When Genius Failed: The Rise and Fall of Long-Term Capital Management

by Roger Lowenstein

The evangelical Merton showed disdain for the very possibility that investors could be anything but calculating automatons, and he blithely ignored the times when their emotions ran riot. Thus, he took credit for the contribution that his theories made to “the portfolio-insurance products of the 1980s”—as if he were blind to the fact that, when real people had tried those products, portfolio insurance had miserably failed.15 Even the word “speculative” he put into quotes, as though the notion that it might apply to real investors was so unpleasant he had to handle it with forceps. Indeed, when Merton referred to “well-known and colorful passages by Keynes,” he was knocking the English economist and man of letters for the sin of letting a vivid, human adjective or two slip into his copy. He had the disease of perfect belief, which makes compromise impossible. When Robert J. Shiller, an American economist, dared to suggest that markets were too volatile to