Today the emphasis too often is on "complexity rather than common sense," said James Montier, asset allocation strategist for investment manager GMO. "In finance, we love to complicate. We rely on complexity to bamboozle and confuse."[...]
An example of what went wrong, said Montier, was collateralized debt obligations, the complex mortgage-related products that turned into toxic assets in the financial crisis and almost set off a worldwide depression. The products were ill-conceived from the start, based on faulty assumptions that left out crucial human factors such as investors bolting in fearful market conditions, he said.
Too many in his profession, Montier said, are trying inappropriately to apply physics to investing, where it doesn't belong, and they are ignoring inconvenient truths. Complex mathematics is valued but not necessarily used honestly, he said.
"A physicist won't believe that a feather and brick will hit the ground at the same time, and they won't use models to game the system. But that's what finance does with models," Montier said. "They take them as though they are reality."
Montier, speaking to financial professionals who design, evaluate and sell investment products to individuals and institutions, warned that all professionals in finance need to be thinking more, rather than following the herd.
"Who could have argued that CDOs were less risky than Treasurys with a straight face?" he said. But that's what happened. "Part of the brain was switched off, and people took expert advice at face value."
(ht Bill Bergman)
The FIRE industry on the whole uses complexity to con its customers every day.
ReplyDeleteAdd to that the medical and legal industries, and this becomes a loong list.