Friday 8 August 2014

Why you shouldn't employ too many geniuses

"First class people hire first class people; second class people hire third class people" A famous quote, source unknown. Since presumably you are a first class person (otherwise you couldn't understand this blog) you must want to hire the smartest people you can? Right?

Wrong. I think there may be serious issues in hiring too many really smart people. This is especially the case if by 'smart' you mean 'academically gifted'.

Although these observations are based on working in the quantitative finance industry, to be precise a systematic hedge fund, they probably hold up elsewhere. This is especially true in similar industries where intellectual prowess is perceived to be particularly important.

First personal disclosure. I am pretty clever (137 Stanford-Binet if you care), but have had the experience of working with much cleverer people. Probably I would be lucky to be in the 25th percentile by IQ of the research and technology group where I was working (versus around 1st percentile in the general population). So I know exactly what I am talking about. Genius friends of mine reading this article will hopefully not be offended (and at least pleased I consider them to be geniuses). Of course since this article is full of gross generalizations it doesn't actually apply to you.

Now let's see why having too many super bright people is a problem.

Genius overconfidence

I am very interested in the cognitive biases that underpin the various facets of behavioral finance - the field which explains why people do not conform to rational economic behavior when trading and investing. The most potent behavioral bias in our brains is overconfidence. It leads to poor decision making, most markedly in decisions about money.

Now who is more likely to be overconfident, an average person or a genius? Ignoring delusions of grandeur  its probably going to be the genius. I have yet to meet a super bright person who is not aware of their high IQ, although many of them play it down in public so that some of their friends will continue to invite them to parties. Very clever people often have collections of academic qualifications and prizes that reinforce their self awareness of brilliance.

Most ironically are people who are extremely clever and also have advanced training in statistics or econometrics. This should lead to a deep suspicion of all statistically driven research as being potentially over fitted. Even when it does this suspicion rarely extends to their own research. Unfortunately most very able econometricians only gain in their ability to over fit in more complicated ways.

One way to combat genius overconfidence is to employ a range of abilities. Then at least the more stupid people (like myself) will have a stronger sense of their own deficiencies.

Genius group-think

When people go out and hire very clever people they tend to be fishing from a very small pool of graduates from elite universities. Elite universities at least in the social sciences have a habit of churning out people who all think in exactly the same way. Thus LTCM hired both Myron Scholes and Robert Merton - both geniuses. But that is like hiring the same person and paying them twice; when they might have been better off getting in some people with more heterodox views on financial economics.

Geniuses like other people also generally prefer to hire people with similar outlooks and prejudices.

The sense of collective brilliance can reinforce overconfidence when geniuses agree with each other; thus "We are all so clever that we must be right" (Thus the danger if you have all the smartest guys in the room in one room).

If you have some average people in the firm with your geniuses then you do have the problem that the mere mortals can be dazzled by the brainpower of the elite, leading them to agree with the most ridiculous notions just because someone very clever thought of them.

Geniuses are hard to manage

They refuse to do 'menial work'

Or in the words of Marvin, the paranoid android:
"Here I am, brain the size of a planet, and they ask me to take you to the bridge. Call that job satisfaction, 'cause I don't."

This is most usually a problem with very junior geniuses who think that their raw brain power should immediately put them in the job description of 'pure thinker'. They fail to realise they have to learn about the business and real life in general before their massive collection of neurons is likely to come up with any thoughts that are actually relevant or practical.

They go off on tangents

"Yes I know the client's project is late but I had some interesting ideas about solving the Riemann hypothesis using non Euclidean geometry and a Rubik's cube"

This is a difficult one because the only reason to employ geniuses (apart from gaining an edge in inter office quizzes) is often that they represent 'Out of the money options' - every now and then they will come up with some completely blinding off the wall idea that nobody else could think of. This one idea could easily pay the genius' salary for 1000 years. However you have to be able to spot it, and fend off the resentment from everyone else who is picking up the slack until it arrives.

They can't easily communicate with 'dumb' people

Geniuses find it difficult to articulate their ideas because it means slowing their brains down and trying to get the idea out before another one arrives. Its terribly boring trying to get some thicko to appreciate something that should be pretty obvious to any half intelligent person.

Note: This also makes it hard to distinguish geniuses from people who are just bluffing.

Genius support staff

All of the above means for every genius you need to hire three 'normals' - one relatively stupid person to do the menial work, one clever person to do the work the genius was supposed to do, and one person just below genius level to act as an interpreter.

Genius academic / theoretical bias

Geniuses tend to be attracted to paradigms that require high intelligence to understand. So highly complex models, academically 'sound', very theoretical ideas and anything with loads of unnecessary maths are all favored above more simplistic tools. Even if they are either pointless or downright dangerous.

Rewards to genius less than expected

In my previous career I was forced to repeatedly watch whilst sales people bragged about how many Phd's we employed (lots). This was a bit weird as I myself lack the crucial doctorate. But also as alluded to above I do not think that there is a direct correlation between having highly intelligent people and making profits.

Here is a quote from my current favorite book Daniel Kahneman's Thinking Fast and Slow:

'The most potent psychological cause of the illusion is certainly that people who pick stocks are exercising high level skills.... All this is serious work that requires extensive training... Unfortunately, skill in evaluating the business prospects of a firm is not sufficient for successful stock trading, where the key question is whether the information about the firm is already incorporated in the price of its stock. Traders apparently lack the skill to answer this crucial question, but they appear to be ignorant of their ignorance.'

Or to put it another way just because you are highly trained / clever does not mean you will be a great stockpicker, or indeed create fantastic models to pick stocks.

As far as I can tell success in research often comes down to a combination of luck and effort, once you have researchers with a baseline level of intelligence, skills and knowledge (which admittedly could be quite a high baseline). In quantitative finance its probably even worse; putting more effort into research often just results in more finely over fitted models.

In my field of interest employing a bunch of moderately clever people is necessary to create a half decent basic trading model. But the marginal gains of then adding a series of very clever people is probably small and even negative. The business success of that model will depend on having less academically gifted people with a variety of skills. Sadly these kinds of people are often neglected in the hunt for academic rock stars that it is assumed bring success.

To conclude

Of course none of this means the optimal business strategy is to hire a bunch of stupid people who will obey and bow to your superior intellect. But a nice blend of street smart, and practical pragmatists (with perhaps just the one Nobel prize winner) is probably much better than a room full of Phd's.