Too Clever By Half

February 5, 2018·3 comments·Money

Every financial innovation in history has been brilliant within its own logic and catastrophic in its real-world consequences. Clever people figure out how to win at the game directly in front of them, then get blindsided by a larger game they never saw coming. And when they lose, the only winners are the ones who saw the real board all along.

The brilliance trap: Financial innovation is always securitizing or leveraging something. The math works perfectly. Until one variable changes and the entire structure collapses. The mistake is treating a useful formula like it's immutable law.
Smart people, stupid strategy: The Gaussian Copula proved mathematically that certain mortgage securities "worked." It was elegant. Then housing prices declined. The problem wasn't the math. It was mistaking mathematical correctness for real-world survival.
The raccoon problem: Clever innovators build the structures. Criminals exploit them beyond reason. When systems collapse, the coyotes get hunted. The raccoons often escape. The State doesn't fear criminals. It fears clever people.
The meta-game trap: Financial innovation always ends the same way. The State uses the chaos to consolidate power and restrict who can innovate. This isn't accident. The State fears clever people who don't ask permission.
The real cost: You can be mathematically right about how something works and still be catastrophically wrong about whether it survives. Your brilliance becomes the tool that empowers something much larger than you imagined.

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Comments

Pat_Wover 5 years ago

I pretend to myself someone will notice this comment on an essay years old. Coyotes- My sister kept sheep on a farm in PA that backs up on state forest. When coyotes arrived back east in numbers defensive plans were needed. She got larger dogs from animal rescue, and when the coyotes made noise up in the woods the dogs went nuts in the kitchen. She would let them out and the dogs chased the coyotes back up over the ridge. That was their job. Great fun was had by all- the dogs did their job, the sheep stayed safe, and the coyotes likely chuckled about how much faster they were.

Coyotes are genetically and traditionally solitary hunters but they are also very social. When I used to camp in the SW desert they would start calling to one another after a night’s hunt, a sound that carries several miles in the dry air. After an hour or so I’d notice, in my 5 am lethargy, that some of the voices now sang from the same location. It’s the coyote coffee break after a good night’s hunt. I think they adapted easily to small scale pack behaviors once they moved east, where hunting is a different enterprise and often benefits from numbers.

It is sad, to me, to see the way animals and humans dummy down in domesticated circumstances, BUT I take heart hearing how cattle behave who escape their fenced in domestication. They become quite wily and easily outwit humans on horseback sent to find them. Even with smaller brains I suspect humans can survive in a post apocalypse world.

Ben, you are currently my favorite writer and possibly too clever by half.