Gene Expression

More Financial Morons

Mark Chu-Carroll has an excellent smack-down, Financial Morons, and Quadratics vs. Linears. Mark notes:

There’s one minor problem with that argument: it doesn’t work. A couple of weeks ago, some idiot at JP Morgan circulated a chart that was supposed to summarize just how bad the financial disaster has been. The chart circulated for a couple of weeks – bounced from mailbox to mailbox, sent from one financial genius to another.

Only the chart was blatantly, obviously, trivially wrong, and anyone who had the slightest damned clue of the assets those businesses managed - i.e., the kind of thing that the idiot who drew the chart was supposed to know – should have been able to tell at a glance how wrong it was. But they didn’t. In fact, the damned thing didn’t stop circulating until (of all people) Bob Cringely flamed it. Go look at the chart – it’s up at the top of this post.

What Mark is pointing to is a pretty clear cognitive bias in terms of how we humans take in quantitative data presented in graphical form. You don’t have to be a moron, you just have to be processing on the the reflexive and implicit cognitive level. Here’s the problem: people were being paid a lot of money because of their presumed ability to extract themselves out of their animal milieu and operate as rational actors who engaged in reflective analysis. There’s not that much value-add in gut-level intuition. Below the fold is a commercial that anyone who has worked with MBAs might find amusing.

Comments

  1. #1 John Roth
    February 25, 2009

    I’m not sure whether this is the one they’re talking about, but if it is it got a real smackdown at Junk Charts. It’s a bubble chart, it’s on the right topic, and it came from J. P. Morgan.

    http://junkcharts.typepad.com/junk_charts/2009/01/popping-the-bubble-so-to-speak.html

    I just checked Cringely.com, and it’s the same chart. He picked it up a day after Junk Charts:

    http://www.cringely.com/2009/02/wall-street-cant-count/

    Shows what having a bigger pulpit can do for one.

    John Roth

  2. #2 John Emerson
    February 25, 2009

    Here’s the problem: people were being paid a lot of money because of their presumed ability to extract themselves out of their animal milieu and operate as rational actors who engaged in reflective analysis. There’s not that much value-add in gut-level intuition.

    I think that perverse incentives and opportunism are the biggest factor, not gut thinking. “If you want to get along, go along”. In particular, the way things were structured, it was hard to profit from being right, and trying to do so was a big gamble. You had to be a bear at exactly the right moment.

    Here’s the problem: people were being paid a lot of money because of their presumed ability to extract themselves out of their animal milieu and operate as rational actors who engaged in reflective analysis. There’s not that much value-add in gut-level intuition.

    IQ and reflective abstraction are your idols, but the problem with the quants, who did play a role in this even they don’t want anyone to say so, is that they abstracted out some of the things they shouldn’t have, and that they had no reality sense (and reality sense is a kind of gut thinking).

    I think that the moron theory is crap. These were educated, high IQ, focussed, hard-working guys. Perverse incentives, institutional collapse, corruption, magical thinking, herd mentality (which is social psychology or sociology, not psychology), opportunism, tunnel-vision compartmentalization, and toxic optimism all played a part.

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