Buried by the Wall Street Crash


As the night draws in and the fire blazes on the half we warn the children by telling them stories. Cinderella teaches them. That if you want to leave the party early leave your phone number rather than a piece of designer footwear. But my stories for the education of the grown-ups stories all true. Tim Harford Gabar close. And listen to my cautionary tales Late One evening on the twentieth of December nineteen fifty four. A small group of people sat together in a living room in oak park a suburb of Chicago. Waiting for the end of the world they were led by a woman named Dorothy Martin. Who's a conduit for messages from aliens? Will God or both the messages were alarming at midnight. The aliens would land a flying saucer in the backyard and convey the true believers to the safety of a planet named Clarion then that door a cataclysmic flood would destroy much of the world now at five minutes to midnight. The believers were waiting. Some were disheveled. Since the aliens had demanded they remove all metal from their clothing. Brock lips bottoms even trousers. It had been hastily. Slashed away by fumbling hands wielding scissors raises some of the group with air out of mere curiosity. Others had sacrificed almost everything for this moment that quit their jobs given away their possessions and said farewell to their families. But what distinguishes this particular apocalyptic cult from all the others is that a small team of social scientists led by the world renowned psychologist. Leon festinger had managed to infiltrate it. They were there to witness what happened at midnight and in particular how the group reacted to the appearance or possibly the non appearance of the aliens gathered around. And I'll tell you another for Sri Times I'll tell you all about what happened with Leon. Festinger Dorothy Martin and the aliens in due course but for a moment. Let's leave them there in Chicago anxiously waiting for the end of days because I have another story to tell you then. It's not a story about crazy cult members but about two economists. Indeed two of the most celebrated economists who ever lived and what these economists have to do with a ufo cult nineteen fifties Chicago. It's very simple just like Dorothy mountain. They tried to see into the future and trying to see into the future. It's a dangerous business. One of the economists. I won't tell you about is the great British polymath. John May Not Canes. You may have heard of him. He's a colossal figure in economics. Overturning the ideas that had gone before him and then reshaping the post war economic system. Many economists still hold themselves Keynesians. Like him or hate him in economics. You can't get much bigger than John Maynard. Keynes except that in his day you could. When canes I strode the world stage he did so in the shadow of another man in nineteen twenty four. The Wall Street Journal tried to describe John Maynard. Keynes this up and coming economist. They reached for comparison that everyone in America would've known Keynes said. The Journal was England's serving Fisher and Irving Fisher was the most famous economist on the planet. But having Fisher wasn't just more famous than Keynes he was brilliant as warm Nobel Prize Winner. Put IT. Fuzhou was anywhere from decades. Dude Asians hit of his time. Some would say he was the greatest economist who ever lived. But if you're thinking I don't hear much about Irving Fisher these days. You're right. He's not the household name. He was one hundred years ago. If you're wondering why. His reputation faded while Keynes's lived on. That is what our cautionary tale is all about. Irving Fisher and John Maynard Keynes. We're very different men in some important ways but they also had a great deal in common. Both were stars at their universities canes at Cambridge in England Fisher at Yale they will both physically impressive. Canes was thin and very tall with piercing eyes. Fisher had the broad chest of a competitive rower. They were both skilled writers charismatic speakers to after witnessing canes giving a speech the Canadian diplomat Douglas Lapan was moved to write. I am spellbound. This is the most beautiful creature I have ever listened to does. He belong to our species or is he from some other order and Fisher and canes also both active investors. They weren't just ivory tower economists but men who believed that their mastery of economics would enable them to make profitable investments that is where the interest in forecasting came in an academic economist might be contents to describe and explain the economy's past but to make money in canes would have to catch a glimpse of the economy's future. Let's meet the Young Irving Fisher. How much there is I want to do. I always feel that I haven't time to accomplish what I wish I want to read much. I want to write a great deal. I want to make money. He's writing from Yale to an old school friend. Money was important Fisher. His father had died of tuberculosis the very week that irving had arrived at Yale. The young man needed to scramble for funds throughout his studies. He understood what it wants to struggle financially. While surrounded by wealth at the age of Twenty Six however Fisher found himself with a small fortune at his disposal. He'd married a childhood playmate. Margaret has it he was the daughter of a wealthy industrialist irving and Margaret's wedding was sumptuous enough to be covered by the New York Times with two thousand invited guests three ministers and extravagant lunch and a wedding cake weighing sixty pounds. They commenced a fourteen month European and turned to a brand new mansion in new haven. It had been built in their absence. As a wedding. Present from Margaret's