# Buried by the Wall Street Crash

An episode of [Cautionary Tales with Tim Harford](https://invisiblenetwork.ai/podcast/1484511465), 6 Dec 2019, 36 min.

Audio: https://podtrac.com/pts/redirect.mp3/pdrl.fm/18db03/tracking.swap.fm/track/SxlTEPDY7xDg35RXkASs/traffic.omny.fm/d/clips/e73c998e-6e60-432f-8610-ae210140c5b1/c0ae8c6e-22f0-4e9b-ac1c-ae390037ac53/263548bf-4319-4487-aaeb-ae39003fbd27/audio.mp3?utm_source=Podcast&in_playlist=7f5a4714-6b10-4ccf-a424-ae390037ac70

Both of the world’s greatest economists, Irving Fisher and John Maynard Keynes, thought they could see into the future and make a killing on the stock market - and then both were wiped out by the Wall Street Crash. One died a pauper, the other millionaire. What does it take to bounce back from ruin? Oh... and UFOs. Read more about Tim's work at http://timharford.com/ Learn more about your ad-choices at https://www.iheartpodcastnetwork.com See omnystudio.com/listener for privacy information.

## Transcript

[0:15] Speaker 1: Pushkin. As the night draws in and the fire blazes
[0:26] Speaker 1: on the hearth. We warn the children by telling them stories.
[0:31] Speaker 1: Cinderella teaches them that if you want to leave the
[0:33] Speaker 1: party early, leave your phone number rather than a piece
[0:36] Speaker 1: of design of footwear. But my stories are for the
[0:41] Speaker 1: education of the grown ups, and my stories are all true.
[0:47] Speaker 1: I'm Tim Harford. Gather close and listen to my cautionary tales.
[1:12] Speaker 1: Late one evening on the twentieth of December nineteen fifty four,
[1:17] Speaker 1: a small group of people sat together in a living
[1:20] Speaker 1: room in Oak Park, a suburb of Chicago, waiting for
[1:24] Speaker 1: the end of the world. They were led by a
[1:27] Speaker 1: woman named Dorothy Martin, who was a conduit for messages
[1:32] Speaker 1: from aliens or God, or both. The messages were alarming.
[1:39] Speaker 1: At midnight, the aliens would land a flying saucer in
[1:43] Speaker 1: the backyard and convey the true believers to the safety
[1:47] Speaker 1: of a planet named Clarion. Then at dawn, a cataclysmic
[1:53] Speaker 1: flood would destroy much of the world. Now, at five
[1:59] Speaker 1: minutes to midnight, the believers who were waiting some were disheveled,
[2:04] Speaker 1: since the aliens had demanded they remove all metal from
[2:07] Speaker 1: their clothing. Braclip buttons, even trouser zips had been hastily
[2:12] Speaker 1: slashed away by fumbling hands wielding scissors or razors. Some
[2:17] Speaker 1: of the group were there out of mere curiosity. Others
[2:20] Speaker 1: had sacrificed almost everything for this moment. They'd quit their jobs,
[2:25] Speaker 1: given away their possessions, and said farewell to their families.
[2:29] Speaker 1: But what distinguishes this particular apocalyptic cult from all the
[2:34] Speaker 1: others is that a small team of social scientists, led
[2:39] Speaker 1: by the world renowned psychologist Leon Festinger, had managed to
[2:43] Speaker 1: infiltrate it. They were there to witness what happened at midnight,
[2:51] Speaker 1: and in particular, how the group reacted to the appearance
[2:56] Speaker 1: or possibly the non appearance, of the aliens. Gather round,
[3:04] Speaker 1: and I'll tell you another cautionary tale. I'll tell you
[3:33] Speaker 1: all about what happened with Leon Festinger, Dorothy Martin and
[3:37] Speaker 1: the aliens in due course, but for a moment, let's
[3:40] Speaker 1: leave them there in Chicago anxiously waiting for the end
[3:44] Speaker 1: of days, because I have another story to tell you.
[3:48] Speaker 1: And it's not a story about crazy cult members, but
[3:51] Speaker 1: about two economists, indeed, two of the most celebrated economists
[3:58] Speaker 1: who ever lived. And what do these economists have to
[4:01] Speaker 1: do with a UFO cultin nineteen fifties Chicago. It's very simple.
[4:07] Speaker 1: Just like Dorothy Martin, they tried to see into the future,
[4:10] Speaker 1: and trying to see into the future it's a dangerous business.
[4:16] Speaker 1: One of the economists I want to tell you about
[4:18] Speaker 1: is the great British polymath John Maynard Keynes. You may
[4:22] Speaker 1: have heard of him. He's a colossal figure in economics,
[4:25] Speaker 1: overturning the ideas that had gone before him and then
[4:28] Speaker 1: reshaping the postwar economic system. Many economists still call themselves Keynesians,
[4:35] Speaker 1: like him or hate him. In economics, you can't get
[4:38] Speaker 1: much bigger than John Maynard Keynes, except that in his
[4:43] Speaker 1: day you could. When Caynes first strode the world stage,
[4:49] Speaker 1: he did so in the shadow of another man. In
[4:53] Speaker 1: nineteen twenty four, The Wall Street Journal tried to describe
[4:56] Speaker 1: John Maynard Caynes, this up and coming economist. They reached
[5:00] Speaker 1: for a comparison that everyone in America would have known.
