Did smart people cause the financial meltdown?

It's a point raised by Calvin Trillin in the New York Times . Brilliant people entered the world of derivatives and credit default swaps, lured by the prospect of the kind of money they could never make working as academics or legal-services lawyers.

Trillin's story, while not completely convincing, is reminiscent of what happened with Long Term Capital Management (LTCM), the firm run by former university professors, including two Nobel Prize-winning economists, which collapsed after making enormously leveraged gambles with various forms of arbitrage involving more than $1 trillion dollars. According to the professors, their model was scientifically sound and could not go wrong. They claimed that on the basis of their complex computer models, their long and short positions were highly correlated and so there was next to no risk. Their model did not take into account Russia defaulting on its government obligations. The guys at LTCM had hedged their positions by selling rubles. Disaster struck when the ruble collapsed and the Russian Government stopped further trading in its currency.

Smart people are not that smart when it comes to markets. Another piece of evidence supporting that comes with the reports that Harvard Business School screwed up and lost $500 million when it made the stupid bet that interest rates in the US would rise. Worse still, the net asset value of Harvard’s General Operating Account, a pool of cash from which bills are paid, fell to $3.7 billion from $6.6 billion.

Intellect and finance don't necessarily go together. Whether it's because of arrogance, or just a different type of mindset is worth exploring.