital, but it does allow you to choose roles that increase your surface area of professional interactions. When I was an early-stage employee at a startup, I worked directly with founders, investors, and vendors. These weren't just people I saw at industry conferences – these were folks I collaborated with on real deals and projects. Moreover, you might find yourself working in flatter hierarchies, collaborating with individuals who, in a more hierarchical setting, you'd only be able to meet for a mentorship coffee.

Risk management takes on a new dimension too. Without the safety net of a predictable career ladder, you need to be more proactive about managing your financial and professional risks. This might mean having multiple income streams or being more intentional about saving during high-earning periods to cushion potential dry spells.

Being proactive, having good social skills, and a bit of charisma is important regardless of your career path. But my sense is that these qualities can take you further in a more customized, illiquid path. And not having these, all else equal, is a bigger disadvantage.

Conclusion

Illiquid career paths typically yield a wider distribution of outcomes. For those aiming at the extreme positive tail, leveraging unique strengths and actively managing one's career become crucial. This approach can potentially lead to outsized returns in terms of impact, personal satisfaction, and financial rewards.

However, these paths aren't suitable for everyone. They demand higher tolerance for uncertainty, proactive career management, and often rely more heavily on social capital and personal initiative. So if you’re looking for a nice job that pays the bills and can fund your lifestyle, you should probably chase liquidity at the expense of expected return. 

In the next part of this series, I explore what you can do to manage risk on an illiquid career path.