[5:04] Speaker 1: Canes said the journal was England's Irving Fisher, and Irving
[5:11] Speaker 1: Fisher was the most famous economist on the planet. But
[5:15] Speaker 1: Irving Fisher wasn't just more famous than Kenes. He was
[5:19] Speaker 1: brilliant as one Nobel Prize winner put it, Fiesel was
[5:23] Speaker 1: anywhere fully decade to dooge. In additions ahead of his time,
[5:28] Speaker 1: some would say he was the greatest economist who ever lived.
[5:33] Speaker 1: But if you're thinking I don't hear much about Irving
[5:36] Speaker 1: Fisher these days, you're right. He's not the household name
[5:41] Speaker 1: he was a hundred years ago. If you're wondering why
[5:44] Speaker 1: his reputation faded while Canes is lived on, that is
[5:49] Speaker 1: what our cautionary tale is all about. Irving Fisher and
[5:56] Speaker 1: John Maynard Keynes were very different men in some important ways,
[6:00] Speaker 1: but they also had a great deal in common. Both
[6:03] Speaker 1: were stars at their universities, Canes at Cambridge in England,
[6:07] Speaker 1: Fisher at Yale. They were both physically impressive. Canes was
[6:11] Speaker 1: thin and very tall, with piercing eyes. Fisher had the
[6:15] Speaker 1: broad chest of a competitive rower. They were both skilled
[6:18] Speaker 1: writers charismatic speakers too. After witnessing Canes giving a speech,
[6:24] Speaker 1: the Canadian diplomat Douglas Lapan was moved to write, I
[6:27] Speaker 1: am spellbound. This is the most beautiful creature I have
[6:31] Speaker 1: ever listened to. Does he belong to our species? Or
[6:35] Speaker 1: is he from some other order? And Fisher and Canes
[6:40] Speaker 1: also both active investors. They weren't just Ivory Tower economists,
[6:45] Speaker 1: but men who believed that their mastery of economics would
[6:49] Speaker 1: enable them to make profitable investments. That is where their
[6:52] Speaker 1: interest in forecasting came in. An academic economist might be
[6:57] Speaker 1: content to describe and explain the economy's past, but to
[7:02] Speaker 1: make money, Fisher and Canes would have to catch a
[7:04] Speaker 1: glimpse of the economy's future. Let's meet the young being Fisher,
[7:10] Speaker 1: how much there is I want to do? I always
[7:13] Speaker 1: feel that I haven't time to accomplish what I wish.
[7:16] Speaker 1: I want to read much. I want to write a
[7:19] Speaker 1: great deal. I want to make money. He's writing from
[7:24] Speaker 1: Yale to an old school friend. Money was important to Fisher.
[7:29] Speaker 1: His father had died of tuberculosis the very week that
[7:34] Speaker 1: Irving had arrived at Yale. The young man needed to
[7:37] Speaker 1: scramble for funds Throughout his studies. He understood what it
[7:41] Speaker 1: was to struggle financially while surrounded by wealth. At the
[7:46] Speaker 1: age of twenty six, however, Fisher found himself with a
[7:49] Speaker 1: small fortune at his disposal. He had married a childhood playmate,
[7:54] Speaker 1: Margaret Hazard, who was the daughter of a wealthy industrialist
[7:57] Speaker 1: Irving and Margaret's wedding was sumptuous enough to be covered
[8:01] Speaker 1: by the New York Times. With two thousand invited guests,
[8:05] Speaker 1: three ministers, an extravagant lunch, and a wedding care weighing
[8:10] Speaker 1: sixty pounds, they commenced a fourteen month European honeymoon and
[8:15] Speaker 1: returned to a brand new mansion in New Haven. It
[8:19] Speaker 1: had been built in their absence as a wedding present
[8:22] Speaker 1: from Margaret's father, had was furnished with a library, a
[8:26] Speaker 1: music room, and spacious offices. If marrying your childhood's sweetheart
[8:31] Speaker 1: sounds a little too wholesome, I'm just getting started. There
[8:37] Speaker 1: are three things you need to know about Irving Fisher.
