Most of you are probably too young to remember this. You may only think of Goldie Hawn as somebody you’ve seen in a few old movies with Kurt Russell or Steve Martin or maybe just as Kate Hudson’s mother. But once upon a time she was young and cute, frugged around on Laugh-In in a bikini, and made a living playing a dumb bunnie. Or “Dumb Dora” as it used to be called in vaudeville. You think we invented this stuff?
Well, she had a stand-up comedy routine much of which consisted of explaining how smart people were responsible for all of the world’s woes. Example: who invented the atom bomb? Dumb people? No, smart people.
Cal Trillin’s explanation for the collapse of the Wall Street investment banks reminds me of that. You see, the guys who were running the Wall Street investment banks were guys whose families had been in the business for generations, mostly from the lower third of the class. Then smart people began to get into the business
“Because there is,†he said. “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness.â€
“So having smart guys there almost caused Wall Street to collapse.â€
“You got it,†he said. “It took you awhile, but you got it.â€
I think there’s a kernel of truth to it. My own theory is that Calvinist theology is very deeply ingrained into the American ethos. Riches are seen as the equivalent of virtue rather than the other way around which IMO is closer to the truth. If you’re rich you must be smart, brave, etc. Or, as the lyric goes in Fiddler on the Roof, “When you’re rich, they think you really know.”
There’s nothing wrong with being the smartest guy in the room but once you start believing you’re the smartest guy in the room all sorts of terrible things can happen.
I saw Trillin on TV once taking a tour of his favorite places in New York. One stop was in Chinatown to see a chicken that played tic-tac-toe. He said he delighted in taking his (very smart and very highly educated) friends to see the chicken and play against it. The chicken always won, he said, and the comeback from his friends was always the same: But the chicken got the first move!
And the chickens are often guided by a computer.
http://www.lasvegassun.com/news/2002/jun/21/columnist-susan-snyder-defeat-a-chicken-good-cluck/
http://answers.google.com/answers/threadview/id/207971.html
I’m duh. Yeah, a chicken playing tic tac toe and never losing.
sam, I have this bridge not too far from Chinatown, NY that you might be interested in.
Ah for Christ’s sake, Verdon, I was only recounting a funny story that Trillin told. Jesus. And he never said, as I recall, that the chicken never lost, only that his friends never won.
Actually the chicken never loses…because it is not the chicken playing, but the computer so the outcome for the chicken is a tie or a win. If you play a perfect game you never lose (you either tie or win). Computers don’t have an issue with “trembling hands” when it comes to games–i.e. they never make mistakes…well if the programming is done right. Note that none of setups are where the human player can see the chicken selecting his move. It would like be playing 21 in Vegas and then having to take the dealers word as to whether you won or lost.
Actually, unless I’m mistaken, securitized mortgages have been around much, much longer than 8 to 10 years. More like mmmm…at least 30, maybe even close to 40.
Now don’t get me wrong, I think there is some validity to the story that smart people played a role. But it isn’t just that simple as history indicates. Securitization started much, much longer ago than that story indicates. And it wasn’t just smart young guys going on to do the quant stuff on Wall Street, but also professors. Quantitative finance got its start in the 1930’s. From that initial starting point it became more and more developed where now it involves Ito calculus, martingales, and so forth. Have you heard of the Black-Scholes model? That was a quantitative finance model (Black and Scholes won a Nobel for their work).
Speaking of smart people and financial shenanigans, how to you feel about this: Intractability of Financial Derivatives?