There’s a very provocative piece in the NYTimes this morning by Richard Dooling on what may, in fact, be the underlying cause of the present financial crisis.
He quotes Warren Buffet as saying “Beware of geeks bearing formulas” to begin and then goes on to say that it’s entirely possible that Wall Street, by hiring the best and brightest minds to find new ways to monetize and re-monitize the same asset again and again may have built a house of cards that is now collapsing around us.
Dooling, quoting Freeman Dyson, writes
“‘I have felt it myself,’ [Dyson] warned. ‘The glitter of nuclear weapons. It is irresistible if you come to them as a scientist. To feel it’s there in your hands, to release this energy that fuels the stars, to let it do your bidding. To perform these miracles, to lift a million tons of rock into the sky. It is something that gives people an illusion of illimitable power, and it is, in some ways, responsible for all our troubles — this, what you might call technical arrogance, that overcomes people when they see what they can do with their minds.’
The Wall Street geeks, the quantitative analysts (‘quants’) and masters of ‘algo trading’ probably felt the same irresistible lure of ‘illimitable power’ when they discovered ‘evolutionary algorithms’ that allowed them to create vast empires of wealth by deriving the dependence structures of portfolio credit derivatives.
…Somehow the genius quants — the best and brightest geeks Wall Street firms could buy — fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and — poof! — created $62 trillion in imaginary wealth. It’s not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers. Or maybe we are lost in space, with Dave the astronaut pleading, ‘Open the bank vault doors, Hal.’”
Read the full article here.
When I was in college and thinking about a career in Astronomy, my advisor took me aside and explained that, back then, there were only about 2000 or so full time astronomers in the United States. He politely pointed out that I was unlikely to be one of them in the future. He went on to suggest that I consider honing my computer skills and then doing what a number of folks who had trained in astronomy had done; getting a job on Wall Street. Apparently the modeling algorithms used to predict the Stock Market are very similar to the Monte-Carlo algorithms used to model stellar atmospheres. It was a relatively easy thing to use ones expertise in our field and then translate to the other.
Lots of folks made the shift.
I’m wondering how many of them took the basic business ethics classes that are required of a regular old MBA-type? Would requiring that have made a difference?