[8:40] Speaker 1: The first is that he was a health fanatic. He
[8:43] Speaker 1: abstained from alcohol, tobacco, meat, tea, coffee, and chocolate. One
[8:49] Speaker 1: dinner guest enjoyed his hospitality while noting his quirkiness. Well,
[8:53] Speaker 1: I ate right through my succession of delicious courses. He
[8:58] Speaker 1: dined on a vegetable and a raw egg. He founded
[9:03] Speaker 1: the Life Extension Institute and persuaded William Taft, who had
[9:08] Speaker 1: just stepped down as president, to be its chairman in
[9:11] Speaker 1: nineteen fifteen, when he was nearly fifty years old, he
[9:14] Speaker 1: published a book titled How to Live. How to Live Now,
[9:19] Speaker 1: that's some real ambition. It was a huge bestseller, the
[9:23] Speaker 1: free economics of its day, and from a modern perspective,
[9:27] Speaker 1: it's hilarious. I advocate a sunbath, common sense must dictate
[9:32] Speaker 1: its intensity and duration. It is important to practice thorough mastication,
[9:38] Speaker 1: chewing to the point of natural involuntary swallowing. He even
[9:41] Speaker 1: adds a discussion of the correct angle between the feet
[9:45] Speaker 1: while walking, about seven or eight degrees of out tying
[9:48] Speaker 1: in each foot. And there's a short section on eugenics,
[9:52] Speaker 1: which really hasn't aged well. But while it's easy to laugh,
[9:57] Speaker 1: How to Live is in many ways as far ahead
[10:00] Speaker 1: of its time as Fisher's economic analysis, describing exercises preaching mindfulness,
[10:06] Speaker 1: and at a time when the majority of doctors were smokers,
[10:09] Speaker 1: correctly warning that tobacco causes cancer. The second thing you
[10:14] Speaker 1: need to know about Irving was that he believed in
[10:16] Speaker 1: the power of rational quantified analysis. In the modern study
[10:21] Speaker 1: of scientific clothing, there is a new unit, the cloe.
[10:26] Speaker 1: This is a technical unit for measuring the warming power
[10:29] Speaker 1: of clothing. There's also the money that's the third thing
[10:33] Speaker 1: you need to know. Irving Fisher was rich, and not
[10:37] Speaker 1: just because of his wife's inheritance. Making money was a
[10:40] Speaker 1: matter of pride for Fisher. There were the book royalties
[10:43] Speaker 1: from How to Live. There were his inventions, most notably
[10:47] Speaker 1: a forerunner of the rolodex, a way of organizing business cards.
[10:51] Speaker 1: He sold that invention to a stationary company for six
[10:55] Speaker 1: hundred and sixty thousand dollars in cash, many millions of
[10:59] Speaker 1: dollars in today's terms. Fisher turned his academic research into
[11:03] Speaker 1: a major business operation called the Index Number Institute. It
[11:07] Speaker 1: sold data, forecasts and analysis as a syndicated package to
[11:11] Speaker 1: newspapers across the United States. He called it Irving Fisher's
[11:16] Speaker 1: business Page. With such a platform, Fisher was able to
[11:20] Speaker 1: evangelize about his approach to investment, which broadly speaking, was
[11:25] Speaker 1: to bet on American growth by buying shares in the
[11:28] Speaker 1: new industrial corporations using borrowed money. Such borrowing is called
[11:33] Speaker 1: leverage since it magnifies both profits and losses, but during
[11:38] Speaker 1: the nineteen twenties, stock market investors had few losses to
[11:42] Speaker 1: worry about. Share prices were soaring. Fisher wrote to his
[11:48] Speaker 1: old childhood friend to inform him that his ambition had
[11:52] Speaker 1: been fulfilled. We are all making a lot of money.
[11:57] Speaker 1: In the summer of nineteen twenty nine. Irving Fisher was
[12:01] Speaker 1: a best selling author, inventor, data pioneer, friend of presidents, entrepreneur,
[12:06] Speaker 1: health campaigner, syndicated columnist, and the greatest academic economist of
[12:11] Speaker 1: his generation, and in that summer of nineteen twenty nine,
[12:15] Speaker 1: a millionaire many times over, Irving Fisher was able to
[12:19] Speaker 1: boast to his son that a renovation of the family
[12:23] Speaker 1: mansion had been paid for not by the hazard family money,
[12:27] Speaker 1: but by Irving Fisher himself. That achievement mattered to him.
[12:33] Speaker 1: Fisher's own father hadn't lived to see his seventeen year
[12:37] Speaker 1: old boy grow into one of the most respected figures
[12:41] Speaker 1: of the age. As Irving and his son watched a
[12:45] Speaker 1: mansion reshaped before them, he could perhaps be forgiven his pride.