father was furnished with a library. A music room and spacious offices. If marrying your childhood sweetheart sounds a little too wholesome. I'm just getting started. There are three things you need to know about everything fisher. The first is that he was a health fanatic. He abstained from alcohol. Tobacco meat tea coffee and chocolate one. Dinner guest enjoyed his hospitality. While noting his quirkiness I right through my succession of delicious courses. He dined on a vegetable and a raw egg. He founded the life Extension Institute and persuaded. William Taft who just stepped down as president to be its chairman in one thousand nine hundred fifteen. When he was nearly fifty years old he published a book titled How to Live. How to live? Now that some real ambition. It was a huge bestseller freakonomics of its day and from a modern perspective. It's hilarious. I advocate a son bath commonsense must dictate its intensity and duration. It is important to practice thorough massification chewing to the point of natural involuntary swallowing. He even adds a discussion of the correct angle between the feet. While walking about seven or eight degrees of towing in each foot and there's a short section on eugenics which really hasn't aged well but while it's easy to laugh how to live is in many ways as far ahead of its time as fishes economic analysis describing exercises preaching mindfulness and at a time when the majority of doctors were smokers correctly warning that tobacco causes cancer. The second thing you need to know about irving was that he believed in the power of rational quantified analysis in the modern. Study of scientific clothing. There is a new unit. The CLO- This is a technical unit for measuring warming. Power of clothing. There's also the money that's the third thing you need to know. Having Fisher was rich and not just because of his wife's inheritance making money was a matter of pride for Fisher there. Were the book royalties from how to. Live. There were his inventions most notably a forerunner of the ROLODEX. Away of organizing business cards. He sold that invention to a stationary company for six hundred sixty thousand dollars in cash. Many millions of dollars in today's terms Fisher turned his academic research into a major business. Operation called the Index Number Institute. It sold data forecasts and analysis as syndicated package to newspapers across the United States. He called it. Irving Fisher's business page with such a platform Fisher was able to evangelize about his approach to investment which broadly speaking was to bet on American growth by buying shares in the new industrial corporations using borrowed money. Such burrowing is called leverage since it magnifies both profits and losses but during the nineteen twenties stock market. Investors had few losses to worry about share. Prices were soaring Fisher wrote to his old childhood friend to inform him that he's I'm Bishen had been fulfilled. We are all making a lot of money in the summer of Nineteen Twenty Nine Irving Fisher was a bestselling author inventor data. Pioneer friend of presence entrepreneur health campaigner syndicated columnist and the greatest academic economists of his generation. And in that summer of one thousand nine hundred ninety nine a millionaire. Many Times over Irving Fisher was able to boast to his son that a renovation of the family mansion had been paid for not by the hazard family money but by Irving Fisher himself that achievement matter to him. Fisher's own father hadn't lived to see his seventeen year. Old Boy grow into one of the most respected figures of the age as irving and his son watched a mansion reshaped before them he could perhaps be forgiven pride. This episode is brought to you by the new podcast go and see hosted by our very own Malcolm Dodwell produced by the team behind revisionist history go and seek is a six part series focused on Alexis philosophy of Ganci again butson which means teeth yourself an idea that stem list from the belief that if you experience something yourself you have a better understanding people how to create something Ford in a series. Lexus invites Malcolm to Japan. Discover that unconventional thinking and processes firsthand find out. How a Japanese tea ceremony influenced the engineering of a car window. How the sound of an engine is like a musical composition elicit certain emotions how Understanding Samurai warriors is led to a suspension innovation? Malcolm loans that no detail is left behind and that a car company and learn more about my studying people go inside lexuses headquarters in Japan ride along on a top secret test track with a master driver. Sit in the expertly designed seat that actually lowest to welcome you into the vehicle. Follow Malcolm on his journey. Starting March the fifth. Have you liked to listen? Visit LEXUS DOT com slash curiosity more stories. Like these John Maynard. Keynes was the ultimate insider as a schoolboy. He was educated at Eton College. Just like Britain's first prime minister and nineteen of since like his father. He became a senior academic. A fellow of King's College. The most spectacular of all Cambridge colleges his job during the first world. War was managing both debt and currency on behalf of the British Empire. He'd barely turned thirty. He knew everyone he whispered. In the ear of prime ministers he had the inside track on whatever was going on in the British economy. May Not Bank of England here just wanted to let you know that interest rates will be rising Tamara Champ but this child of the British establishment was a very different person to his American rival. Irving Fisher. He loved fine wines enrich food. He gambled monte-carlo is sex. Life was more like a nineteen seventies