Malcolm Gladwell Deeply Offends Wall Street By Comparing Them To Overconfident Gamblers
If you're looking to see the collapse of Bear Stearns explained using the British defeat at Gallipoli as an example of disastrous overconfidence, you can do no better than Malcolm Gladwell's new piece in the New Yorker. Be forewarned, however, that Wall Street apparently thinks it's a load of crap.
New York Magazine says:
One bank official commented to me that Gladwell was "full of it," engaging in "pop science," and that "you can make sweeping generalizations sound true if you tap the entirety of scientific and literary history to find sources."
That basically sounds like every critique of Gladwell we've ever heard.
What we think is interesting about Gladwell's argument (that Wall Street is populated with people who, because of their competence in other areas, believe their mastery extends to things over which humans have no control, like the markets) is that it seems to suffer a bit from the hubris it's attempting to describe.
For our money, we think this this interview with a hedge fund manager is more telling, and this Frontline episode (with John Thain interview!) is more fun.
Wall Street's Gambling Soul Wounded by Malcolm Gladwell [NY Mag]
Cocksure [New Yorker]
(Photo:Maulleigh)
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Comments:
Wall Street says he's full of it? Well if that isn't a ringing endorsement of the validity of this piece, I don't know what is.
@JustinSane07: We are the city we live in, too -- we built it and without us, it would not exist. That doesn't mean that any of us, or any group of us, has absolute control over it.
@JustinSane07: well, not really. the "invisible hand" has control. we're just along for the ride.
yes, the market is us, but it doesn't act like you or me. neither of us can manipulate it on our own (usually). even in cases where people successfully manipulate it, they cannot predict the outcome b/c they don't know entirely how it will react.
it's more like a river & we're all along for the ride whether we like it or not.
I am similarly offended that my retirement account has hemorrhaged so much of its value over the past few years, but nobody called me for comment.
+1 for the Gallipoli reference, anyway
(Excellent movie, btw.)
@JustinSane07: You ever try herding a cat? How about 5 million of them?
Control is the last thing we have. The real power is convincing the market to go one way or the other, and then letting it do its thing.
The guy across the street from me works for a big investment bank and manages a lot of money for rich clients, he has often described himself as just a gambler and loves it when our local horse racing season starts because it is fun and reminds him or his work.
I'm no Gladwell acolyte myself, however, the basic point that people tend to overestimate their expertise is actually well-known and has been demonstrated many time in many ways. This is known as the "above average effect" or, more colloquially, the "Lake Wobegon effect" (because Garrison Keillor describes all the children of that fictional town as being "above average").
As it turns out, research suggests the above average effect is at work in the business world, e.g. this story in Reuters; it's not just Gladwell saying so.
Ironically — or perhaps not! — research has shown that those most vulnerable to this effect, are those with the least amount of competence. People with moderate to high levels of competence tend to overestimate their ability less than those with minimal or low competence.
@mac-phisto: Exactly. The failure of the financial wizards to recognize this basic truth drives me nuts. My company does investment advising, and I HATE when people use shorthand like "What does the market think?" This way of talking underscores an idea that the market is a singular entity that can "think" in some rational way. Apparently it takes a crash to forcibly remind us that of course, it isn't and can't.
My Friend: A friend asked me why I dont have a girlfriend and I told her because they are expensive. She got mad at me.
Me: Tell her the truth hurts.
This was the first thing that came to mind after seeing this headline.
Hah. Why is it that when you or me plays with the stock market its gambling, but when "Wallstreet" plays with the market its sound investment?
Me: Hey wallstreet... I got reality on line 1.
Wallstreet: Tell them im in a meeting.
It's difficult to control things that are not real.
Any gambler would be *thrilled* to have the same level of success as Wall Street does. Quite easy to look at the past couple years and get all outraged and yell that the whole thing is just a con by the uber-rich to cheat you out of your money, but historically, "the market" is pretty much guaranteed to make you more money than a craps table.
This is why I have difficulty reading books or articles by people who are experts in the field by their research, but not by credentials. I defend fellow journalists, but I have to say that unless you specifically have credentials in health communication, are a medical doctor, or has worked extensively in medical science, I'm not going to trust your research as much as I would a real doctor who did the research, or is reporting on it.
That said, I can't bear to read a boring report by a medical doctor who doesn't understand the use of an adjective. The reason why I really enjoy work by Malcolm Gladwell is because I don't treat his work as if he's an expert on what he's saying. He's a good writer, and what good journalists do best is write well. If I trust that what he's saying has an element of truth to it (though the ideas he proposes can often be a matter of opinion), then it makes the topic easier to read and comprehend - versus a dry report by a medical doctor who may be a leader in the medical field, but just isn't a very good writer.
