Latest / Masters in Business / William J. Bernstein on Crowd Behavior (Podcast)

Transcript

William J. Bernstein on Crowd Behavior (Podcast) · Masters in Business

0:00
Speaker 1: M This is Mesters in Business with Very Renaults on
0:06
Speaker 1: Bluebird Radio this week on the podcast What Can I Say?
0:11
Speaker 1: Bill Bernstein is a brilliant author neurologists, financial theorists, investor.
0:17
Speaker 1: His most recent book, The Delusion of Crowds, Why People
0:21
Speaker 1: Go Man in Groups is going to be one of
0:24
Speaker 1: those must read books in the pantheon of both bubbles
0:28
Speaker 1: and behavioral finance. He's written so many books, Birth of Plenty, Investors,
0:35
Speaker 1: Asset Allocator, four Pillars of Investing, just just just too
0:40
Speaker 1: many to mention. I find Bill to be one of
0:43
Speaker 1: those really unique people who has a number of insights
0:49
Speaker 1: into the world of investing, partly because he's a neurologist
0:54
Speaker 1: and really spent a lot of time learning how people's
0:58
Speaker 1: brains function and what drives us in our decision making process.
1:04
Speaker 1: But just as important, he's a historian and a deep
1:08
Speaker 1: researcher and author, and so not only does he understand
1:13
Speaker 1: the neurology and the cognitive science of our brains, but
1:18
Speaker 1: he is very familiar with all of the academic literature
1:22
Speaker 1: and all of the actual history of what's taken place
1:25
Speaker 1: over the past pick a timeframe five hundred, a thousand,
1:29
Speaker 1: two thousand years and so all of his work is
1:33
Speaker 1: always a deep dive. Every page is filled with so
1:36
Speaker 1: much fascinating information. I'm really enjoying Delusions of Crowds. I'm
1:41
Speaker 1: about halfway through it. All of his books are absolutely
1:45
Speaker 1: essential reading to me. So if you are at all
1:48
Speaker 1: interested in anything from cognitive theory, behavioral finance, investing, anthropology,
1:58
Speaker 1: bubble behavior, bitcoin, in Tesla, you name it, you're gonna
2:02
Speaker 1: find this to be just a fascinating dive. So, with
2:06
Speaker 1: no further delay, my conversation with William Bernstein. This is
2:13
Speaker 1: mesters in Business with very Renaults on Bloombern Radio. My
2:19
Speaker 1: extra special guest this week is William Bernstein. He began
2:24
Speaker 1: his career as a neurologist before becoming an author, financial theorist,
2:29
Speaker 1: and investment advisor. He's written a dozen books, the most
2:34
Speaker 1: recent of which is The Delusion of Crowds, Why People
2:38
Speaker 1: Go Mad in Groups. Who better to discuss people going
2:43
Speaker 1: insane than a neurologist investor William Bernstein, Welcome back to Bloomberg.
2:50
Speaker 1: As always a pleasure, Barry. So let's dive right into this.
2:54
Speaker 1: But before you were an investor and an author, you
2:58
Speaker 1: worked as a medical doctor, with this specialty in neurology,
3:01
Speaker 1: How did that background help you as an investor? Really
3:07
Speaker 1: only in a very indirect way. You would think that
3:10
Speaker 1: being a clinical neurologist would help you with psychology uh
3:15
Speaker 1: and the neuropsychology, but really practicing neurology is a very
3:21
Speaker 1: down and dirty, ground level occupation. Um. You know what
3:24
Speaker 1: I like to explain to people, uh, is that the
3:28
Speaker 1: great neuroscientists that we think of. Uh. You know, people
3:31
Speaker 1: like the Demasio's are like great artists, or Michelangelo's and
3:35
Speaker 1: da Vinci's. Or is what I did was more Sherwin Williams.
3:38
Speaker 1: It was met pain in back pain. Rather, what helped
3:41
Speaker 1: me write about finance is simply the scientific training and
3:45
Speaker 1: back of being a doctor. Uh. And you know the
3:48
Speaker 1: importance of examining data, seeking it out and rigorously analyzing it. Interesting. So,
3:56
Speaker 1: so I mentioned to some colleagues that I was going
3:58
Speaker 1: to be speaking with you, and one of them, uh
4:01
Speaker 1: said to ask you. Michael Batnick said to ask you,
4:04
Speaker 1: when you started writing Why People Go Mad in Groups?
