#cognitive elite

[jareddillian]

Wall Street Is Now Ruled By Physics PhDs, Not Traders

One of the reasons I am where I am today is because I did not study hard in school.

I was barely in the top 10 percent of my high school class. I probably could have been number one, but I was too busy screwing around.

I intentionally failed physics my senior year because I didn’t like the teacher.

Clearly, I did not have a great deal of maturity. My test scores were very high, but my options were limited since my grades weren’t very good.

Yes, I went to the Coast Guard Academy, which is a good school. But it’s not a great school, despite being a selective school.

There is a difference.

The Cognitive Elite

Most of my classmates at gifted and talented camp (which counts among its alumni Mark Zuckerberg, Sergey Brin, and Lady Gaga) went on to Ivy League schools, where they became part of the cognitive elite.

They now have careers in academia, journalism, finance, technology, even politics. As forty-somethings, they are the ones running the country. One of my very good friends from gifted and talented camp is probably a billionaire.

Rewind to a few decades ago. Colleges suddenly became more meritocratic, admitting people on the basis of grades and test scores, instead of other criteria.

So the smartest people got into the smartest schools, the less smart people got into the less smart schools, and dumb people didn’t get into schools at all.

The results of that sociology experiment are fascinating: the smart people in smart schools started marrying each other and having smart children…

The smart parents earned more money and gave a leg-up to those smart children…

Those smart children got into the smart schools…

And it set off a self-reinforcing cycle that continues to this day.

The funny thing about Americans is that though we’re very careful about racism, we are actually a very classist society. Implicit in the assertion that “you don’t have any money” is the judgment that “you make poor decisions.”

People don’t talk about this. We are obsessed with racism, but people of differing socioeconomic status just do not mix.

This all came to a head in the 2016 election, where we threw out the smart people in academia and journalism and finance and technology and politics—the so-called “experts.”

The Finance Implications

I worked on Wall Street in the 2000s. That was an interesting time—on the trading floor, you had a mix of propellerheads like me and lax bros from places like Cornell. Ah, there was a lot of lacrosse back then.

But things were changing. During the associate training program, they announced the average GMAT score for the class. I was average! I was accustomed to gifted and talented camps, but didn’t expect to end up working at one.

Funny thing is, if you look across a trading floor nowadays, there are almost no lax bros.

There are almost no people.

The traders are gradually being replaced by quantitative analysts.

Most cash equity desks at the big banks are staffed by almost no one, except for a central order book—a matching engine that pairs off firm and customer order flow. A robot, built by very smart people.

Not long ago, Bloomberg posted an article about Renaissance Technologies, the most successful hedge fund in history. All quants.

Any coincidence that the top hedge fund in the world is run by the smartest people—the top math and physics PhDs—in the world?

In case you had any doubt about the correlation between intelligence and investment success.

There are two structural trends present in today’s markets:

The move from active to passive.

The move from discretionary to quant.

There is a limit to how far 1) can go… but 2) is going to continue forever.

So the formation of a cognitive elite is happening in finance, too. And with similar consequences.

There is a bit of a rebellion against the quants—carping that non-traders don’t have the same eye for market history, liquidity, etc.

Well, the quant funds seem to blow up less than the discretionary funds do.

But we’ll see. There are a lot of systematic strategies out there selling a lot of options.

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[etedprince-blog]

Should we deliberately slow down innovation?

Did you notice that Alvin Toffler, author of “Future Shock” just passed away? His book was published in 1970. That was well before the Internet, Twitter, Facebook and even photocopiers and hand-held electronic calculators. Think what he would say today?

Clearly the pace of change has accelerated dramatically since Toffler alerted us to the problem. Essentially he was warning us that as innovation speeds up its gets to be a continuous series of ever bigger shocks. Where are we in the process now?

How many people can keep up with the constant barrage of –admittedly smart and useful  - gadgets, apps and so on? I think now it’s impossible for the vast majority of people to keep up with their names, let alone what they do.

Maybe your kids can keep up with some of the latest chat apps. But as they get older do they also keep up with the shattering advances in biotechnology, space exploration, cosmology and neuroscience? I think not. The shocking future is already with us and the fact is, much as the vast majority of us doesn’t want to admit it, that most of us just can’t keep up.

Is there a neural or cognitive speed limit on how much change we can absorb and respond to constructively? That’s something that neuroscience hasn’t really checked out to the best of my knowledge. But it might be the most important limit there is, up there and maybe beyond the capacity to love, aspire and lead.

But what we can say with almost virtual certainty is that we are approaching our limits, both individually and socially. On the social side it is reflected I n increasing levels of ungovernability or semi-governability in an increasing number of countries. How might it be reflected at the level of the individual?

Here’s my take on it. Most people are at or past their levels of capability to absorb the accelerating levels of innovations and change. The number of people who can still respond effectively to this change is already a minority and is diminishing the more the level of change increases.

This cognitive elite is the one that is supplying most of our knowledge workers, and especially the ones actually creating the innovations and change. The cognitive elite are naturally earning more and more money, but it is a diminishing proportion of the population.

The majority of people are not members of this elite. They are the ones that are losing out in the earnings and lifestyle sweepstakes ( see “In Advanced Economies, Two-Thirds of Population Have Seen Incomes Stagnate”). Many of these are the ones that are voting for radical change, as per Bernie Sanders and Donald Trump. Many of them voted for BREXIT and the Far Right in Europe.

As the levels of innovation and change inexorably rise, the cognitive elite will comprise an ever-smaller proportion of the population and the vast majority of the population will suffer relative declines in earnings and life style benefits and possibilities. So we can expect them to get progressively even more unhappy than they are now.

For these disaffected people I don’t think the problem is just a loss of jobs, although that’s part of it. It’s their perception that with the advance of technology most of them, and their kids, are going to lose out. So there's no hope for them.

And we're not just talking about intelligence and education either. Being part of the cognitive elite is having the innate capability to respond constructively to massive continuous change. That’s not a common capability and people know that.

The conventional answer is to speed up growth. But none of the developed countries now look as if they can do that. The emerging countries are probably a lost cause too despite their needs. So it looks as if we cannot grow our way out of the problem either.

And if we distribute more of the wealth it might make things even worse by reducing incentives in the system to innovate our way out of the problem either. That’s because the more you innovate, the worse the problem of inequality becomes.

It might be that there is an answer but it might be radical and highly discomfiting to everyone including yours truly. But you have to think through the worst if you want to discover the best.

Here’s what I think. It might be that governments might have to adopt deliberate policies of slowing innovation and change. I know, it goes totally against the grain of what every business guru in the world is saying. So be it.

Some possibilities:

·         Weaken patent protection to provide less incentive for technology changes and products

·         Regulate the pace at which companies can introduce new products

·         Regulate the pace of new IPOs especially tech IPOs

·         Introduce curricula in schools and universities showing how to cope with change

·         Introduce curricula to show people how to make do with less

·         Increase the tax on capital gains

·         Eliminate the favored tax treatment for investment funds.

Full disclosure: I am an incorrigible disruptor so this definitely goes totally against the grain.

But desperate times call for desperate measures.

[allisondroberts]

Another good article discussing the growing wealth inequality in the US and the problems that is it causing.

[allisondroberts]

This is another article from the Economist special on global leaders which I found interesting.

[allisondroberts]

Another article from the special report on global leaders discussing education and the wealth gap.