[13:02] Speaker 1: John Maynard Keynes was the ultimate insider. As a schoolboy,
[13:07] Speaker 1: he was educated at Eton and College, just like Britain's
[13:11] Speaker 1: first Prime minister and nineteen others. Since like his father,
[13:15] Speaker 1: he became a senior academic, a fellow of King's College,
[13:19] Speaker 1: the most spectacular of all the Cambridge colleges. His job
[13:24] Speaker 1: during the First World War was managing both debt and
[13:27] Speaker 1: currency on behalf of the British Empire. He had barely
[13:31] Speaker 1: turned thirty. He knew everyone. He whispered in the ear
[13:36] Speaker 1: of prime ministers. He had the inside track on whatever
[13:39] Speaker 1: was going on in the British economy. Maynard Bank of England. Here,
[13:44] Speaker 1: I just wanted to let you know that interest rates
[13:46] Speaker 1: will be rising tomorrow. There's a good chab. But this
[13:52] Speaker 1: child of the British establishment was a very different person
[13:55] Speaker 1: to his American rival, Irving Fisher. He loved fine wines
[13:59] Speaker 1: and rich food. He gambled at Monte Carlo. His sex
[14:03] Speaker 1: life was more like a nineteen seventies pop star than
[14:06] Speaker 1: a nineteen hundreds economist, bisexual, polyamorous, eventually settling down not
[14:12] Speaker 1: with his childhood sweetheart but with a Russian ballerina. One
[14:16] Speaker 1: of Keynes's ex boyfriends was the best man at their wedding,
[14:21] Speaker 1: and Canes was adventurous in other ways too. In nineteen eighteen,
[14:25] Speaker 1: for example, as the First World War was raging and
[14:28] Speaker 1: the German army was camped outside Paris, Canes caught wind
[14:33] Speaker 1: of the fact that in Paris, the Great French Impressionist
[14:37] Speaker 1: artist Edgar de Gas was about to auction his vast
[14:40] Speaker 1: collection of pieces by France's greatest nineteenth century painters, and
[14:46] Speaker 1: so Canes embarked on an insane adventure. First, he spoke
[14:50] Speaker 1: to the Chancellor of the Exchequer, the UK's senior treasury minister,
[14:55] Speaker 1: asking for a fund for purchasing art twenty thousand pounds.
[15:00] Speaker 1: That's millions in today's money. Maynard, it's the first occasion
[15:04] Speaker 1: that I've ever known you in favor of any expenditure whatsoever.
[15:09] Speaker 1: The British Treasury was four years into fighting the most
[15:13] Speaker 1: devastating war the planet had yet seen, but Canes knew
[15:17] Speaker 1: how to get his way. My picture coup was a
[15:19] Speaker 1: whirlwind affair, carried out in a day and a half
[15:22] Speaker 1: before anyone had time to reflect on what they were doing.
[15:25] Speaker 1: I think the Chancellor was very much amused at my
[15:28] Speaker 1: wanting to buy pictures, and eventually let me have my
[15:31] Speaker 1: way as a sort of a joke, some joke. Escorted
[15:35] Speaker 1: by destroyers and a silver airship watching overhead, Canes crossed
[15:41] Speaker 1: the Channel to France with the director of London's National Gallery,
[15:45] Speaker 1: who shaved off his mustache so that nobody recognized him,
[15:48] Speaker 1: and just as Deagar's auction begins, the German artillery starts up.
[15:54] Speaker 1: Some people panic and hurry out. Canes pounces, buying twenty
[15:59] Speaker 1: seven pieces at rock bottom prices for the National Gallery,
[16:04] Speaker 1: and he buys a few for himself, including a Cesanne,
[16:07] Speaker 1: which these days would be regarded as a better buy
[16:10] Speaker 1: than anything the National Gallery director chose. It costs Canes
[16:15] Speaker 1: just three hundred and seventy pounds. He then flee back
[16:20] Speaker 1: to the English Channel and cross home with a convoy
[16:23] Speaker 1: of hospital ships. Exhausted after his NonStop adventure, Canes calls
[16:28] Speaker 1: in on some friends. I've got a Czanne in my suitcase.
[16:32] Speaker 1: It was too heavy for me to carry, so I've
[16:34] Speaker 1: left it in the ditch behind the gate. What Irving
[16:37] Speaker 1: Fisher would have made of it all, I do not
[16:39] Speaker 1: know yet. Like Fisher, Canes was also pursuing an investment career.
[16:45] Speaker 1: It wasn't just in art. He set up what some
[16:47] Speaker 1: historians describe as the first hedge fund to speculate on
[16:51] Speaker 1: currency movements. He raised money from rich friends and from
[16:55] Speaker 1: his own father, to whom he made the not entirely
[16:58] Speaker 1: reassuring comment, when or lose this high stakes. Gambling amuses me. Initially,
[17:04] Speaker 1: Canes made money fast, but then a brief spasm in
[17:08] Speaker 1: the currency markets wiped out his fund in nineteen twenty awkward,
[17:13] Speaker 1: but he went back to his investors, including his own father,
[17:17] Speaker 1: and asked them to trust him with more of their money.