4:08
Speaker 1: Did you expect it to come out at a time
4:10
Speaker 1: when people were in fact going mad in groups? No?
4:14
Speaker 1: This is the very definition of dumb. Luck. As it
4:17
Speaker 1: turns out, my publisher decided to delay bring the book
4:21
Speaker 1: out for about six months because they didn't want to
4:24
Speaker 1: bring it out right before the election, because they figured
4:26
Speaker 1: out would suck up too much of people's bandwidth. Uh.
4:30
Speaker 1: And so it got delayed until just at the moment
4:34
Speaker 1: when people started, you know, believing in Q and on
4:38
Speaker 1: and occupying the Capitol building and going nuts over bitcoin
4:42
Speaker 1: and game stop. So we'll we'll get to just about
4:46
Speaker 1: each and every one of those things. But it leads
4:50
Speaker 1: to an obvious question, how has the Internet changed the
4:54
Speaker 1: psychology of crowds? How has it affected how people respond
4:59
Speaker 1: to these men as delusions? Well, you can think of
5:03
Speaker 1: a mass delusion the same way you think of the pandemic. Uh.
5:09
Speaker 1: There is an agent, a causative agent. So in the
5:12
Speaker 1: case of the pandemic, it's the coronavirus. In the case
5:15
Speaker 1: of the Black Death, it was your seni epestus uh.
5:19
Speaker 1: And then there's a vector, and the vector for COVID
5:23
Speaker 1: is people uh, coughing and springing each other with droplets. Uh.
5:27
Speaker 1: And with the Black Death it was you know, fleas
5:31
Speaker 1: and rats transmitting the disease across great distances. What's the
5:36
Speaker 1: same thing. It's the same way with UH. With delusions,
5:39
Speaker 1: the the agent is the narrative UH. And the more
5:43
Speaker 1: compelling the narrative, the more virulent, the more dangerous the agent.
5:47
Speaker 1: And then you've got the vector UH. And the vector
5:50
Speaker 1: is the medium through which the delusion spreads. UH. And
5:55
Speaker 1: what we saw over the past ten years of the
5:58
Speaker 1: evolution in the explosion of social media UH. And so
6:02
Speaker 1: that is one of the most powerful vectors of delusions
6:05
Speaker 1: that we've ever we've ever seen. And it's kind of
6:07
Speaker 1: like we've gone, you know, in the in the days
6:09
Speaker 1: of the old media, from being you know, widely separated
6:13
Speaker 1: people who are infected UH. And we've gone now into
6:16
Speaker 1: a world where everybody's in the same small, aerless room
6:19
Speaker 1: and they're coughing on each other. So let's stay with
6:22
Speaker 1: the idea of narrative. M One of the things you
6:25
Speaker 1: refer to is that human beings are cognitive misers, and
6:30
Speaker 1: according to psychologists, we much prefer mental shortcuts and heuristics
6:35
Speaker 1: and a compelling narrative. What is the role of narratives
6:40
Speaker 1: in these manias? Well, the narrative is the causative agent. Okay,
6:45
Speaker 1: you can think of the narrative as being viral to
6:48
Speaker 1: the extent that it's compelling. And what psychologists have found
6:53
Speaker 1: is that the more compelling a narrative is, the more
6:57
Speaker 1: corrosive it is to our cognitive ability, in our analytical ability. Uh.
7:03
Speaker 1: And so you know what I did in the book
7:06
Speaker 1: was I identified the most compelling narratives that we're exposed to.
