The Big Short

The Big Short (sent to me by the publisher) is Michael Lewis’s best book, and that’s saying a lot. Moneyball was excellent. The Blind Side was excellent. All three are stories of underdog triumph but The Big Short is about a far more important subject, a far more complicated subject, and has a tremendously dark side. You know the saying: Fool me once, shame on you; fool me twice, shame on me. Well, shame on Wall Street for creating the worst financial disaster ever. But then, as Nassim Taleb puts it, the school-bus driver who crashed a bus full of children were given a new bus. Those who created the disaster were put in charge of fixing it. As Steve Eisman, one of Lewis’s main characters, puts it, “I can understand why Goldman Sachs would want to be included in the conversation about what to do about Wall Street. What I can’t understand is why anyone would listen to them.” (Not just listen. They were allowed to dominate the conversation.) Showing that the foolishness of people at the top in American society has no clear limit.

I could hardly stop reading. Endless fascinating detail. Michael Burry, another main character, discovers he has Asperger’s after his son is turned down by several kindergartens and he tries to understand why. I’ve been talking and reading about data analysis my whole professional life, yet Lewis’s story about how means can be terribly misleading is the best I’ve heard. An average credit score of 600 can be due to two scores of 600 or to scores of 500 and 700, with vastly different consequences. (This escaped the averagers.) Sure, I knew about the conflict of interest of bond rating agencies, such as Moody’s, but Lewis describes it so well I loved reading about it again.

Long ago, I blogged about the importance of insider/outsiders — close enough to understand what’s going on yet far enough away to see the truth. Lewis’s heros, who saw that a tremendous crash was coming, are exactly that. Like Harry Markopolos, they were on the fringes of the financial industry. One of them (Eisman) had a gift for tactlessness, another (Burry) had Asperger’s, and a third group ran their fund from a Berkeley garage. Without them, the people at the top (e.g., the head of Goldman Sachs), who run and crashed our financial system, could plausibly say Nobody could have predicted this. Because of Lewis’s heros, they can’t.

7 Replies to “The Big Short

  1. Isn’t it a little disingenuous to talk about this as confirmation of the importance of insider/outsiders when Michael Lewis has explicitly mentioned that he chose the people profiled in large part for their outsider status? You refer to them as his heroes, and that is precisely because they fit an appealing narrative. At the same time, more and more insiders (or at least a certain contingent thereof) are being exposed as having prior knowledge of the coming collapse and exploiting it. Are you saying that the difference lies in their response to that recognition?

  2. I reread the article you linked to, which was my main source for the complaint. On second reading, I see that I misinterpreted a couple of passages. However, I still think it would instead be correct to assert that he failed to profile the folks at Goldman in greater depth because they are insiders, and therefore denied him access. As we are seeing more and more, many of these people did have a sense of what was to come and chose to profit (much like the outsiders). However, because they are complicit, they have an incentive to cover up, whereas the outsiders had no reason not to scream bloody murder. I suppose this expedited the exposure of their wrong doing, which plays further into your portrayal of evens. Thanks for pushing me to re-examine this post. I hope sometime in the future you will explore further the notion of insider-outsider, above just pointing it out where it appears. For me the notion still has the unsettling air of the anecdotal, though we see it praised quite a bit.

  3. Seth: I’m not getting a clear picture of what importance you are attaching to narrative. I can understand that a compelling narrative is important, maybe essential, to maintaining reader/viewer/student interest while absorbing complex information. But you seem to be saying, also, that the presence or absence of a compelling narrative helps to indicate whether the information itself is correct and worthy of attention. Are you saying that incorrect information is inherently difficult to construct a compelling narrative around?

  4. Zach, yeah it is incredibly hard if not impossible to quantify this stuff. Mendel, an insider/outsider, discovered genes. There were maybe 100 biology professors at the time whose research was about the same topic. They were the insiders. But how many people were in Mendel’s position, with both scientific knowledge and outsider freedom? That’s really hard to know.

    Nathan, no I’m not saying that. If you make enough stuff up, you can come up with a compelling story. The Hockey Stick Illusion contains a vast number of references. Its assertions can be checked.

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