[17:20] Speaker 1: I am not in a position to risk any capital myself,
[17:24] Speaker 1: having quite exhausted my resources. Remember this is John Maynard Keynes,
[17:31] Speaker 1: the man who persuaded a wartime government to speculate in
[17:34] Speaker 1: a Parisian art auction. The man a Canadian diplomat mistook
[17:38] Speaker 1: for an angel. I anticipate very substantial profits with very
[17:42] Speaker 1: good probability if you are prepared to stand the racket
[17:45] Speaker 1: for a couple of months. Of course, they gave him
[17:48] Speaker 1: the money he wanted. Canes was back in profit by
[17:51] Speaker 1: nineteen twenty two. So, having made a small fortune, lost
[17:58] Speaker 1: it and made it again. Canes turned to the vast
[18:01] Speaker 1: investments of his own college, King's Cambridge. Canes persuaded his
[18:07] Speaker 1: fellow academics to let him adopt a radical money making strategy.
[18:11] Speaker 1: He would forecast booms and recessions and move in and
[18:14] Speaker 1: out of different economic sectors. Accordingly, such an approach makes
[18:19] Speaker 1: sense only if you actually can forecast recessions. But Canes
[18:25] Speaker 1: was the leading economist in the country and a man
[18:27] Speaker 1: who remember would get friendly phone calls from the Bank
[18:30] Speaker 1: of England. If anyone could see into the future of
[18:34] Speaker 1: the British economy, it was John Maynard Keynes. By late
[18:40] Speaker 1: nineteen twenty nine, both Irving Fisher and John Maynard Keynes
[18:45] Speaker 1: were rich, famous, respected, and standing on the brink of
[18:50] Speaker 1: a financial precipice. The cataclysmic Wall Street Crash followed by
[18:55] Speaker 1: the Great Depression, the worst peacetime economic calamity to befall
[18:59] Speaker 1: the Western world, and the two greatest economists of the age,
[19:04] Speaker 1: Fisher and Canes. Both of them failed to see it coming.
[19:17] Speaker 1: Experts don't have a stellar reputation for forecasting. In nineteen
[19:22] Speaker 1: eighty seven, a young Canadian born psychologist named Philip Tetlock
[19:27] Speaker 1: became curious about the entire prognostication racket. Tetlock had been
[19:32] Speaker 1: interviewing Cold War experts, and he soon found himself frustrated
[19:37] Speaker 1: by their wildly different predictions, their refusal to change their
[19:40] Speaker 1: minds when they were wrong, and the endless excuses for
[19:44] Speaker 1: their forecasting failures. Tetlock's response was patient painstaking and quietly brilliant.
[19:51] Speaker 1: He began to collect forecasts from almost three hundred experts,
[19:56] Speaker 1: eventually accumulating twenty seven thousand, five hundred predictions. He focused
[20:01] Speaker 1: on politics and geopolitics, throwing in a few questions from
[20:05] Speaker 1: areas such as economics. Tetlock sought clearly defined questions, enabling him,
[20:11] Speaker 1: with the benefit of hindsight, to pronounce each forecast right
[20:15] Speaker 1: or wrong. Then Tetlock simply waited while the results rolled
[20:20] Speaker 1: in for eighteen years. Tetlock published his conclusions in two
[20:26] Speaker 1: thousand and five in a subtle and scholarly book, Expert
[20:30] Speaker 1: Political Judgment. He found that his experts were terrible forecasters,
[20:35] Speaker 1: both in the simple sense that what they predicted often
[20:38] Speaker 1: didn't happen, and in the deeper sense that the experts
[20:41] Speaker 1: had little idea of when they should be confident and
[20:44] Speaker 1: when they should admit that they didn't have a clue.
[20:47] Speaker 1: Expert forecasts were barely more accurate than chimpanzees throwing darts.
[20:53] Speaker 1: Most people hearing about Tetlock's research simply conclude that either
[20:58] Speaker 1: the world is too complex to forecast, or that experts
[21:02] Speaker 1: are too stupid to forecast it, or both. On April
[21:08] Speaker 1: Fool's Day twenty thirteen, of all days, I received an
[21:12] Speaker 1: email from Philip Tetlock inviting me to join what he
[21:16] Speaker 1: described as a major new research program. It was funded
[21:20] Speaker 1: by the US Intelligence Services. This program continued and expanded
[21:25] Speaker 1: Tetlock's long running study in the form of a forecasting tournament.
[21:29] Speaker 1: You would simply log onto a website, give you a
[21:32] Speaker 1: best judgment about matter as you may be following anyway,
[21:35] Speaker 1: and update that judgment if and when you feel it
[21:37] Speaker 1: should be. When time passes and forecasts are judged, you
[21:41] Speaker 1: could compare your results with those of others. More than
[21:44] Speaker 1: twenty thousand people signed up, some professionals and some amateurs.
[21:49] Speaker 1: Tetlock and his colleagues ran experiments on this army of volunteers,
[21:54] Speaker 1: giving them different kinds of training or assembling them into
[21:57] Speaker 1: teams to see if that helped. I didn't join in.
