Ken’ Take: An interesting read.
Central premise: MBAs over-engineered markets with statistical models that left no room for error (or common sense).
* * * * *
Excerpted from Bloomberg.com, “Harvard Narcissists With MBAs Killed Wall Street”, Hassett, Feb 17, 2009
For two centuries, Wall Street survived wars, depressions, bank panics and terrorist attacks. Now Wall Street as we know it is dead. Gone.
Wall Street changed radically in recent years in one notable way. Twenty or 30 years ago, it was common for the best and the brightest to be doctors or engineers. By the 2000s, they wanted to be investment bankers.
When Wall Street was run by ordinary people it was able to survive everything. After the best and brightest took over, it died the first time real-estate prices dropped 20 percent.
If you walked into any major Wall Street firm a year ago and randomly selected an employee, chances are that person would either be from an Ivy League school like Harvard University, or have an MBA, or both.
The statistics are striking. Back in the 1970s, it was typical for about 5 percent of Harvard graduates to work in the financial sector… by the 1990s, that number was 15 percent. And the proportion of those with MBAs grew as well.. A 2008 report in Fortune said that Goldman Sachs hired about 300 MBAs in 2007 and that, last year, Merrill Lynch and Citigroup were planning to hire 160 and 235 MBAs, respectively.Is it just a coincidence that so many superstar minds arrived on Wall Street just as it died? Perhaps not.
Wall Street is gone because its firms did a terrible job assessing the risks of the positions they took. The models these firms used to evaluate risks failed. But having a failed model brings a firm down only if the firm collectively buys into the model.To do that, the firm must be run by people who have a great deal of faith in their models, and a great deal of faith in themselves.
That’s where Ivy Leaguers and MBAs come in.What do you get from an MBA? One recent study found that MBAs acquire an enormous amount of self-confidence during their graduate education. They learn to believe that they are the best and the brightest.
The consequences of Wall Street’s reckless brilliance in many ways parallel modern-day engineering disasters. If you travel through Italy, you can’t help but notice the many Roman bridges that still stretch across that nation’s waterways. How is it that the Romans could build bridges that would last thousands of years, while the ones we build today collapse after a few decades?
The answer is simple. Back then, they did not have the fancy computers required to calculate exactly how strong a bridge must be. So an architect made a bridge very, very strong. Today, engineers can calculate exactly how much steel they need to incorporate into a bridge to bear the expected load. The result is, they are free to make them weaker. Another result is less wiggle room for design error. Hence, modern bridge’s predilection for collapsing.
The same is true of the financial sector. Back when Wall Street was run by individuals without fancy degrees, they had a proper skepticism toward fancy models and managed their risks with a great deal more humility and caution.
Only when failed models became canon did catastrophe strike.Wall Street didn’t die in spite of being run by our best and brightest. It died because of that fact.
* * * * * *
Full article:
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=a_ac69DqFutQ
* * * * *
Want more from the Homa Files?
Click link => The Homa Files Blog
SHARE THIS POST WITH FRIENDS & FAMILY
The Homa Files 