My hero Douglas Adams pointed out that when you have an infinite number of monkeys, someone’s eventually going to come through the door and talk about the script for Hamlet they’ve worked out.
“We have to pay bankers vast sums of money to attract talent” the financial services industry claims. And our politicians (many of whom are economists) clearly believe the threats from the ‘financial wizards’ that they might go somewhere else.
Well, I say: let them. You can buy a lot of peanuts for the kind of sums we’re talking about, and monkeys love peanuts.
Despite politicians’ promises that the flaws in the financial system would be addressed, nothing much has changed in the last couple of years (well, there’s a surprise). Those responsible for the 2008 global financial meltdown (oh, excuse me, I mean of course the ‘credit crunch’), instead of being reprimanded, penalised or — shock, horror — sacked for incompetence, are allowed instead to… continue in their old ways. We taxpayers bail out the banks, and the bankers turn around, stick two fingers in the air to us (who — in theory at least — are in many cases now their main stakeholders) and pay themselves obscene bonuses.
Odd. I would have thought that financial services industrialists and economists, of all people, would understand statistics.
Take the case of Bill Miller (described excellently in “The Drunkard’s Walk” by Leonard Mlodinow, and if you want to know more, I thoroughly recommend that read).
When there are thousands of mutual fund managers, some of these will outperform others. Some of the high performers will have streaks, periods in which they can, apparently, do no wrong. Do such people deserve to reap immense rewards for their successes? Well, yes, you might argue (especially if you’re a financial services industrialist). But if you know about the hot hand fallacy, the answer is a resounding ‘no!’
When there are thousands of people tossing coins and hoping for a run of heads, it’s inevitable that there will be one who outperforms all the others by blind chance alone. You can point to that one and call him a great tosser if you want (but you can only do it in retrospect, which is, of course, the point).
The question is whether the average mutual fund manager’s performance is governed by skill, or by random chance. According to Nobel laureate (and economist) Merton Miller:
“If there are 10,000 people looking at the stocks and trying to pick winners, one in 10,000 is going to score, by chance alone, and that’s all that’s going on. It’s a game, it’s a chance operation, and people think they are doing something purposeful but they’re really not.”
So, I take it all back. There is at least one economist who understands statistics. Meanwhile, the rest of us keep on voting into power politicians who are clearly clueless; and they allow the financial institutions to continually grape the rest of us.
And I do mean ‘grape’ — because there’s a wunch of these bankers. They must be laughing their ludicrously expensive socks off. The only reason they don’t do it all the way to the bank is because they’re already there.