[22:00] Speaker 1: I told myself I was too busy. I suppose I
[22:03] Speaker 1: was chickening out too. But the fundamental reason that I
[22:06] Speaker 1: didn't participate was because Tetlock's work had already persuaded me
[22:10] Speaker 1: that the forecasting task was impossible. But it wasn't. This
[22:16] Speaker 1: vast new tournament identified a select group of people whose forecasts,
[22:21] Speaker 1: while by no means perfect, were vastly better than the
[22:25] Speaker 1: dart throwing chimp standard. Tetlock, with an uncharacteristic touch of hyperbole,
[22:31] Speaker 1: called them super forecasters. So what makes a super forecaster?
[22:36] Speaker 1: The super forecasters are what psychologists call actively open minded thinkers,
[22:43] Speaker 1: people who didn't cling too tightly to a single approach,
[22:46] Speaker 1: who were comfortable abandoning an old view in the light
[22:49] Speaker 1: of fresh evidence or new arguments, and who embraced disagreements
[22:54] Speaker 1: with others as an opportunity to learn the secret of
[22:58] Speaker 1: super forecasting. It's a willingness to change your mind. Philip
[23:11] Speaker 1: Tetlock's work on super forecasting has rightly attracted a huge
[23:16] Speaker 1: amount of attention. But I think there's a message in
[23:19] Speaker 1: that work that's often overlooked. A willingness to change your
[23:23] Speaker 1: mind doesn't just help you make better forecasts, it helps
[23:27] Speaker 1: you cope with failed predictions too. Let's return to John
[23:32] Speaker 1: Maynard Keynes and Irving Fisher. Both of them, remember, had
[23:36] Speaker 1: persuaded themselves that their expertise in economics should lead to
[23:41] Speaker 1: investment success. Both of them were wrong. The stock market
[23:45] Speaker 1: crash of nineteen twenty nine caught each of them by surprise,
[23:49] Speaker 1: both lost a lot of money. Yet here's a curious fact.
[23:54] Speaker 1: Despite his failure, Canes died a millionaire and perhaps the
[24:00] Speaker 1: most celebrated economist in the world. Fisher made basically the
[24:05] Speaker 1: same mistake, yet it ruined both his finances and his reputation.
[24:11] Speaker 1: Why the difference in their fortunes. In a way, the
[24:15] Speaker 1: answer is ridiculously simple. Canes changed his mind and changed
[24:21] Speaker 1: his investment strategy. Fisher changed neither. But that only raises
[24:27] Speaker 1: a deeper question. Why did Caines change while Fisher didn't.
[24:36] Speaker 1: Canes had lost one fortune in nineteen twenty and survived
[24:40] Speaker 1: the experience By nineteen twenty nine, before the crash, he
[24:44] Speaker 1: was again pondering his shortcomings. His investment strategy, based on
[24:49] Speaker 1: the assumption that he could predict the ups and downs
[24:51] Speaker 1: of the business cycle, wasn't working out. He started thinking
[24:55] Speaker 1: about how to change his approach. Canes lost more than
[25:00] Speaker 1: eighty percent of his net worth in nineteen twenty nine,
[25:03] Speaker 1: but even afterwards, he was still rich. In short, he
[25:06] Speaker 1: had plenty of evidence that had made him as he
[25:09] Speaker 1: had experience of making mistakes in the past and bouncing back,
[25:13] Speaker 1: and he was still comfortably off. Why not change. By
[25:18] Speaker 1: the early nineteen thirties, Cans had abandoned business cycle forecasting entirely.
[25:23] Speaker 1: The greatest economist in the world had decided he just
[25:27] Speaker 1: couldn't do it well enough to make money. As time
[25:30] Speaker 1: goes on, I get more and more convinced that the
[25:33] Speaker 1: right method in investment is to put fairly large sums
[25:36] Speaker 1: into enterprises which one thinks one knows something about and
[25:40] Speaker 1: in the management of which one thoroughly believes. Forget what
[25:44] Speaker 1: the economy is doing. Just find great companies and invest
[25:48] Speaker 1: for the long term. And if that approach sounds familiar,
[25:51] Speaker 1: it's most famously associated with Warren Buffett, the world's richest
[25:56] Speaker 1: investor and a man who loves to quote. John Maynard Keynes.
[26:01] Speaker 1: Kens is rightly viewed today as a successful investor at
[26:05] Speaker 1: King's College. He recovered from the poor performance of the
[26:08] Speaker 1: early year. He secured high returns with modest risks, outperforming
[26:13] Speaker 1: the stock market as a whole many times over. It's
[26:17] Speaker 1: an impressive reward for being able to change your mind.
