EppsNet Archive: Michael Lewis

Get Rich Making Dumb Decisions

31 Mar 2014 /

The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side — the entire financial system, essentially — had gambled with the odds against them. Up to this point, the story of the big short could not be simpler. What’s strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich. . . . The CEOs of every major Wall Street firm were also on the wrong end of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.

What are the odds that people will make smart decisions about money if they don’t need to make smart decisions — if they can get rich making dumb decisions?

— Michael Lewis, The Big Short

EppsNet Book Reviews: The Big Short by Michael Lewis

10 Nov 2013 /

I worked in the information technology department of a mortgage bank in the run-up to the 2007 implosion of the subprime mortgage market . . .

Given that it was fairly evident at the time that complicated financial instruments were being dreamed up for the sole purpose of lending money to people who could never repay it, it’s remarkable that very few people foresaw the catastrophe and that even fewer actually had the nerve to bet on it to happen.

Long story short, the major rating agencies — Standard and Poor’s and Moody’s — were incompetent in their rating of subprime mortgage bonds, giving investment-grade and, in some cases, triple-A ratings to high-risk instruments. A lot of people took the ratings — which implied that subprime mortgage derivatives were no riskier than U.S. Treasury bonds — at face value and acted accordingly.

But there were also some interesting psychological factors in play, not specific to the investment arena:

  1. Nothing really bad had ever happened in the subprime mortgage market. Every tiny panic was followed by a robust boom. Since nothing really bad had ever happened (albeit over a short and statistically insignificant period of time), nothing really bad ever would happen.
  2. The collapse of the subprime mortgage market would be a national catastrophe, and was unlikely precisely because it would be such a catastrophe. Nothing that bad could ever actually happen.

The Big Short

10 Jan 2012 /

What is amazing is not just that people are greedy and prone to engage in ethically questionable activities; the big lesson is how people can reach unimaginable positions of power and essentially be (a) incompetent, and (b) not willing to do even the most mundane and trivial parts of their job.

— Jeffrey Pfeffer, reviewing The Big Short: Inside the Doomsday Machine, by Michael Lewis (quoted on WSJ.com)