The real reason for the latest hedge-fund disaster.

Another hedge fund blew up this week. Don't worry if you missed it, though, because you already know the story:

An aggressive trader places risky bets, gets lucky, and makes himself and his bosses rich. The bosses, eager to keep the gravy train rolling, let the trader make bigger, riskier bets (and, in this case, give him a reported $75 million to $100 million bonus and his own personal trading floor). To head off concerns that they are taking big chances, the bosses extol their risk controls and "multi-strategy" expertise. Then the trader makes some huge, risky bets, gets unlucky, and loses $6 billion in a few weeks.

So crashed Amaranth Advisors, the Connecticut-based hedge fund, following the same trajectory as Long Term Capital Management, Enron, Barings Bank, and dozens of other firms, all staffed with brilliant traders and Ph.D.s, all apparently way too sophisticated to make moronic billion-dollar mistakes.

In the immediate aftermath, such gigantic failures are usually attributed to the moronic mistakes. In Amaranth's case, for example, a 32-year-old named Brian Hunter was so sure he knew what natural gas prices would do that he bet the firm. Amaranth's bosses and risk-control people, meanwhile, concluded that the risks were worth taking because—well, for starters, because it was apparently inconceivable that gas prices could fall to levels not seen since … 2004.

It's true that such mistakes are colossally stupid. But when smart people keep making the same stupid mistakes, it's safe to conclude that idiocy is not the only factor at work. Indeed, when you start to examine the market carefully, it's clear that these errors actually have a deeper and more predictable cause.

The only plausible conclusions that can be drawn from the crackups of Amaranth, et al, are that 1) they didn't know the risks they were taking, or 2) they knew and didn't care.

Hedge funds like Amaranth have "risk-control" units that do nothing but analyze holdings and try to anticipate worst-case scenarios. A common factor in such blowups is that the firms analyze time frames too short to provide an accurate picture of risk. A decade or two of price behavior, for example, doesn't usually capture the range of potential outcomes that prudent traders must take into account, and even when it does, the future can always be different. If the firms really "didn't know" the risks, therefore, they either didn't do their homework—or left their brains at the beach.

Given the frequency with which this short-memory mistake is made, it is hard to chalk it up to ignorance. According to the New York Times, for example, the head of Amaranth lived through a similar near-catastrophe at his prior fund. What's more likely is that Amaranth had a sense of its risk but deemed it worth taking. To understand why it would do this, you need to distinguish between the risks faced by a hedge fund's investors and those faced by a hedge fund's employees.

The risks faced by hedge-fund investors are obvious: They might lose money—a lot, in fact, if prices move the wrong way. This is a strong incentive for investors to hope that their hedge funds are careful. It is not, unfortunately, a strong incentive for the funds to be careful.

The risks facing hedge-fund employees, meanwhile—and, importantly, the employees of "fund-of-funds" that invest in hedge funds—encourage the funds to swing for the fences. Unless the employees keep most of their net worth in their funds, for example, they are not in danger of losing their money or careers. The total of $6 billion that Amaranth vaporized this month belonged mostly to corporations, individuals, and lenders, not Amaranth employees, and fired hedge-fund staffers can usually get jobs at other funds (or start their own).