THE BLOG
05/19/2010 05:12 am ET Updated 4 days ago

Five Lessons on Rightness From Michael Lewis's The Big Short

In my review of Michael Lewis's The Big Short, I argue that it is ultimately a book about the factors that conspire to lead us into either dazzling rightness or staggering wrongness. To an almost eerie degree, Lewis's otherwise rag-tag protagonists embody the qualities you need to have if you care about being right. I don't mean if you care about looking right or feeling right. I mean if you care about trying to assemble, to the best of our flawed human abilities, an accurate picture of the world. Herewith, five reasons the guys in The Big Short were able to foresee the coming financial calamity -- and how the rest of us get stuff right, too.

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  1. They were all outsiders -- in fact, in personality, or in both. As a result, they were neither unduly awed by authority nor unduly swayed by society. They didn't give a damn what Ben Bernanke or the CEO of Goldman Sachs had to say, and they either didn't know or didn't particularly care what the masses in the financial mainstream were thinking. Being a few thousand miles from Manhattan helped; so, probably, did Asperger's Syndrome (which one of the main characters is diagnosed with, and which is often characterized by a certain obliviousness to other people's thoughts and expectations).
  2. They were empiricists to an astonishing, almost Cartesian, degree. They cared about facts. They devoured facts. Lewis describes one of his characters, Michael Burry as "the only human being on earth who read [the prospectuses for subprime mortgage bonds], apart from the lawyers who drafted them." (Compare that to the supposed consumer-loan experts who, when asked to estimate the amount of subprime mortgages in their own financial products, guessed figures between 10 and 20 percent. The actual number was 95 percent.) All of us incline toward bending the facts to fit our theories. These guys, to the best of their abilities, adjusted their theories to respect the facts.
  3. Notwithstanding this appetite for knowledge, they had a healthy respect for the unknowable. Lewis writes that his protagonists were "predisposed to feel that people, and by extension markets, were too certain about inherently uncertain things." The past, they understood, did not perfectly predict the future. The unknown, the uncertain, the unlikely: any of that could occur. Other people dismissed some possibilities (the collapse of the global economy, say) as simply unthinkable, by which they usually meant too alien and painful to think about. But these guys did not believe in unthinkability. See point #2: thinking -- Kelvin-scale cool thinking -- was the coin of their realm.
  4. Accordingly, they constantly questioned their own convictions. Most of us gravitate toward trying to verify our beliefs -- that is, if we bother investigating their validity at all. Lewis's protagonists gravitated toward falsification. For chapters on end, we watch them pleading with Wall Street insiders to explain where they (the protagonists, that is) have gone wrong. It is only when no one can do so that they begin to suspect they are right.
  5. Finally, and most interestingly, they know about all the above strategies and deliberately employ them; they think about how they think. "I hated discussing ideas with investors," Michael Burry says, "because then I became a Defender of the Idea, and that influences your thought process." After investor Charlie Ledley and his partners made a fortune shorting the subprime mortgage market, they "actually spent time wondering how people who had been so sensationally right (i.e., they themselves) could preserve the capacity for diffidence and doubt and uncertainty that had enabled them to be right." Psychologists and philosophers call this kind of thinking meta-cognition, and (as countless psychological studies can attest) it is one of the best things you can do to minimize your odds of being wrong.

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