[26:26] Speaker 1: Irving Fisher was in a very different situation. Irving Fisher's
[26:30] Speaker 1: business page had graced newspapers across the country. When things
[26:34] Speaker 1: turned sour, Fisher was a scapegoat in front of the
[26:37] Speaker 1: entire United States. The New York Times reported that the
[26:41] Speaker 1: bubble had been blamed on US Treasury Secretary Melon, former
[26:46] Speaker 1: President Coolidge, and Professor Irving Fisher of Yale. And Professor
[26:51] Speaker 1: Irving Fisher of Yale was in deep financial trouble. The
[26:55] Speaker 1: fact that his investments were made using leverage meant that
[26:59] Speaker 1: both gains and losses were magnified. What had seemed like
[27:03] Speaker 1: brilliance before the crash was catastrophic afterwards. Fisher was staring
[27:09] Speaker 1: in the face of bankruptcy, the loss of his house,
[27:12] Speaker 1: his businesses, everything. For example, one of Fisher's major investments
[27:17] Speaker 1: was in the stationary company Remington Rand. It was fifty
[27:20] Speaker 1: eight dollars a share before the crash, dropping to twenty
[27:23] Speaker 1: eight dollars within a few months. At that point, Fisher
[27:27] Speaker 1: borrowed more money to invest, but the share price kept
[27:31] Speaker 1: falling all the way to one dollar. You could imagine
[27:36] Speaker 1: his desperation. But surely being in such a tight spot
[27:40] Speaker 1: would have made Fisher more likely to adapt his strategy.
[27:45] Speaker 1: Not necessarily, I've received another message. Everyone, get your overcoats
[27:56] Speaker 1: and stand. Life has moved. Okay, okay, kids, Okay, everyone
[28:01] Speaker 1: sit quietly in the living room. We shall act as
[28:04] Speaker 1: if this were just an ordinary gathering of friends. Remember
[28:08] Speaker 1: Dora T. Martin and her UFO cult. They've persuaded themselves
[28:13] Speaker 1: that the world is about to be flooded and that
[28:15] Speaker 1: they will be saved at midnight by aliens delivering them
[28:18] Speaker 1: safely to planet Clarion. And remember too, that the psychologist
[28:23] Speaker 1: Leon Festinger has infiltrated the cult. His researchers were there
[28:27] Speaker 1: that night to observe what happened. Festinger had a striking
[28:32] Speaker 1: prediction that when the aliens didn't appear, many cultists wouldn't
[28:37] Speaker 1: be discouraged by the clear failure of missus Martin's prophecy
[28:41] Speaker 1: or feel angry and betrayed. Instead, they would redouble their
[28:45] Speaker 1: efforts to believe another reporter, in no doubt, just hang up.
[28:52] Speaker 1: Our preparations cannot be interrupted. We'll call them later if
[28:56] Speaker 1: we have anything for them. Hasn't the clock has midnight
[29:00] Speaker 1: or so that clock is love, Look at the other clock.
[29:07] Speaker 1: I said it myself this afternoon, and it's not midnight
[29:10] Speaker 1: yet one minute at midnight, and not a player this chalistry.
[29:17] Speaker 1: At midnight, the aliens did not appear nobody said a word.
[29:24] Speaker 1: One of the more casual cult members, who had expressed
[29:28] Speaker 1: skepticism before, picked up his coat and hat and walked out. No, Carmen,
[29:36] Speaker 1: we have nothing to tell you. People tried to make
[29:40] Speaker 1: sense of what was happening, or rather not happening. The
[29:43] Speaker 1: theories grew ever, wilder. People were confused, exhausted. Leon Festinger's
[29:48] Speaker 1: observers tried to ask why the sorcer hadn't come. The
[29:52] Speaker 1: group didn't want to talk about it, and then at
[29:57] Speaker 1: four o'clock in the morning, Dorothy Martin put her face
[30:03] Speaker 1: in her hands and began to weep. One of Festinger's
[30:08] Speaker 1: researchers stepped outside for some air and discussed the situation
[30:12] Speaker 1: with a leading cult member. I've had a long way
[30:15] Speaker 1: to go. I've given up just about everything. I've cut
[30:18] Speaker 1: every tie, I burned every bridge. I've turned my back
[30:22] Speaker 1: on the world. I can afford to doubt. I have
[30:25] Speaker 1: to believe. They went back inside, But at four forty
[30:32] Speaker 1: five am, Dorothy Martin, with hand shaking, picked up a
[30:38] Speaker 1: pencil and began to write. It was, she said, a
[30:43] Speaker 1: new message. Because of the faith shown by that small
[30:48] Speaker 1: group of people, the earth had been spared destruction, a
[30:53] Speaker 1: higher power would save not only the small cult but
[30:56] Speaker 1: the entire human race. At this the cultists acquired new fervor,
[31:04] Speaker 1: going out to greet the dawn and tell people the
[31:06] Speaker 1: good news. They suddenly became evangelists, issuing statements to the
[31:11] Speaker 1: press rather than batting them away. Dorothy, is this the
