Having read Joe Hagan’s New York magazine piece on Goldman Sachs, Michael Lewis’ piece in Vanity Fair on Joe Cassano (or AIG, American International Group), Malcolm Gladwell’s piece on overconfidence (he concentrates on the former Bear Stearns’ CEO) and the Der Spiegel article on William White (former chief economist at the Bank for International Settlements at Basel), I have the following thoughts to share:
All four concentrate on individuals— either to praise them or to caricature them. So, they make for interesting reading. The exception is the piece on Goldman Sachs by Hagan. It is not focused on either Lloyd Blankfein or Henry Paulson or Robert Rubin.
Lewis’ piece is easily the pick of the lot. The message of the article is not Cassano’s attitude to writing bond protection, but that when AIG stopped writing protection on subprime mortgages in 2005, Wall Street took over. Had AIG not existed, Wall Street would have found a way to do it by itself. So, the “target” or the “villain of the piece” is not AIG. It is what drove AIG’s behaviour or that of Wall Street subsequently.
The answer is to be found in at least three of the four pieces reviewed here. Go over what Cassano believed. Home prices would not fall at the national level. These things are rated AAA by the credit rating agencies. Ask, in turn, why did they do that. Logically, they must have shared that same underlying belief.
Were they alone? No. Go over to Der Spiegel’s piece on White. Concentrate on the portions that highlight Alan Greenspan’s and Ben Bernanke’s beliefs. They all believed that bad things simply couldn’t happen. Was it overconfidence or a reflection of our cognitive limitation? I think overconfidence is, in itself, a cognitive limitation. So, it is cognitive limitation. Not recognizing it, not accepting it and not acting within such limitations is, then, a failure of intelligence.
So that is why Gladwell’s piece focusing on Jimmy Cayne’s overconfidence should be viewed as illustrative. Unfortunately, we don’t seem to have recognized this still. We have not absorbed this lesson from the crisis of 2008. At least, that is not what we gather from public pronouncements—either from industry or from government or from academics. The concluding portions of Hagan’s piece on Goldman Sachs illustrate that.
In fact, two excellent books—one recent and one not so recent—make this point amply well: Predictably Irrational by Dan Ariely at the Massachusetts Institute of Technology and Complications by Dr Atul Gawande. The overarching reality is that there is uncertainty in every situation and, hence, the scope for large and serious errors in every judgement we make. We know a lot, but what we do not know, or cannot know, is more.
The effects placebos have on our sickness and the effects of suggested morality on our decisions to cheat are simply astounding. These come through in the experiments that Ariely conducted with fellow researchers or the experiments that he recounts in his book.
As for Complications, the entire book is about an acknowledgement of uncertainty in a surgeon’s or doctor’s professional life and, hence, the gross limitations of the judgements they make. According to Gawande, “Three decades of neuropsychology research have shown us numerous ways in which human judgement, like memory and hearing, is prone to systematic mistakes. It is affected by the order in which information is presented and how problems are framed.”
Many scientific articles document the human tendency to see patterns where none existed. They also explain the rationale. The benefit of imaging a snake in the grass, even where it was a mere rustling of grass in the wind, vastly exceeded the cost of seeing this false pattern in a random occurrence.
Hence, human beings started from a position of prudence and caution before they proceeded to take risks. In other words, they demanded a premium for taking risk. Where, when, how and why did we lose our recognition of our frailty? Recently, investors in Singapore queued up for a property launch from the previous day—the launch was brought forward to 8pm from the next morning. According to New York’s attorney general, bankers paid themselves bonuses even in 2008. When did greed begin to overwhelm our alertness for dangers and risks or our sense of social responsibility and obligations?
Those who do not recognize errors are condemned to repeat them. For investors, too, the message is the same: unwillingness to ask questions, to be sceptical, to be less greedy and more mindful of risk means subjecting one’s savings and wealth to the vagaries of booms and busts—caused as much by liquidity as by hubris. The choice is ours, or is it really?
Malcolm Gladwell: http://www.newyorker.com/reporting/2009/07/27/090727fa_fact_gladwell
Joe Hagan on Tenacious G: http://nymag.com/news/business/58094/index1.html
Michael Lewis on The Man Who Crashed the World: http://www.vanityfair.com/politics/features/2009/08/aig200908
Der Spiegel article on The Man Nobody Wanted to Hear: http://www.spiegel.de/international/business/0,1518,635051,00.html
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org