A New Theory on why Wall St Failed?

by Ben Cohen

Malcom Gladwell on why bankers overconfidence really caused the financial collapse:

There is something intoxicating about pure expertise, and the real

mastery we can attain around a card table or behind the wheel of a

racecar emboldens us when we move into the more complex realms. “I’m good at that. I must be good at this, too,”

we tell ourselves, forgetting that in wars and on Wall Street there is

no such thing as absolute expertise, that every step taken toward

mastery brings with it an increased risk of mastery’s curse.

Gladwell’s argument is that the structural arguments for the collapse don’t add up (his evidence for this is rather light), and that over confidence caused bankers to engage in activity they didn’t fully understand:

Since the beginning of the financial crisis, there have been two

principal explanations for why so many banks made such disastrous

decisions. The first is structural. Regulators did not regulate.

Institutions failed to function as they should. Rules and guidelines

were either inadequate or ignored. The second explanation is that Wall

Street was incompetent, that the traders and investors didn’t know

enough, that they made extravagant bets without understanding the

consequences. But the first wave of postmortems on the crash suggests a

third possibility: that the roots of Wall Street’s crisis were not

structural or cognitive so much as they were psychological.

The analysis is interesting and not necessarily wrong, but Gladwell has a habit of ignoring overwhelming evidence in favor of clever theories. I’m definitely a Gladwell fan and have enjoyed his books immensely. His unique perspective puts him in a class of his own as a social commentator and writer, but he often gets carried away with the ‘third eye’ analysis that gets everyone excited (and usually helps sell books).

The structural reasons for the financial crisis have been meticulously cataloged (most notably by Matt Taibbi), and to suggest otherwise is simply irresponsible and wrong. There’s no doubt that cocksure bankers thought they were Masters of the Universe, and that’s why regulating the greedy assholes is an absolute must. It’s basically like saying ‘Poker players lose all their money when they lose their confidence’ – a self evident statement and a reason we don’t let Poker players run banks. Or so we thought.

Ben Cohen is the editor and founder of The Daily Banter. He lives in Washington DC where he does podcasts, teaches Martial Arts, and tries to be a good father. He would be extremely disturbed if you took him too seriously.