Did the MBA Mentality bring us to this mess?

1. Did the MBA Mentality bring us to this mess? A View from Wall Street Thanks to Kevin Hassett

2. Why this crash, now? Up to now Wall Street has survived everything: wars, depressions, bank panics; but now it seems to be dead. When someone dies unexpectedly, there is usually a post-mortem to find out why. 30 years ago, the brightest and best among students wanted to be doctors, lawyers, or engineers. By 2000 they all wanted to be Investment Bankers.

3. Resilience When Wall Street was run by a broad cross section of the population, it seemed able to survive anything—though badly damaged. Now, the entire institution collapsed once real-estate prices fell by 20% What happened? “Did Harvard kill Wall Street?”

4. How had Wall Street changed? It became populated with people from Ivy-League Schools, particularly those with MBAs. But, shouldn’t this have helped? The attraction? In 1980, people working in Wall Street earned about the same as workers in other sectors. By 2005, they earned 50% more, which is why everybody wanted in.

5. The “braining” of Wall Street. “Go Forth and Make Money, then Give it to us.” The reason for the extra pay was that Wall Street was recruiting graduates and post graduates, who needed to be paid more to be induced into the positions. Computerization, innovation in financial instruments etc. made this seem wise. But, the recent failure of WS was a result of very bad risk-assessment; but isn’t that just what these guys are supposed to do?

6. “Blind Faith” “I know everything I need to know. In fact, I think I always knew everything, even though I’ve never had a real job. That’s why I am chief financial officer.” People seem to have had more faith in their models than experience. In fact, they dismissed experience. If you believe you are the “best and brightest” you may lose sight of your limitations, and MBAs tend to have a very high opinion of their abilities. What about “humility?” Respect?

7. Narcissism This occurs when you lose all sense of proportion in your self-confidence. It leads to bad judgment and recklessness, so psychologists tell us. “Narcissistic leaders tend to have volatile and risky decision-making performance, and can be ineffective and destructive leaders.” This is why they give themselves bonuses as the firms are going down in flames.

8. Old Time Perspectives Without the benefit of computer models, people in the past were much more circumspect about risk. They had humility and caution, and often a lifetime of experience, which was rewarded, not treated with contempt. Add to this the short-term nature of financial gain, bonuses, and an irrational overconfidence in what you really know.

9. Conclusion What caused the disaster was, really, a lack of any real understanding of risk management; overconfidence, a total lack of any sense of history, and the death of humility and respect. These people were very clever, very ignorant, and very stupid. The result is hardly surprising.