7:12
Speaker 1: And the one, of course, it's most financially afflictable, as
7:14
Speaker 1: a narrative that you can become effortlessly rich just by
7:19
Speaker 1: going online and clicking a few keys and there's almost
7:22
Speaker 1: no every involved. That's a very pleasing and a very
7:25
Speaker 1: compelling narrative. The other narrative that I examined a great
7:30
Speaker 1: length in the book is the most compelling religious narrative
7:34
Speaker 1: out there, which is the one that the world is
7:35
Speaker 1: going to end very quickly, which it turns out is
7:38
Speaker 1: far more prevalent than most people in your in my bubble,
7:42
Speaker 1: uh think that it is. So let's stay with that
7:45
Speaker 1: because there's some really fascinating combinations of apocalyptic end times
7:51
Speaker 1: and investment mania. One of the things I've found about
7:56
Speaker 1: the hardcore goldbugs as well as the hyper inflationists is
8:02
Speaker 1: that overlap between Hey, when it hits the fan and
8:05
Speaker 1: it all goes down. You better have some gold coins
8:08
Speaker 1: because that paper money will be worthless. That seems to
8:12
Speaker 1: really combine the religious armageddon with the financial armageddon. Yeah,
8:18
Speaker 1: and you can throw into that conspiracy theories. Uh. You know.
8:21
Speaker 1: Social psychologists have found that the two biggest correlates of
8:26
Speaker 1: conspiracy theories are a belief in the end times, that
8:29
Speaker 1: is the theological the religious end times. Uh. And the
8:33
Speaker 1: other characteristic that it correlates with is manichey and thinking.
8:37
Speaker 1: I believe that the world is divided into black and white,
8:41
Speaker 1: good people and bad people with nothing in between the
8:45
Speaker 1: maniche and personality. Could people never do bad things and
8:48
Speaker 1: bad people never do good things, even though we know
8:50
Speaker 1: that happens all the time. Yeah, that binary approach to
8:54
Speaker 1: reality seems to be a gross over simplification, and it
8:58
Speaker 1: certainly doesn't work for investing. I can't imagine it works
9:02
Speaker 1: in day to day life, although people certainly seem to
9:06
Speaker 1: be functioning despite holding some pretty insane beliefs. Yeah, absolutely,
9:12
Speaker 1: I mean you're right. Occasionally, you know, Jim Kramer gets
9:15
Speaker 1: things right. So Kramer is an interesting example because he
9:20
Speaker 1: leads um a group of followers. Uh. You could say
9:25
Speaker 1: the same thing about barstool sports. You could say the
9:28
Speaker 1: same thing about a number of different either financial or
9:33
Speaker 1: religious movements. But when we look at either Robin Hood
9:37
Speaker 1: or or read It's Wall Street Bets, there are no
9:41
Speaker 1: leaders there. There are no proselytizers there. Can you have
9:45
Speaker 1: a mob with no leader? I think there's something like
9:48
Speaker 1: ten million people follow Wall Street Bets, but no one
9:52
Speaker 1: person controls that group. Oh, absolutely, that's the way it
9:55
Speaker 1: happened most of the time. Uh. You know, when someone
9:58
Speaker 1: goes up on a lead and threatens to jump and
10:02
Speaker 1: a crowd gathers below them, A small percentage of the time,
10:07
Speaker 1: maybe you know, a few percent, maybe five or ten
10:10
Speaker 1: percent of the time, people start shouting up for the
10:13
Speaker 1: person to jump. All right, Uh, this is a one
10:16
Speaker 1: of the sad, you know, accouterments of human nature. Well,
10:20
Speaker 1: certainly there's no leader there, and it's it's certainly possible.
10:24
Speaker 1: In fact, I think that history shows that most math
10:27
Speaker 1: meanias really don't have an identifiable leader. Quite interesting. So
10:32
Speaker 1: there's some really fascinating quotes throughout the book I want
10:35
Speaker 1: to start with. More often than not, we avoid contrary
10:39
Speaker 1: facts and data when we cannot avoid them. Are erroneous assessments,
10:43
Speaker 1: will occasionally even harden them and yet more amazingly, make
10:49
Speaker 1: us more likely to proselytize them. This sounds very much
10:54
Speaker 1: like cognitive dissonance. Is how key a factor is that
10:58
Speaker 1: in both religious and financial decision making. Well, you said
11:03
Speaker 1: the magic the magic words uh. You know, cognitive difference
11:07
Speaker 1: was something that was written about and talked about by
11:10
Speaker 1: Leon Festinger, although he didn't invent the term uh and uh,
11:15
Speaker 1: it's you know, it's it's it's somewhat overdone, I think,
11:19
Speaker 1: especially in modern culture, but it's certainly still a fact that.
