[Reader-list] Narcissism / Faith / Models

[Jeebesh]

This makes for an interesting relation between narcissism,  
mathematical models, faith and management graduates. maybe a few MBAs  
in this list would like to comment on this. best jeebesh


Harvard Narcissists With MBAs Killed Wall Street: Kevin Hassett
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=a_ac69DqFutQ
Feb. 17 (Bloomberg) -- For two centuries, Wall Street survived wars,  
depressions, bank panics and terrorist attacks. Now Wall Street as we  
know it is dead. Gone.

When a healthy and thriving person dies suddenly, a medical examiner  
may talk to family and friends to see if the deceased had recently  
changed behavior in some way.

Wall Street did change 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 people randomly selected from the  
population, it was able to survive everything. After the best and  
brightest took over, it died the first time real-estate prices dropped  
20 percent.

Are the two facts related? In other words, did Harvard kill Wall Street?

The suspect certainly had the opportunity. 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,  
according to a recent study by Harvard economists Claudia Goldin and  
Larry Katz. By the 1990s, that number was 15 percent. It probably  
climbed since then.

And the proportion of those with MBAs grew as well. Economists Thomas  
Philippon of New York University and Ariell Reshef of the University  
of Virginia found that, in 1980, workers in finance earned about the  
same wages, on average, as workers in other sectors. By 2005,  
financial-sector workers earned 50 percent more than similar workers  
in other industries.

Wages and Degrees

Philippon and Reshef went on to explore what caused the surge in wages  
in the financial sector. They found one of the key reasons was the  
increasing reliance on highly educated workers with post-graduate  
degrees.

Their results accord with anecdotal evidence concerning the hiring  
practice of Wall Street firms. 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.

Master of Mastery

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.

This narcissism has a real career impact. Psychologists at Ohio State  
University studied the behavior of 153 MBA students, who were put in  
groups of four and asked to orchestrate a large financial transaction  
on behalf of an imaginary company. The psychologists observed that the  
students who had the strongest narcissistic traits were most likely to  
emerge as leaders.

According to Amy Brunell, the lead author, the results of the study  
had large implications for real-world settings, because "narcissistic  
leaders tend to have volatile and risky decision- making performance  
and can be ineffective and potentially destructive leaders."

The Bathroom Test

Guys like John Thain (Harvard Business School, 1979) exemplify this  
behavior when their sense of entitlement is so grand that they can  
spend a fortune renovating an office while their firm is going down in  
flames.

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.

Room for Error

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.

(Kevin Hassett, director of economic-policy studies at the American  
Enterprise Institute, is a Bloomberg News columnist. He was an adviser  
to Republican SenatorJohn McCain of Arizona in the 2008 presidential  
election. The opinions expressed are his own.)