The View

A 'smart bubble' of stupid geniuses has taken over the markets

Mathematics whizz-kids and economists are the new kings of Wall Street, yet the emphasis on raw intelligence risks bursting a 'smart bubble'

PUBLISHED : Monday, 11 August, 2014, 10:11am
UPDATED : Tuesday, 12 August, 2014, 5:04am

It seems only a generation or so ago a character in Michael Lewis' Liar's Poker could roam the pages of the book whistling a tune from The Wizard of Oz - If I Only Had A Brain.

Being a dolt did not stop the guy from becoming a top executive in Salomon Brothers' extremely profitable bond trading department of the 1980s.

Or think of that line spoken by Jeremy Irons in the recent movie Margin Call, based loosely on various events that occurred in the 2008 financial crisis.

Told that his investment bank has built up an excessive position in complex mortgage-backed securities, Irons, playing the chief executive of the firm, asks for an explanation of how these things work.

His trader starts speaking in investment-ese, and then is interrupted by Irons: "Speak as you might to a young child. Or a Golden Retriever. It wasn't brains that brought me here; I assure you that."

The increasing complexity of economies has been a boon for the eggheads

Brawn, grit, ruthlessness, diligence, raw ambition, vision - these and other traits used to matter enough to make up for a bit of soft-headedness.

Now it's the opposite; in the knowledge economy, it's all about smarts.

If you test smart - especially in maths - many other shortfalls will be forgiven. The increasing complexity of the world's modern economies has been a boon for the eggheads.

Google effectively gives IQ tests as employment exams. A guy named William Poundstone wrote a book about how to breeze through "trick questions, Zen-like riddles and insanely difficult puzzles" to gain employment at Google or other technology companies.

The short answer is to go for the answer that would appear to most defy common sense. This is the new proof of new-age genius, that you can look past your untrustworthy instincts and zero in with Spock-like accuracy on the empirical truth.

Can anyone name a modern philosopher? Most of us might get that Slovenian dude who once wrote something about door-close buttons in elevators.

But the well-known thinkers and shapers of public opinion are the economists. And the field of economics is increasingly dominated by maths.

It's the maths guys we all know: those who slice and dice human behaviour according to formulas and regression models.

Not surprisingly in this age of complexity, the credential mills are enjoying a boom. Bloomberg News recently noted the increasing popularity of the "notoriously difficult" Chartered Financial Analyst qualification. The number of CFAs more than doubled from 2003 to last year.

The CFA started as a professional certification - that is, a test taken only by practising financing professionals - but already there are year-long programmes dedicated to passing the test.

And no wonder. Get on any of the Hong Kong chatrooms about the CFA and you can see many commentators recommending 300 to 500 hours of study for each level, and there are three levels. The typical pass rate is below 50 per cent.

It is nice to think that nothing goes to waste, even studying for a test that isn't passed. But how many hours of potentially productive labour are getting sucked into the credential mills?

Young professionals that could be out kicking the tyres, learning their fields through bottom-up labours, are increasingly finding themselves still effectively in school, cramming in a smorgasbord of data that may or may not ever be applied in their fields, that may or may not be remembered after the tests are over and the credential is on the card.

Yet we know "genius fails", as exemplified in the book When Genius Failed, about the spectacular downfall of Long-Term Capital Management, a hedge fund with Nobel-prize winning economists on board.

Sometimes it almost looks like a "smart bubble" has taken hold in the markets.

Look at those collateralised debt products backed by the slicing and dicing of mortgage debt into a dizzying array of complex tranches. Only a real whizz could come up with that - and the financial industry bowed down to this genius.

It was colossal stupidity in broad terms, comprised of genius in the specifics.

Once it bursts, a financial bubble is easy to identify. A property bubble is also a no-brainer in retrospect.

But if we are in the grips of a "smart bubble", then this one is proving hard to deflate.