Those who are born mathematically “gifted” often develop an elitist attitude. Society reinforces that with movies such as “A Brilliant Mind” (John Nash) and “The Theory of Everything” (Stephen Hawkins). M.I.T. Professor Paul Samuelson personified this cultural mindset when he said, “When the worst economics grad student leaves M.I.T. and goes to Harvard, both of the departments’ averages go up.” As you may know, Samuelson taught in the 20^th century at a time when economics was heavily mathematical winning the Nobel Prize in economics in 1970. But it was also a time when the subject became known to investment professionals as the dismal science.

Much has changed since 1970, as we have transitioned from an industrial to a knowledge/service-based economy. But this change has not been an opportunity open to all. In fact, it has widened income disparity. The 20^th century employed, largely, physical labor. The automobile industry and the United Auto Workers personified it. Now in the 21^st century, those who are mathematically gifted are the ones rewarded.

A large part of math’s intelligence appeal is its presumed “exactitude;” it conveys a sense of certainty. That is very different than assessing the work of a right brained creatively “gifted “Ernest Hemingway or Vincent Gogh. Such intelligence can only be judged on a comparative basis. So one would imagine that math’s presumed exactitude would make it ideal for the investment business; a business that is, ostensibly, done by numbers. I say ostensibly because all great money managers, a few of whom I’ve known, were and are categorically right brain hemisphere people. They think in concepts. Yes, they have underperformed for the past 12 years. But then so have the left brained quantitative managers.

The problem, whether portfolio management or economics, is that people create the numbers. How does one identify fraud when the numbers seemingly work? The numbers at WorldCom and Enron worked perfectly … until they didn’t. Therein lies the problem historically with economics and, more recently, quantitative portfolio management. Humans have sentience; numbers do not. Human judgement and emotion must be brought to bear on the numbers. Traditional economics was always based on human self-interest and rational decision making. But we are not always rational.

We cannot function in a linear progression of mathematical certainty from just the left side of the brain. Both sides must contribute. This insight was developed by Israeli psychologists Daniel Kahnerman and Amos Teversky who won the Nobel Prize in economics in 2002. Richard Thaler took their insight and turned traditional economics into a new concept. Behavioral Economics. An example of it: imagine you had purchased two tickets to a Broadway show for $200. When you got to the theater on the night of the show, you discovered - upon opening your wallet – that you were missing $200 cash. Would you still go to the show? The answer: yes. Now imagine when you got to the theater you had lost the tickets, but still had the $200. Would you repurchase the tickets? The answer: overwhelmingly, no. To go to the show either way is $400! It’s emotional perception. To imagine what others do not is to be truly gifted. Professor Richard Thaler, Nobel 2019, is this century’s gifted one.

-Francis Patrick Boland