pop star in nineteen hundreds economist bisexual. Poly-amorous eventually settling down. Not with his childhood sweetheart but with Russian Ballerina. One of Keynes's ex-boyfriends was the best man at their wedding. And Canes was adventurous in other ways to in one thousand nine hundred eighty nine for example as the first World War was raging and the German army was camped outside Paris canes caught wind of the fact that in Paris the Great French impressionist artist at Garda Guy was about to auction his vast collection of pieces by franz his greatest nineteenth century painters and so- canes embarked on an Insane Adventure. I he spoke to the Chancellor of the Exchequer the UK's senior Treasury minister asking for a phone for purchasing art twenty thousand pounds. That's millions in. Today's money may not the first occasion that I've ever known you in favor of any expenditure. John won't so ever remember. The British Treasury was four years into fighting the most devastating war the planet yet seen the Canes New House against his way my picture coup was a whirlwind affair carried out in a day and a half before anyone had time to reflect on bought. They were doing. I think the chance was very much amused at my wanting to buy pictures. And eventually let me have my way as a sort of a joke. Some joke escorted by destroyers and a silver ship watching overhead canes crossed the channel firms with the director of London's National Gallery who shaved off his moustache so that nobody recognized him and just as dagoes auction begins the German artillery starts up some people panic and hurry out Canes Pounces Buying Twenty seven pieces at rock bottom prices for the National Gallery. Andy buys a few for himself. Including Suzanne which these days would be regarded as a better by than anything the National Gallery director chose it costs canes just three hundred seventy pounds then flee back to the English Channel and Cross home with a convoy of hospital ships exhausted after his nonstop adventure canes calls in on some friends. I've got in my suitcase. It was too heavy to carry. So I've left it in the ditch behind the gate. What Irving Fisher would have made it at all? I do not know yet like Fisher. Keynes was also pursuing an investment career. It wasn't just an art. He set up what some historians described as the first hedge fund to speculate on currency movements. He raised money from rich friends. And from his own father to whom he made the not entirely reassuring comment when all those this high stakes. Gambling amuses me. Initially canes made money fast but then a brief spasm in the currency markets wiped out his phoned in nineteen twenty awkward but he went back taste investors including his own father and asked them to trust him with more of that money. I am not in a position to risk any capital myself. Having quite exhausted my resources remember. This is John Maynard. Keynes the man who swayed a wartime government to speculate in a Parisian auto auction. The man a Canadian diplomat mistook for an angel. I anticipate very substantial profits with very good probability if you are prepared to stand the racket for a couple of months of course. They gave him the money he wanted. Canes was back in profit by nineteen twenty two so having made a small fortune lost it and made it again. Canes turned to the vast investments of his own college king's Cambridge Canes persuaded his fellow academics to let him adopt a radical making strategy. He would forecast booms and recessions and move in and out of different economic sectors accordingly. Such an approach makes sense. Only if you actually can forecast recessions. But Canes was the leading economists in the country and a man who remember would get friendly phone calls from the Bank of England if anyone could see into the future of the British economy it was John Maynard. Keynes by late nine thousand nine hundred thousand nine both Irving Fisher and John Maynard. Keynes were rich famous respected and standing on the brink of a financial precipice. The Cataclysmic Wall Street crash followed by the Great Depression. The worst peacetime economic calamity to befall the Western world on the two greatest economists of the Age Fishe and Canes. Both of them failed to see it coming. Experts don't have stellar reputation for forecasting in one eighty-seven the young canadian-born psychologist named Philip. Tedtalk became curious about the entire prognostication racket. Tet Lock had been interviewing Cold War experts and he soon found himself frustrated by their wildly different predictions their refusal to change their minds when they were wrong and the endless excuses for their forecasting failures. Tech's response was patient. Painstaking and quietly brilliant. He began to collect forecasts from almost three hundred. Experts eventually accumulating twenty seven thousand five hundred predictions. He focused on politics and geopolitics throwing in a few questions from areas such as economics. Ted Talk sought clearly defined questions enabling him with the benefit of hindsight to pronounce each forecast right or wrong. Then Ted lock simply waited while the results rolled in eighteen years Ted lock published his conclusions in two thousand and five. In a subtle and scholarly book expert political judgment found that his experts were terrible forecasters both in the simple sense that what they predicted often didn't happen. And in the D percents that the experts had little idea of when they should be confident and when they should admit that they didn't have a clue. Expert forecasts were barely more accurate than chimpanzees throwing darts most people hearing about Ted talks research simply conclude that either the world is too complex to forecast or the