[31:14] Speaker 1: first time you've called the newspaper yourself? Oh? Yes, this
[31:19] Speaker 1: is the first time I've ever called them. I've never
[31:22] Speaker 1: had anything to tell them before, but now I feel
[31:26] Speaker 1: it's urgent. We should call the Associated Press and the
[31:29] Speaker 1: Oneida Press. This thing is pretty important. It's a very
[31:33] Speaker 1: big thing, bigger than just one newspaper. I don't think
[31:37] Speaker 1: the creator would want this to be an exclusive story
[31:40] Speaker 1: any Definitely not. Oh no, all right, correct, it's got
[31:43] Speaker 1: to be for everybody. It's for everybody. Correct. Yes, Festinger
[31:48] Speaker 1: had been right. His view that the cultists would redouble
[31:51] Speaker 1: their efforts to believe in the face of failure was
[31:54] Speaker 1: based on a theory he called cognitive dissonance. Cognitive dissonance
[31:59] Speaker 1: predicts that people will start to squirm when they hold
[32:03] Speaker 1: contradictory thoughts, such as it's worth quitting my job in
[32:07] Speaker 1: order to be collected by aliens, and the aliens did
[32:12] Speaker 1: not show up. People often deny the obvious in order
[32:16] Speaker 1: to reduce the discomfort, and the more suffering people have
[32:19] Speaker 1: put themselves through on behalf of a belief, the more
[32:23] Speaker 1: likely they are to cling onto it. Otherwise, all that
[32:27] Speaker 1: suffering would seem ridiculous, would it not. Festinger's theory applies
[32:36] Speaker 1: perfectly to poor Irving Fisher in the nineteen thirties. He
[32:40] Speaker 1: believed himself to be a man of logic and reason,
[32:44] Speaker 1: and yet he was deeply in debt, the most famous
[32:48] Speaker 1: financial basket case in the country. In fact, if people
[32:54] Speaker 1: today know just one thing about Irving Fisher, it's this.
[32:59] Speaker 1: Two weeks before the Wall Street crash began, he was
[33:02] Speaker 1: quoted by The New York Times, starks have reached what
[33:06] Speaker 1: looks like a permanently high plateau. How do you back
[33:10] Speaker 1: away from that? Fisher went deeper and deeper in debt
[33:15] Speaker 1: to the taxman and to his brokers. Towards the end
[33:19] Speaker 1: of his life. He was a marginalized figure, a widower,
[33:24] Speaker 1: an easy target for scam artists and their get rich
[33:27] Speaker 1: quick schemes because he was always on the lookout for
[33:31] Speaker 1: a way to revive his fortune. He never did. Although
[33:37] Speaker 1: Canes had much in common with Fisher, he was a
[33:40] Speaker 1: different kind of character. Recall came to his comment to
[33:44] Speaker 1: his father, this high stakes gambling amuses me. The Monte
[33:48] Speaker 1: Carlo gambler knew all along that while investing was a
[33:52] Speaker 1: fascinating game, it was a game nonetheless, and one shouldn't
[33:57] Speaker 1: take an unlucky throw of the dice too much to heart.
[34:00] Speaker 1: When his investments flopped, he tried something else. Fisher and
[34:07] Speaker 1: Canes died with in a few months of each other.
[34:10] Speaker 1: Not long after the end of the Second World War.
[34:13] Speaker 1: Fisher had become irrelevant. Canes was the most influential economist
[34:19] Speaker 1: on the planet, fresh from shaping the World Bank, the IMF,
[34:23] Speaker 1: and the entire global financial system. Looking back, Canes reflected,
[34:30] Speaker 1: my only regret is that I have not drunk more
[34:33] Speaker 1: champagne in my life. But he's remembered far more for
[34:37] Speaker 1: words that he probably never said. Nevertheless, he lived by them.
[34:43] Speaker 1: When my information changes, I alter my conclusions. What do
[34:48] Speaker 1: you do, sir? If only he had taught that lesson
[34:53] Speaker 1: to Irving Fisher. You've been listening to cautionary tales. If
[35:03] Speaker 1: you'd like to find out more about the ideas in
[35:05] Speaker 1: this episode, including links to our sources. The show notes
[35:09] Speaker 1: are on my website, Tim Harford dot com. Cautionary Tales
[35:13] Speaker 1: is written and presented by me, Tim Harford. Our producers
[35:17] Speaker 1: are Ryan Dilley and Marilyn Rust. The sound designer and
[35:21] Speaker 1: mixer was Pascal Wise, who also composed the amazing music.
[35:27] Speaker 1: Starring in this season are Alan Cumming, Archie Panjabi, Toby
[35:31] Speaker 1: Stevens and Russell Tovey, alongside Enzocellente, Ed Gochen, Melanie Gutteridge,
[35:38] Speaker 1: Mass Siam and Rowe and rufus Wright and introducing Malcolm Gladwell.
[35:44] Speaker 1: Thanks to the team at Pushkin Industries, Julia Barton, Heather Faine,
[35:49] Speaker 1: Mia LaBelle, Carlie Migliori, Jacob Weisberg and of course the
[35:53] Speaker 1: mighty Malcolm Gladwell. And thanks to my colleagues at The
[35:56] Speaker 1: Financial Times.

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