Seth's Blog

The Big Short (sent to me by the publisher) is Michael Lewis’s best book, and that’s saying a lot. Moneyball was excellent. The Blind Side was excellent. All three are stories of underdog triumph but The Big Short is about a far more important subject, a far more complicated subject, and has a tremendously dark side. You know the saying: Fool me once, shame on you; fool me twice, shame on me. Well, shame on Wall Street for creating the worst financial disaster ever. But then, as Nassim Taleb puts it, the school-bus driver who crashed a bus full of children were given a new bus. Those who created the disaster were put in charge of fixing it. As Steve Eisman, one of Lewis’s main characters, puts it, “I can understand why Goldman Sachs would want to be included in the conversation about what to do about Wall Street. What I can’t understand is why anyone would listen to them.” (Not just listen. They were allowed to dominate the conversation.) Showing that the foolishness of people at the top in American society has no clear limit.

I could hardly stop reading. Endless fascinating detail. Michael Burry, another main character, discovers he has Asperger’s after his son is turned down by several kindergartens and he tries to understand why. I’ve been talking and reading about data analysis my whole professional life, yet Lewis’s story about how means can be terribly misleading is the best I’ve heard. An average credit score of 600 can be due to two scores of 600 or to scores of 500 and 700, with vastly different consequences. (This escaped the averagers.) Sure, I knew about the conflict of interest of bond rating agencies, such as Moody’s, but Lewis describes it so well I loved reading about it again.

Long ago, I blogged about the importance of insider/outsiders — close enough to understand what’s going on yet far enough away to see the truth. Lewis’s heros, who saw that a tremendous crash was coming, are exactly that. Like Harry Markopolos, they were on the fringes of the financial industry. One of them (Eisman) had a gift for tactlessness, another (Burry) had Asperger’s, and a third group ran their fund from a Berkeley garage. Without them, the people at the top (e.g., the head of Goldman Sachs), who run and crashed our financial system, could plausibly say Nobody could have predicted this. Because of Lewis’s heros, they can’t.

• Vision therapy
• Omega-3 and brain health. “Participants were 280 community volunteers between 35 and 54 y of age, free of major neuropsychiatric disorders, and not taking fish oil supplements. . . Five major dimensions of cognitive functioning were assessed . . . Among the 3 key (n-3) [poly-unsaturated fatty acids], only DHA [was] associated with major aspects of cognitive performance.”
• The rise and fall of Beijing restaurants

Thanks to Steve Hansen, Tim Lundeen, and Eric Meltzer.

After The Hockey Stick Illusion by Andrew Montford (about Stephen McIntyre’s criticisms of Michael Mann’s hockey-stick graph), I read No One Would Listen by Harry Markopolos (sent to me by the publisher), about the Madoff case. They have plenty in common.

Size. According to Elizabeth Kolbert and New Yorker fact checkers, “thousands of scientists at hundreds of universities in dozens of countries” are sure that humans are disastrously warming the Earth. Madoff stole about $60 billion from thousands of investors. Helped by dozens of hedge-fund managers.

Hans Christian Andersen. The lesson of The Hockey Stick Illusion was that of The Emperor’s New Clothes, as I said. Markopolos mentions that story at least twice.

Failure at the top. In The Hockey Stick Illusion, Nature magazine and the National Academy of Sciences dismiss McIntyre’s criticisms. In No One Would Listen, the Wall Street Journal was given the story and, for three years, failed to do anything with it. They covered it only after Madoff confessed.

Regulatory failure. Science is said to be “self-regulating,” meaning that mistakes will be noticed and fixed by other scientists. Unfortunately for that homily, McIntyre wasn’t a scientist. In No One Would Listen, the no one of the title means no one at the SEC (Securities and Exchange Commission). After hearing Markopolos’s story, a congressman says the SEC “couldn’t find steak at an Outback”.