experts are too stupid to forecast it or both on April Fools Day in twenty thirteen full days. I received an email from Philip deadlock inviting me to join what he described as a major new research program it was funded by the. Us intelligence services. This program continued and expanded. Tet Locks look study in the form of a full costing tournament. You would simply log onto a website. Give your best judgement about matters. You may be following anyway and that judgment if and when you feel it should be when time passes and forecasts are judged you could compare your results with those of others. More than twenty thousand people signed up some professionals and some amateurs and his colleagues ran experiments on this army of volunteers giving them different kinds of training or assembling them into teams to see if that helped. I didn't join in a told myself I was too busy. I suppose I was chickening out too but the fundamental reason that I didn't participate was because Ted talks work had already persuaded me that the forecasting task was impossible. But it wasn't. This vast new tournament identified a select group of people whose forecasts while by no means perfect. Were vastly better than the dog. Throwing CHIMP STANDARD. Ten o'clock with an uncharacteristic touch of hyperbole called them super forecasters so what makes a super forecaster the super forecasters a what psychologists call actively open minded thinkers people who didn't cling to tightly to a single approach who were comfortable abandoning an old view in the light of fresh evidence so new arguments and who embraced disagreements with others as an opportunity to learn the secret of super forecasting. It's a willingness to change your mind. Philip Tet locks work on super forecasting has rightly attracted a huge amount of attention. But I think there's a message in that work that's often overlooked a willingness to change. Your mind doesn't just help. You make better forecasts it. Helps you cope with failed predictions to? Let's return to John Maynard. Keynes and Irving Fisher. Both of them remember had persuaded themselves that their expertise in economics should lead to investment success. Both of them were wrong. The stock market crash of nineteen thousand. Nine court each of them by surprise both lost a lot of money yet. Here's a curious fact. Despite his failure canes died a millionaire and perhaps the most celebrated economist in the World Fisher made basically the same mistake yet. It ruined both his finances and his reputation why the difference in their fortunes in a way. The answer is ridiculously simple. Canes changed his mind and changed his Investment Strategy Fisher changed neither but that only raises a deeper question. Why did Keynes Change while Fisher? Didn't canes had lost one fortune in nineteen twenty and survived the experience by nineteen twenty nine before the crash he was again pondering his shortcomings his investment strategy based on the assumption that he could predict the ups and downs of the business. Cycle wasn't working out. He started thinking about how to change his approach. Canes lost more than eighty percent of his net worth in twenty nine but even afterwards he was still rich in short he had plenty of evidence. That had made a mistake. He had experience of making mistakes in the past bouncing back and he was still comfortably off. Why not change by the Early Nineteen Thirties? Cames had abandoned business cycle forecasting entirely the greatest economist in the world had decided he just couldn't do it well enough to make money as time goes on. I get more and more convinced that the right method investment to put fairly large sums enterprises which one things one knows something about and in the management of which one thoroughly believes. Forget what the economy's doing just fine. Great companies and invest for the long term and if fat approach sounds familiar. It's most famously associated with Warren Buffett. The world's richest investor that a man who loves to quote John Maynard Keynes. Keynes is rightly viewed today as a successful investor. At King's college he recovered from the poor performance of the early years he secured high returns with modest risks outperforming the stock market as a whole many times over. It's an impressive reward for being able to change your mind. Having Fisher was in a very different situation Irving Fisher's business page had graced newspapers across the country when things turned Sour Fisher was escape goat in front of the entire United States. The New York Times reported that the bubble had been blamed on. Us Treasury Secretary Mellon former president. Coolidge and Professor Irving Fisher of Yale and Professor Irving Fisher of Yale was in deep financial. Trouble the fact that his investments were made using leverage meant that both gains and losses were magnified what had seemed like brilliance before the crash was catastrophic. Afterwards Fisher was staring in the face of bankruptcy the loss of his house his businesses everything for example one of fishes major investments was in the stationery company Remington rand. It was fifty eight dollars a share before the crash dropping to twenty eight dollars within a few months at that point Fisher borrowed more money to invest but the share price kept falling all the way to one dollar you can imagine his desperation but surely being in such a tight spot would have made Fisher more likely to adapt his strategy. Not necessarily a received another message. Everyone gets your overcoats and stand by okay. Okay Okay. Everyone sit quietly in the living room. We shall act as if this were just an ordinary gathering of friends. Remember Dorothy Maltin an had. Ufo called. They've persuaded themselves that. The