11:23
Speaker 1: Really what cognitive disfinance is about and confirmation bias is about,
11:27
Speaker 1: is it's not necessarily doubling down or reinforcing your beliefs
11:32
Speaker 1: when presented with contrary data, although that happens all the time,
11:35
Speaker 1: but it's more the avoidance of inconvenient uh facts and
11:39
Speaker 1: things that this confirm your theory. And to give you
11:42
Speaker 1: an example, there are people out there who believe that
11:45
Speaker 1: the Bible is perfectly prophetic, and there are a lot
11:48
Speaker 1: of very prophetic things in the Bible, things that came true,
11:52
Speaker 1: But there are a lot more things with the Bible
11:54
Speaker 1: prophesieses that didn't come true, and those get conveniently ignored
11:58
Speaker 1: by religious fundamental with So you mentioned in the book
12:02
Speaker 1: State of Balance that let's say you're not a Trump supporter,
12:08
Speaker 1: but a good friend of yours is a Trump supporter.
12:11
Speaker 1: That creates an inherent tention that not just the political debate,
12:17
Speaker 1: but the ability to reconcile. Hey, here's a person I like,
12:21
Speaker 1: but they have views I disagree with. How does that
12:25
Speaker 1: state of balance get reconciled in a brain? And I
12:28
Speaker 1: don't know if that's the best example from the book,
12:31
Speaker 1: but just that concept of being able to manage two
12:35
Speaker 1: inconsistent beliefs at the same time. Well, what you're talking
12:40
Speaker 1: about is a concept that was written about in by
12:44
Speaker 1: a psychologist by the name of the Fritz Tighter, and
12:46
Speaker 1: it's an important concept because it explains a lot. So
12:50
Speaker 1: I'll spend just a little bit of time on it,
12:52
Speaker 1: which is that of the balanced state. So let's say
12:56
Speaker 1: that you're, you know, a Trump supporter, okay, uh, and
13:01
Speaker 1: you meet someone and they're a Trump supporter and you
13:04
Speaker 1: really like the person, all right, then you're in a
13:06
Speaker 1: balanced state. All right. Now, if you meet someone who
13:10
Speaker 1: thinks that Donald Trump is Satan incarnate and you think
13:14
Speaker 1: that that person is a charcoal head, then you're in
13:16
Speaker 1: a balance state too, because it enables you to dismiss
13:19
Speaker 1: his or her opinion. But on the other hand, if
13:24
Speaker 1: you're a Trump supporter and you disagree with your very
13:26
Speaker 1: best friend about it about Donald Trump, then you're in
13:30
Speaker 1: an unbalanced state and you have to resolve that you
13:33
Speaker 1: have to or either have to decide that Donald Trump
13:36
Speaker 1: isn't so good, or you have to decide that you
13:38
Speaker 1: don't like your friends so much anymore, which is much
13:41
Speaker 1: more likely to happen because people find it easier to
13:44
Speaker 1: lose their friends than to completely obliterate their their belief system. Uh.
13:50
Speaker 1: And so you can actually do functional magnetic resonance imaging
13:55
Speaker 1: and you can see these two mechanisms at work. You
13:57
Speaker 1: can see certain areas of the brain lighting up when
13:59
Speaker 1: you're in a balanced state, and you can see certain
14:02
Speaker 1: other areas of the brain light up when you're in
14:06
Speaker 1: an unbalanced state, and then when that gets resolved, you
14:08
Speaker 1: see other areas of the brain light up. So when
14:11
Speaker 1: we hear about family members having disputes with other family
14:16
Speaker 1: members over Q and on and people literally being cut
14:20
Speaker 1: off by their parents and others who have fallen prey
14:24
Speaker 1: to do we call it a cult or a belief system.
