Harvard narcissists with MBAs killed Wall Street

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 behaviour 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 five 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. 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 postgraduate 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.

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 behaviour 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."

Guys like John Thain (Harvard Business School, 1979) exemplify this behaviour 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. Another result is less wiggle room for design error.

Hence, modern bridges' 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 scepticism 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 is a Bloomberg News columnist. The opinions expressed are his own.

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READERS' COMMENTS

MBA - Right or Wrong
Posted by angelo, Dubai, UAE on Tuesday 24 February 2009 at 15:21 UAE time


I have worked with and admired some persons with MBA's - These are the ones who have had a reasonably successful career prior to taking on the MBA and started in their mid to late thirties . The main reason they took the Post grad Qualification was to get promoted since it was the requirement for the position or, to make themselves a more marketable source when they applied for a new position. Entrepreneurial skill is nothing to do with any degree or qualification - It is a gift

Dodgy bridge analagy
Posted by Mart on Monday 23 February 2009 at 19:03 UAE time


An interesting article but the logic of his Roman bridge argument is very flawed.

I'd wager that the Romans built quite a few dodgy bridges 2000 years ago. But 2000 years later they've all long since collapsed, and only the most hard wearing and decent survive.

Sure you don't see any dodgy Roman bridges - but that doesn't mean there weren't any. It just means they've done what modern dodgy bridges have done - collapsed!!!

MBA or not
Posted by Coomon sense, Dubai, UAE on Monday 23 February 2009 at 11:45 UAE time


I can't understand why MBA's should be an issue. Blaming someone who has taken the effort to get a superior education is not really the point. What I would add to the equation and is addressed in some way by others is that there is no replacement for real life experience and the ability to use a little of that sense that people have the audcity to call common. What Wall street and just about every other financial market in the developed world had was a bunch of people with fancy titles, no experience and a hierarchy chasing them for ever larger returns. The result was financial products that you needed a degree to understand, sold by people who had no idea what they were, but promised massive returns bought by people who had even less of an idea what they were buying, but liked the idea of the returns.....all of this regulated by .....?? Greed ultimately is the problem, but greed has been amplified by expectations. For the last 30 years, profit has been the biggest buzz word. making a 5 or even 10 percent return on investment is no longer acceptable, and I believe that Wall street and it's celebrity bankers created unrealistic expectations within the parameters of greed. Greed is a natural human characteristic, we can not avoid that, but we can manage it's expectations, that would be the first step in the right direction. Making a 100% return can not be the norm, it should be like that huge fish you catch once in a lifetime, we need to find a little balance in Greed's expectations.

MBAs brought the wall street down
Posted by lakshman Dalpadado, Colombo, Sri Lanka on Monday 23 February 2009 at 08:32 UAE time


Steve Forbes, in his lectures, used to mention that getting a first class in the university is like a curse hanging around one's neck because many failed to make the grade in real life( some failed miserably) and that the twenty most successful persons in USA, in innovation, and financially, has got only one degree between them! He was, of course, referring to the top twenty billionaires.

I often quoted Steve's quotes in my lectures to college and university students - I believed him then and certainly believe him now.

Ability to pass exams with flying colours does not correlate with later achievements. Some of the most outstanding and innovative people in the world have been misfits in college. At the same time, corridors of failure in real life are littered with first class degree holders.

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