Sometimes you do get professionals (i.e. not writers by trade) who are very good at writing nonfiction and critical analysis of their fields. I think that is the happy medium, but in no way am I disparaging Gladwell. I like his writing, even if I don't always agree.
@JustinSane07: Human beings comprise markets, yes ... but that doesn't mean any single human being, or even a group of them, controls it. This is because a market is more than just the sum of its parts.
A cell in your body might say the same thing about you ... but that doesn't mean that any one cell, or even a group of them, has complete control over you. Even your brain, as an organ, has limitations on what it can make you do; e.g. it can decide you should stand up, but to do that, it sends orders to your muscles to make that happen, and if any of them don't or can't cooperate, it won't happen.
Now that doesn't mean that markets can never be controlled or manipulated. They certainly can be. But they need to be small enough to do so. If the market for something is small enough, then those involved with it can commandeer it. But as the size and scope of a market gets larger and larger, control becomes increasingly difficult.
An example of this sort of thing is the creation of asset bubbles. It happened with the "dot-com" bubble, and again with the real-estate bubble, and again with last year's oil bubble. These bubbles were all engineered by people within those markets and with a great deal of influence over them. However, they were still vulnerable to outside forces, that the bubbles' engineers could not control, which caused all of those bubbles to burst. Each of those markets was small enough to manipulate — up to a point. But beyond that point ... disaster lies.
An inexact parallel to control over markets might be the example of a community and its mayor. The mayor of a village of 50 people would likely have a great deal to say about how it's run and what happens with in it. A mayor of a town of 500 would have a little less; of 5,000, still less ... and on and on you go. When you get to cities of 5,000,000 or more, while they may have powerful and influential mayors, let's be honest ... their ability to control those cities is minimal at best. And what control they do have, is transmitted down through the city agencies ... those mayors do not do everything themselves, and are certainly not consulted about every decision that is made within that city.
So while human beings do comprise a market, they are not the whole market. There is a dimension beyond the human beings that make up markets. That dimension is often unaccounted for by those within it.
Considering that Wallstreet invests in everything from home and student loans, to betting that stock will actually fail, I am reminded more and more of John Cleese in the move Rat Race.
@smartmuffin: More money than a craps table and less money than a slot machine? Less money than Pachinko and more money than roulette?
Not even Mel Gibson could save the British from the Turks. I mean Wall St. Wait. I'm confused.
Methinks that overconfident gamblers have more of a beef here.
@smartmuffin:
"the market" is pretty much guaranteed to make you more money than a craps table.
Is that so? It's incredibly easy to make money at craps.
Be the house.
In the hyper-sensitive to gambling state I live in (Utah), I've often heard stock trading compared to gambling. There is a huge difference, though. On the stock market, NOBODY has to lose. Everyone can win.
Shame on Malcolm for insulting gamblers like this....
The bank official's comment about "sweeping generalizations" is sweetly ironic....since bank and institution problems have occurred in general, sweeping manner.
@PsiCop: My vote is for not ironic. It makes sense that people who are really good at what they do know what they can and can't do. People little competence know just enough to be dangerous; they don't know what they don't know.
The Gladwell piece is totally worth reading if only to see just what an enormous douche Jimmy Cayne, who ran Bear Stearns into the ground, was and is. Here's a dude who presided over the complete and total meltdown of his company. And asked afterward to talk about it, FOR POSTERITY/PUBLICATION, there's no "Wow, we messed up, and it'd be worthwhile to figure out why." There's no "Man, I'm proud of such-and-such, but I wish I'd done such-and-such differently." All he has to say is variations on "Duuuuuude, check out my BIG SWINGING DICK." (Which, I'm guessing, is all he ever had to say anyway.)
In response to Princess Leela's post....I hereby coin, and claim copyright to the word, "gargantudouche".
@Princess Leela: You might enjoy this story from my financial statistics professor:
He had attended a financial stats course where the professor invited a Wall Street investor to come in to give a talk. This guy claimed he could differentiate between an actual random process and an actual day of trading in the market. So the professor took five plots: four were random and one was from a day in the market. The investor's first guess: wrong, he picked a random process. His second: another random process. Third guess: wrong. Even when he was down to just two graphs, he guessed the wrong one. The guy was apparently so furious and claimed the professor was playing a joke on him (which he wasn't) that he left and didn't give his talk.
The lesson: market moves should be treated as though they were random (not foreseeable). I'm suspicious of any investor who claims otherwise. This doesn't mean you cannot model those processes to optimize returns (you can), however, any reputable models IMO must endorse this inherent randomness and ignorance about what the market will do.
@Mary Marsala with Fries: I'm sorry Mary, but you're missing something. We built this city on rock and roll.
How exactly do humans not have control over the market? We are the market. The market is a creation that we put forth. We have absolute control over it.