14:28
Speaker 1: Is that balanced state issue? What's underlying that schism with
14:33
Speaker 1: even within families? Yes, uh to to to to get
14:38
Speaker 1: to bring in a four bit term, that's the classic
14:41
Speaker 1: Hiberian unbalanced state and it has to be resolved one
14:45
Speaker 1: way or the other. And the way most people resolved
14:47
Speaker 1: if they cut themselves off from people who they have
14:50
Speaker 1: strong political uh disagreements with. Quite interesting. Let's move towards uh,
14:55
Speaker 1: fear and greed. Those are the phrases I've always heard
14:59
Speaker 1: in finance. But if we want to get more specific
15:04
Speaker 1: that when we look at the limbic system, you discuss
15:08
Speaker 1: more precisely, I'm gonna I'm gonna mangle this the nuclei,
15:12
Speaker 1: accumbents and the amygdala. How important is the limbic system
15:18
Speaker 1: to our financial behavior? Well, it's almost everything. Uh. And
15:24
Speaker 1: you know to the extent that you succeed in finance,
15:27
Speaker 1: you succeed in finance to the extent that you can
15:30
Speaker 1: suppress the Limbic system, your system one, which is the
15:35
Speaker 1: very fast moving emotional system that we have. If you
15:38
Speaker 1: can't suppress that, you're probably going to die poor. That's interesting.
15:43
Speaker 1: I have a few more specific questions from the neurology perspective,
15:49
Speaker 1: also from the perspective of evolutionary history. You reference a
15:54
Speaker 1: preference for quote rationalization over rationality. Whatever luctionary purpose does
16:01
Speaker 1: that serve well? In a state of nature, you have
16:06
Speaker 1: to react very quickly. If you see, you know, black
16:10
Speaker 1: and yellow stripes in your peripheral vision, or you hear
16:13
Speaker 1: the history the stake, you would better move and better
16:15
Speaker 1: move quickly. Uh. And that leads to a number of things.
16:19
Speaker 1: But number one is the dominance of your fast moving
16:22
Speaker 1: limbic system. The limbic system is the fastest moving uh,
16:25
Speaker 1: central structure that you that you have, at least you
16:28
Speaker 1: know in your brain it is UH. And you know
16:32
Speaker 1: the central nervous system extends below the brain, but that's
16:35
Speaker 1: been getting too much in the weeds. Uh, And so
16:40
Speaker 1: evolutionarily it's got real survival value. But it also leads
16:44
Speaker 1: to something else, which is patternization. Okay, seeing patterns uh
16:49
Speaker 1: that really aren't there, because there's relatively little penalty for
16:53
Speaker 1: doing that. If you if you if you think you
16:55
Speaker 1: see yellow and black black stripes and your periphle vision
16:58
Speaker 1: and you jump but it's really not a tiger, it's
17:00
Speaker 1: something else. You haven't lost much. But if you under
17:03
Speaker 1: interpret the black and yellow stripes, then you're then you're lunch.
17:08
Speaker 1: So false positive evolutionary drive that let neat leave us
17:12
Speaker 1: to over interpret things. And the analogy I think that's
17:15
Speaker 1: that's best is that you know, if you're a skunk,
17:18
Speaker 1: millions of years of evolution have told you that when
17:20
Speaker 1: you need a large predator, you turn a hundred maybe degrees,
17:24
Speaker 1: lift your tail and spread uh. And that's you know,
17:28
Speaker 1: very very functional and very useful in a state of nature.
17:31
Speaker 1: But in a semi urban environment where the biggest threat
17:34
Speaker 1: to your existence is a hunk of steel weighing two
17:36
Speaker 1: tons moving at sixty that is not a functional response.
17:42
Speaker 1: And unfortunately that's the world we live in today. So
17:46
Speaker 1: false positives carry no cost, but false negatives are really
17:51
Speaker 1: significant from an evolutionary perspective, From an evolution yeah, but
17:55
Speaker 1: today it's the other way around. Today, the false positives
17:59
Speaker 1: that we're that we're proned to have a very high cost.