world is about to be flooded and they will be saved at midnight. I aliens delivering them safely to Planet Clarion and remember too that the psychologist. Leon festinger has infiltrated the Colt. His researchers were there that night to observe what happened. Festinger had a striking prediction. That when the aliens didn't appear many cultists wouldn't be discouraged by the clear failure of Mrs Martens Prophecy or feel angry and betrayed. Instead they would redouble the efforts to believe another reporter. No doubt just hang up. Preparations cannot be interrupted. We'll call them later. If we have anything for hasn't the clock has made national starts with a couple of minutes back. Caught is look at the clock. I set myself this afternoon and it's not midnight yet one minute to midnight midnight. The aliens did not appear. Nobody said a word. One of the more casual cult members who've expressed skepticism before picked up his coat and hat and walked out no comment. We have nothing to tell you. People tried to make sense of what was happening or rather not happening. The theories grew ever wilder. People were confused exhausted. Leon festinger observers tried to ask why the saucer hadn't come the group didn't want to talk about it and then at four o'clock in the morning Dorothy. Martin put her face in her hands and began to weep one fasting researchers stepped outside for some air and discussed the situation the leading cult member. I've had a long way to go I've given up just about everything cut everyti- burned every bridge. Turn my back on the world. I CAN'T AFFORD TO DOUBT I. I have to believe they went back inside but four forty five. Am Dorothy Maltin hand. Shaking picked up a pencil and began to ride it was. She said a new message. Because of the faith shown by that small group of people F- had been spared destruction. A higher power would save not only the small Colt but the entire human race At this the cultists acquired new fervor going out to greet the dawn and tell people the good news. They suddenly became evangelists issuing statements to the press. Ravin batting them away. Dorothy is this the first time you've called the newspaper yourself? Oh yes. This is the first time I've ever called them. I've never had anything to tell them before. But how I feel it's urgent. We should call the Associated Press and the United Press. This thing is pretty important. It's a very big thing bigger than just one newspaper. I don't think the Creator would want this to be an exclusive story. Any not definitely not right correct. It's it's got to be for everybody for everybody correct. Yes festinger had been right. His view that the cultists would redouble efforts to believe in. The face of failure was based on a theory. He called cognitive dissonance. Cognitive dissonance predicts that people will start to squirm when they hold contradictory thoughts. Such as it's worth quitting my job in order to be collected by aliens and the aliens did not show up. People often deny the obvious in order to reduce the discomfort and the more suffering people of put themselves through on behalf of a belief. The more likely they are to cling onto it otherwise. Olot suffering would seem ridiculous. Would it not fasting? Gas Theory applies perfectly to poor Irving Fisher in the nineteen thirties. He believed himself to be a man of logic and reason and yet he was deeply in debt the most famous financial basket case in the country in fact if people today not just one thing about Irving Fisher. It's this two weeks before the Wall Street crash began he was quoted by The New York Times. Stocks have reached what looks like a permanently high plateau. How'd you back away from that? Fisher went deeper. And deeper in debt to the tax man and to his brokers towards the end of his life he was a marginalized figure a widower an easy target for scam artists and their get rich quick schemes. Because he was always on the lookout for a way to revive his fortune he never did. Although canes had much in common with Fisher was a different kind of character recall canes his common to his father this high stakes. Gambling amuses me. The monte-carlo Gambler knew all along but wall investing was a fascinating game. It was a game nonetheless and one shouldn't take an unlucky throw of the dice too much to heart. When his investments flopped he tried something else Fisher and canes died within a few months of each other not long after the end of the Second World War Fisher had become irrelevant. Canes was the most influential economist on the planet fresh from shaping the world the IMF and the entire global financial system looking back canes reflected. My only regret is that I have not drunk more champagne in my life. But he's remembered far more for words that he probably never said nevertheless live by them when my information changes. I ultimate conclusions. What do you do sir? If only had taught that lesson to Irving Fisher. You've been listening to cautionary tales if you'd like to find out more about the ideas in this episode including links to our sources the show notes on my website. Tim Harford Dot Com cautionary tales written and presented by me. Tim Harford our producers are Ryan Deli and Marilyn rust the sound designer and mixer was Pasqua wise who also composed the amazing music. Starring in this season are Allen. Coming Archie pange rb Toby Stevens and Russell tovy alongside Enzo Chilean at Gahan Melanie Gutteridge Messiah Monroe and Rufus. Right and introducing Malcolm Bradwell. Thanks to the team at Pushkin Industries. Julia Barton had a fain meal. Lebel Kalemie Jacob Weisberg and of course the mighty Malcolm Dodwell. Thanks to my colleagues at the Financial Times

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