Yesterday’s New York Times carried a wonderful contribution by Calvin Trillin that struck a chord well-known to our regular readers–smart people are dangerous.
We could go on about how high intelligence tends to be correlated with an ideology of expertise that overestimates the ability of intelligence to anticipate uncertain events. But it’s far more entertaining to just read Trillin.
The story starts when Trillin runs into a guy drinking martinis in a bar in New York. The guy explains that in the old days, the smartest people tended to gravitate toward public service or the sciences. But all that changed in recent decades.
Trillin’s martini drinker explains why the change happened:
“Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they’d have so much money they could then become professors or legal-services lawyers or whatever they’d wanted to be in the first place. That’s when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.”
“But you still haven’t told me how that brought on the financial crisis.”
“Did you ever hear the word ‘derivatives’?” he said. “Do you think our guys could have invented, say, credit default swaps? Give me a break! They couldn’t have done the maths.”
“Why do I get the feeling that there’s one more step in this scenario?” I said.
“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.”
“So having smart guys there almost caused Wall Street to collapse.”
That’s the core of the discussion, but you should really go read the entire Trillin essay.
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