The Gulf Spill And The Wall Street Meltdown: Hubris Is The Common Denominator

Just finished reading "The Quants: How a New Breed of Math Wizards Conquered Wall Street and Nearly Destroyed it," by Scott Patterson (Crown/Random House, 2010).

Patterson, a Wall Street Journal reporter, traced the rise of math and physics Ph.D's at hedge funds and investment banks who used their faith in quantitative science to create and 'manage' exotic investment vehicles.

Many made enormous sums of money in a competitive and deregulated financial environment - - and then lost billions, trillions of dollars of wealth: ours and theirs, when their pursuit of "The Truth" ran aground.

Turns out that investor behavior isn't quite so predictable and manageable as the quants assumed.

And bet on heavily. Bet being the right term, because when they weren't gambling with new-age financial instruments, they were either trying to beat the house at Las Vegas or in high-stakes games with each other.

One little section in the book about the quants and their belief in their own infallibility struck me as pretty similar to BP's Deepwater Horizon well - - also believed too unlikely to fail.

Even though the well head was a mile beneath the surface of the Gulf of Mexico, thus, literally, in uncharted drilling waters.

Wrote Patterson, of economist Paul Krugman, (p. 290):

"...Nobel-Prize winning economist Paul Krugman...blamed "the profession's blindness to the very possibility of catastrophic failures in a market economy....As I see it, [Krugman wrote], the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth."

Substitute "deep water oil drillers" for economists, and "high-tech drilling technology" for impressive-looking mathematics - - and you get another kind of catastrophic failure.