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Home > Human and Intellectual Capital Viewpoints > Urgent Need to Retool Business Faculties with Financial Historians and Eject the Financial Engineers

Human and Intellectual Capital Viewpoints

Urgent Need to Retool Business Faculties with Financial Historians and Eject the Financial Engineers

by Russell Napier


Russell Napier is an Edinburgh-based consultant for Asia-focused brokerage CLSA Asia-Pacific Markets who writes about issues impacting the global equity markets. With more than two decades in the industry, he has contributed to the development and scope of CLSA’s equity research. He started his career in investment at Edinburgh-based asset managers Baillie Gifford before joining CLSA in 1995 as an Asian equity strategist based in Hong Kong. He remained in that post until 1999 and was ranked number one for Asian strategy in the Asiamoney and Institutional Investor polls from 1997 to 1999. Napier is a nonexecutive director of the Scottish Investment Trust and the Mid Wynd International Investment Trust. His book Anatomy of a Bear was published to critical acclaim in 2005 (an updated edition was published in 2009). He created and runs a course for finance professionals at the Edinburgh Business School called “A practical history of financial markets.”

The Emperor Is Naked: The Fallacy of Market Efficiency

“Only someone who has Asperger’s would read a subprime mortgage bond prospectus.” This is the opinion of Michael Burry, a man diagnosed with Asperger’s syndrome and one of the few investors who made a fortune betting that there would be a subprime mortgage crisis. Burry is quoted in The Big Short by Michael Lewis, which recounts the story of how the investors who foresaw and profited from the debacle in the US mortgage market were people who just didn’t fit in. Educated as a doctor, Burry saw something that the business school graduates missed. This doctor with a “disorder” saw something coming which escaped even the Nobel laureates. Michael Burry could see that the price was wrong when everybody schooled in price determination believed it to be right. Understanding why Burry sees things differently from the financially educated is the key to understanding why financial education needs root and branch reform.

Why did so few people see what was so spectacularly wrong? Did it really take a genius to recognize that lending money to people who couldn’t pay it back was unwise?

Almost 200 years after the publication of Hans Christian Andersen’s story “The emperor’s new clothes” the world was once again full of people looking at one thing but seeing something else. The great tragedy is that these people had paid large amounts of money to be trained and educated…in order to see clothes where none existed. This tragedy, with calamitous consequences for global financial stability, continues. To understand why this is the case, and how we can stop it, we need to understand the intellectual disaster in which a characteristic that is usually associated with the physical sciences was ascribed to a sociological activity. How did we come to believe that a market is efficient—and how do we stop believing this?

The compost left by the decay of one idea can be the key nutrient for the growth of the next. The failed idea was that governments would be better at allocating resources than individuals. What grew out of this was the observation that the marketplace, through price determination, could allocate resources more efficiently than the government. The woeful misallocation of resources by governments in the postwar era didn’t exactly set a high hurdle: it was not difficult to demonstrate that the market could allocate resources more efficiently than politicians and civil servants.

The evidence of superior resource allocation was compelling, and the observation gave impetus to an ideology that opposed government interference in the economy. Through the prism of that ascendant ideology, much higher claims could be made for the market than just that it was more efficient. If the market was more efficient at allocating resources, didn’t this mean that it was also “perfect”?

If so, a huge prize awaited the economists. By assuming that markets were always efficient, the “dismal science” of economics could be transformed. It could at last take its place as a true science. The uncertainty would be banished from economics and Harry Truman’s one-handed economist could be born.

Vegetables vs Mortgage-Backed Securities

Anyone who has ever been to a real market will know that a market is simply a meeting of human beings—buyers and sellers—attempting to reach agreement on prices. When human beings are involved, nothing is truly efficient. It doesn’t matter if the market is a local market for vegetables or a market for mortgage-backed securities.

Indeed, one could argue that a market for vegetables is likely to be much more efficient than a market for complex and opaque financial instruments. It is easy to assess the present value of a vegetable by looking at its condition and noting how this will influence its taste when it is consumed in the very near future. The present value of a mortgage-backed security, however, is dependent on future income streams that are often far in the future, and these are subject to considerable uncertainty.

While opinion on the present value of a tomato has a high likelihood of being accurate, there is much greater room for error when assessing the value of a mortgage-backed security. Even though many generations were aware of the inefficiencies, deception, and theft that occur in a vegetable market, a new generation somehow convinced itself that such uncertainties were absent from financial markets. The reason for this delusion was the normal human failing of searching for certainty in an uncertain world. More cynically, it will always be true that certainty fetches a higher price than uncertainty. By attributing features to financial markets which are not there when human beings gather to determine prices, precision could seemingly be brought to the treacherous task of forecasting.

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Further reading


  • Dimson, Elroy, Paul Marsh, and Mike Staunton. Triumph of the Optimists: 101 Years of Global Investment Returns. Princeton, NJ: Princeton University Press, 2002.
  • Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867–1960. Princeton, NJ: Princeton University Press, 1971.
  • Grant, James. Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken. New York: Farrar, Straus and Giroux, 1994.
  • Homer, Sidney, and Richard Eugene Sylla. A History of Interest Rates. 4th ed. Hoboken, NJ: Wiley, 2005.
  • Lewis, Michael. The Big Short: Inside the Doomsday Machine. New York: WW Norton, 2010.
  • Napier, Russell. Anatomy of the Bear: Lessons From Wall Street’s Four Great Bottoms. Petersfield, UK: Harriman House, 2009.
  • Smith, Adam. The Money Game. New York: Vintage Books, 1976.

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