When Intelligence Fails Miserably

Ben Carlson- Director of Institutional Asset Management at Ritholtz Wealth Management
awealthofcommonsense.com – 10 May 2018



In 2001, Enron was the 7th largest company by revenue (close to $50 billion) before declaring the largest bankruptcy in the U.S. (at that time).

Fortune magazine named it “the most innovative company” six years running from 1995-2000, right before they blew up.

They were also named the 7th “most admired” company in 2001, the year they declared bankruptcy.

Company management overstated profits by roughly $600 million while assets were overstated by $24 billion through the use of mark-to-market accounting shenanigans.

Enron employees lost an estimated $850 million from money invested in the company’s stock (which made up more than 60% of the assets in the company’s retirement plan).

As the stock fell from $90 or so down to around $4 (and eventually zero) half of the Wall Street analysts covering the company still rated the stock a ‘strong buy’ or ‘buy.’
Nine months before they collapsed, Enron was compared to Hollywood it girls Jennifer Lopez and Kate Hudson because “Wall Street was virtually drooling over the stock.”

It’s been nearly two decades but the Enron saga remains one of the craziest business stories I’ve ever heard. In their book, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron, Bethany McLean and Peter Elkind profile the biggest players in the Enron scandal.

While reading about the combination of intelligence, overconfidence, and hubris at Enron, I was immediately reminded of the story of Long-Term Capital Management. Long-Term Capital was John Meriweather’s hedge fund that went through a similarly spectacular fall from grace. They were loaded with brilliant people as well, including Nobel Prize-winning economists Robert Merton and Myron Scholes along with a huge collection of PhDs and experienced traders.

Roger Lowenstein’s book, When Genius Failed: The Rise and Fall of Long-Term Capital Management (even the titles sound alike), includes a client letter sent by Meriweather to the firm’s clients which was eerily similar to Enron in many ways.

I’ve read both of these books in the past year or so and the similarities run deep.

A few thoughts on this:

Too much intelligence can be dangerous. Being the most intelligent person in the room (or assuming you are) is often the most dangerous place to be. It can leave you susceptible to over-thinking things and becoming overconfident in your own abilities. And when others around you assume intelligence is the be-all, end-all, no one else holds you accountable for your decisions. Unchecked intelligence is the worst kind because you begin to assume you’re unstoppable.

Emotional intelligence is underrated. By all accounts, Enron and Long-Term Capital were both filled with highly intelligent people. But each organization lacked common sense, self-awareness, and humility. All the brainpower in the world doesn’t matter much if you don’t have the correct temperament to corral it in a thoughtful manner. Talent is usually overrated in the business world while people skills are highly underrated.

It’s easier to fool yourself with complexity. Complexity in business and investing makes it easier to game your own system. Enron and Long-Term Capital were run by extremely bright people who tried to implement complicated processes to run their business activities. And these complexities allowed everyone within the organizations to be fooled by randomness or turn a blind eye to what was going on.

It led them to take risks they probably didn’t understand. And it made it much easier to fool the outside world because people would like to believe they’re intelligent enough to understand complex businesses and investment strategies. So no one stops to question why things are done a certain way because they don’t want to look stupid.

Risk is always there even when you don’t see it. It doesn’t matter where you are on the intelligence spectrum — we’re all forced to deal with an uncertain future. I think this fact bothers the smartest-people-in-the-room types. This is why people constantly make predictions about the future, even though no one has a clue what’s going to happen. It gives us an illusion of control in the face of an uncomfortable feeling of helplessness.
Another Nobel Prize winner, Merton Miller, said this after the fund’s failure, “In a strict sense, there wasn’t any risk — if the world had behaved as it did in the past.”

If only it were that easy.



A Wealth of Common Sense is a blog that focuses on wealth management, investments, financial markets and investor psychology. Ben Carlson manages portfolios for institutions and individuals at Ritholtz Wealth Management LLC. More about Ben Carlson here.


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