Gideon's Blog

In direct contravention of my wife's explicit instructions, herewith I inaugurate my first blog. Long may it prosper.

For some reason, I think I have something to say to you. You think you have something to say to me? Email me at: gideonsblogger -at- yahoo -dot- com

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Wednesday, July 17, 2002
Malcolm Gladwell's latest piece in The New Yorker about how smart people are overrated reminds me of the firm I used to work for, D. E. Shaw & Co. They were not nearly so free-wheeling as Enron, but they similarly believed that very smart people don't actually need to know anything in order to succeed - indeed, they are more likely to succeed at any given endeavor than someone more knowledgeable and experienced but less sparklingly brilliant. This worked reasonably well for the hedge fund (though they did lose a lot of money doing exactly the same fixed income "arbitrage" trades everyone else was doing in 1998) but cost them dearly in every other business. I'll give you an idea: they started work on a web-based discount brokerage in 1994, less than a year after the debut of the Mosaic browser. But they never managed to launch because their technologists had never built any comparable technology, their business people had never run any comparable business, their marketers had never done any marketing - they had a team of neophytes who had to make every mistake trying to reinvent the wheel before they could get rolling. So they never did get rolling. Another example: in 1993 they launched a business making markets on exchange-listed stocks off exchange (the "Third Market," now dominated by Knight). They decided that they wouldn't unload any of their positions unless they crossed in-house (i.e. if they had a customer buying and another customer selling) because, in their view, there was no "signal" in the trades they were doing, only "noise." In other words, they thought their customers didn't know anything, and the stocks they sold were as likely to go up as go down. Whoops! Millions of losses in a matter of months led to a change of strategy: unload every position immediately. That stemmed the losses fine with just one problem: now it was theoretically impossible to actually make money (since they were committed to making the best price available, and to paying a penny-per-share back to the company directing the order flow their way). So they limped along for a few years, trying to figure out how to square this circle, and then shut the business down. Another example: they launched Juno Online Services, a free email service (later free web access) in 1994. When the original business model wasn't panning out (not enough ad revenues), they tried selling things to their email customers. But they didn't have any experience, so they wasted vast amounts of money on everything from inefficient marketing pitches to warehousing appliances and the like against the eventuality that someone actually ordered something. After losing millions, they shut the effort down. Juno eventually did manage to go public, and had their own brief bubble moment before collapsing and being gobbled up by a sinking NetZero. Who knows if the business ever would have succeeded with better management; what is clear is that their failures took longer and cost more than they would if someone involved had asked questions like: what are the things we need to know to do this? Do we have that knowledge base in house? And if not, how can we acquire it cheaply and efficiently? The firm was so intent on recruiting stars that it became something like the island of Alphas from Brave New World: a whole firm full of people who thought they should be running the place.

Nonetheless, I both enjoyed my time there and felt I learned a lot - both positively (you learn a lot hanging around with really smart people all day) and negatively (you learn a lot working with and for people making massive mistakes in management and business strategy).