“It cannot be”. Just as Kolbert believes that a “hoax” of such size isn’t possible, many people told Markopolos that what he was claiming wasn’t possible. One of the best stories in No One Would Listen is about a colleague of Markopolos’s named Frank Casey, who helped Markopolos investigate Madoff. Casey’s job is selling financial products. After a sales call at an insurance company, the prospective customer, after declining to buy anything, asks Casey about Madoff. Casey is stunned. It felt like a random sales call. Casey tells him what he knows. It takes a half hour. Then the insurance executive explains his question. He recently married into “an extremely wealth Jewish family.” Madoff was at his wedding. After the wedding, Madoff took him aside and said he’d get him “set up” (meaning invested in Madoff). The insurance executive, after studying Madoff’s claimed returns, thought something was fishy and refused to invest. This got him in trouble with his father-in-law. “It’s your job as my son-in-law to take care of my daughter, and you should be putting your money with Bernie,” the father-in-law said over and over. His refusal to invest with Madoff is causing serious friction, he tells Casey, and  begs Casey to put what he said in writing so that he can convince his father-in-law to withdraw his money.  Casey writes a long email. The insurance exec brings it to his father-in-law and reads it out loud. “It can’t be,” says his father-in-law. “Bernie wouldn’t do this to me.” The father-in-law does nothing. They lose everything.

• Made by Hand: Searching For Meaning in a Throwaway World by Mark Frauenfelder
• The Big Short: Inside the Doomsday Machine by Michael Lewis
• Fat: An Appreciation of a Misunderstood Ingredient, with Recipes by Jennifer McLagan. By fat she means animal fat.
• No One Would Listen: A True Financial Thriller by Harry Markopolos
• Wide Awake: A Memoir of Insomnia by Patricia Morrisroe
• Malignant Medical Myths: Why Medical Treatment Causes 200,000 Deaths in the USA Each Year, and How to Protect Yourself by Joel Kauffman
• The Strangest Man: The Hidden Life of Paul Dirac by Graham Farmelo
• Country Driving: A Journey Through China From Farm to Factory by Peter Hessler
• China’s Megatrends: The 8 Pillars of a New Society by John & Doris Naisbitt. Just a teensy bit more persuasive than The Coming Collapse of China (2001) by Gordon Chang.
• The Thing Around Your Neck by Chimanda Adichie

Recently a WSJ columnist told this story:

I was chatting with a friend who, over the years, has helped her kids slog through the obligatory science-fair projects.

“The experiments never turned out the way they were supposed to, and so we were always having to fudge the results so that the projects wouldn’t be screwy. I always felt guilty about that dishonesty,” she said, “but now I feel like we were doing real science.”

Yes, science with a human touch. The Hockey Stick Illusion by Andrew Montford (sent to me by the publisher) is a great book because it tells a great story. That story has a hero (Stephen McIntryre) and a villain (Michael Mann) and illustrates a basic truth about the world: A consensus of the “best people” can be wrong. This point was first made, as far as I know, by The Emperor’s New Clothes. It was later made by the Asch experiment (about line-length judgments). It’s not obvious; Elizabeth Kolbert and her editors at The New Yorker, not to mention Bill McKibben, have yet to understand it. (“No one has ever offered a plausible account of why thousands of scientists at hundreds of universities in dozens of countries would bother to engineer a climate hoax,” Kolbert recently wrote, with the permission of her editors.)  It’s a sad comment on our education system that I first learned it via self-experimentation. My results showed that an acne medicine that my dermatologist prescribed didn’t work — a possibility for which my dermatologist (in consensus with other dermatologists) hadn’t allowed. As truths go, this one is scary: It means you have to think for yourself. But it is also the most liberating truth I know.

The Hockey Stick Illusion tells how McIntyre, skeptical of Mann’s hockey-stick result (a sharp increase in global temperature to unprecedented levels during the 20th century), tried to get the data and computer code that Mann used. Mann put him off. He still hasn’t released the computer code he used. Mann found a hockey stick where none existed because (a) he used principal-components analysis to summarize a lot of temperature series (bad idea), (b) he used that method in an unusual way, making a bad idea worse, and (c) one of his time series had a serious problem. After McIntyre noticed this problem and pointed it out, the story really begins: How did everyone react? Much as a reader of The Emperor’s New Clothes would expect. Nature denied it. The Washington Post denied it. Most climate scientists denied it (and continue to). Montford started writing the book before Climategate, whose overall message was the same — that climate scientists have been distorting the truth, that the case for man-made global warming is far weaker than they say, that a consensus of experts can be wrong. As Montford puts it,

None of the corruption and bias and flouting of rules we have seen in this story [and in the Climategate emails] would have been necessary if there is, as we are led to believe, a watertight case that mankind is having a potentially catastrophic effect on the climate.

Climategate and the story within The Hockey Stick Illusion are bad news for some very powerful people, such as Al Gore and those who gave him a Nobel Prize, but are helpful to the rest of us. When Big Shot X says “This is incredibly clear, everyone knows this” . . . maybe they’re wrong.