18:02
Speaker 1: So let's stay with that theme. Humans attend to bad
18:06
Speaker 1: news much more strongly than good news. We focus on
18:11
Speaker 1: negative outcomes. What's the genetic advantage of being more biased
18:17
Speaker 1: to spotting bad news than good news. Well, again, it's
18:21
Speaker 1: got obvious survival value in the first place. It's something
18:25
Speaker 1: that's almost so obvious that we never we never talked
18:27
Speaker 1: about it. Uh, you know, I mean things generally getting
18:31
Speaker 1: better is not what makes it to the headlines, all right,
18:35
Speaker 1: So we don't attend to good news as much as
18:37
Speaker 1: we attend to bad news. And in a state of nature,
18:39
Speaker 1: once again, it had obvious, uh survival value. One of
18:44
Speaker 1: the questions I get asked as as a doctor or
18:48
Speaker 1: good get asked as a doctor. And people who still
18:50
Speaker 1: ask me that this question is you know, when I
18:52
Speaker 1: was uh five year you know, I was ten years old,
18:55
Speaker 1: I I ate uh some some some Chinese food, and
19:00
Speaker 1: I got hardly sick and sick. And I've not been
19:02
Speaker 1: able to look at Chinese fude ever since. Why is
19:04
Speaker 1: that I can't? I can't get past it? And the
19:07
Speaker 1: answer is very simple. It's in a state of nature,
19:09
Speaker 1: you ate a certain mushroom and it made you sick, uh,
19:13
Speaker 1: never wanting to have that mushroom again. It was a
19:16
Speaker 1: very useful response. Interesting, So I love the quote you
19:21
Speaker 1: used from Charles Kindleberger there's nothing so disturbing to one's
19:25
Speaker 1: well being in judgment as to see a friend get rich.
19:29
Speaker 1: Why is that break that down from us? For us,
19:32
Speaker 1: wouldn't somebody in your tribe getting rich help your own
19:38
Speaker 1: survival prospects from a historical basis? Well, what would be?
19:44
Speaker 1: You know what my book really is is it's really
19:46
Speaker 1: a meditation on human nature. So we've already discussed the
19:51
Speaker 1: fact that, you know, man is the ape to tell stories. Uh.
19:56
Speaker 1: The foremost thing, which we haven't talked about yet, as
19:58
Speaker 1: man is the ape it imitates. But the third most
20:02
Speaker 1: important characteristic of human nature I talk about is man
20:06
Speaker 1: is the ape that seeks status. Uh. Why do we
20:10
Speaker 1: seek status? Well, because it helps us pass on our
20:14
Speaker 1: d n A, particularly if you're a male, uh. You
20:17
Speaker 1: know it's it's why rock stars uh and and athletes
20:21
Speaker 1: do so well with with women, because in a state
20:24
Speaker 1: of nature, if you're good at telling stories, or if
20:26
Speaker 1: you're good at hunting animals, uh, you can support meats.
20:30
Speaker 1: So it's the same thing. It's it's it's a very
20:33
Speaker 1: it's a very basic part of sexual selection. We seek
20:37
Speaker 1: status so he can pass on our d n A.
20:40
Speaker 1: Quite interesting, So let's talk about some of the parallels
20:44
Speaker 1: between religious zealotry and financial mania. If we were to
20:49
Speaker 1: think about how social epidemics like financial bubbles and and
20:54
Speaker 1: violent end time apocalyptic perspectives originate and p up a gate,
21:01
Speaker 1: why is there such parallels between finance and religion because
21:08
Speaker 1: they basically involved pretty much the same the same draws. Uh.
21:14
Speaker 1: You know, I've talked about how compelling financial narratives can
21:20
Speaker 1: sweep people up in its ambit and the same thing
21:23
Speaker 1: happens with compelling religious narratives. Now, if we want to
21:28
Speaker 1: look at you know, compelling narratives, and we want to
21:31
Speaker 1: go at the rubric of bad is more compelling than
21:34
Speaker 1: good or bad is stronger than good, then the most
21:37
Speaker 1: compelling narrative in the all the world has to be
21:39
Speaker 1: the one in which the world ends uh in a
21:42
Speaker 1: in a fiery inferno. Uh. And so that's the compelling
21:46
Speaker 1: narrative that really gets people's attention. And then to bring
21:49
Speaker 1: the status part of it in, uh. You know, if
21:53
Speaker 1: the world is going to end in fiery in a
21:56
Speaker 1: fiery inferno, then what more pleasing outcome than if you're
22:00
Speaker 1: able to avoid it because you and your friends are developed.
22:04
Speaker 1: So that speaks to our desire to acquire both status
22:09
Speaker 1: and you know, the financial narratives, You're going to become
22:12
Speaker 1: effortlessly rich, that's very pleasing. The religious narrative is that
22:16
Speaker 1: the world everybody is going to go to hell except
22:18
Speaker 1: repeat you and people who believe like you. And it's
22:21
Speaker 1: it's very pleasing. It gives you and you're in group status.
22:24
Speaker 1: So on. A very related quote from the book, quote
22:28
Speaker 1: immersion and narrative brings about isolation from the facts of
22:32
Speaker 1: the real world end quote. How significant is that separation
22:38
Speaker 1: from real world facts, both in finance and in religion,
22:42
Speaker 1: and what happens when people are confronted with the truth
22:47
Speaker 1: of their disconnect from real world facts. Well, in finance,
22:52
Speaker 1: that's one of the ways that you identify a mania
22:55
Speaker 1: or a bubble. It's one of the characteristics which is
22:58
Speaker 1: when you disconfirmed, when you get the disconfirming opinion to
23:02
Speaker 1: someone who is in the grips of a financial mania,
23:05
Speaker 1: this delusion that they're going to become effortlessly rich. Uh,
23:08
Speaker 1: they pushed back and they get very angry. Uh. And
23:12
Speaker 1: I don't know if you this happened to you, what
23:15
Speaker 1: you were doing, you know, back in the late nineties.
23:17
Speaker 1: But I was still in middle age back then, and
23:20
Speaker 1: when I would express skepticism about the Internet bubble, people
23:24
Speaker 1: just didn't disagree with me. They got angry at me.
23:27
Speaker 1: They told me I just didn't get it. They told
23:29
Speaker 1: me I was an idiot, and one or two, uh,
23:31
Speaker 1: people made dispersions about my my parenthood. Uh. They don't
23:36
Speaker 1: like that at all. And that was an experience that
23:39
Speaker 1: a lot of people had. And it's the same thing
23:41
Speaker 1: obviously with with religions. Why you don't argue with people
23:44
Speaker 1: ever about religion. You don't want to even think about
23:47
Speaker 1: disconfirming their their religious beliefs. So I had a very
23:51
Speaker 1: similar experience leading up to the O eight oh nine
23:55
Speaker 1: financial crisis. I was barish on stocks, real estate derivatives,
23:59
Speaker 1: and in the beginning, people just laughed. There was just
24:03
Speaker 1: complete and total you know, you're out of your mind.
24:07
Speaker 1: But it was only a little later that it became anger.
24:11
Speaker 1: And then once it turned out, I got lucky. Nobody
24:15
Speaker 1: wanted to talk about it and everybody was seemed to
24:18
Speaker 1: be convinced that they saw it coming. Also, Yeah, my
24:22
Speaker 1: favorite example of that was, you know, in summer around
24:25
Speaker 1: oh six four seven, I was listening to Bob Schiller
24:30
Speaker 1: be interviewed by somebody about the real estate bubble that
24:34
Speaker 1: was still evolving at that point, and he was being
24:37
Speaker 1: interviewed alongside of someone from you know, the National Association
24:41
Speaker 1: of Realities. Uh, And she wasn't having any any part
24:45
Speaker 1: of it. And finally she got so frustrated with Professor
24:48
Speaker 1: Schiller that she stopped and said, Professor Schiller, I don't
24:51
Speaker 1: know who you think you are, but you don't know
24:54
Speaker 1: the first thing about real estate. That's hilarious Nobel Prize
24:59
Speaker 1: to So he has another quote from the another quote
25:03
Speaker 1: from the book that I like religious manias tend to
25:05
Speaker 1: play out in the worst of times, during which mankind
25:10
Speaker 1: desires delivery from its troubles and a return to the
25:14
Speaker 1: quote unquote good old days. So what is it about
25:17
Speaker 1: the good old days that seems so compelling to people?
25:22
Speaker 1: I don't know the answer to that, but it is
25:26
Speaker 1: a constant, near constant feature of human nature to believe
25:33
Speaker 1: that things were always better a generation or two or
25:36
Speaker 1: three generations ago, when it's manifestly not the that's manifestly
25:42
Speaker 1: not the case. And you can see it all the
25:44
Speaker 1: way back to the dawn of literacy. I mean, one
25:47
Speaker 1: of the first archaic Greek Hellas was fellow named Hesiod
25:51
Speaker 1: who was no well known for a collection that he
25:54
Speaker 1: wrote called Works some Days. Uh, and he talks about how,
25:59
Speaker 1: you know, four or five generations, there was a there
26:01
Speaker 1: was a generation of golden men who lived wonderful lives
26:05
Speaker 1: and were virtuous and we're prosperous, and then with each
26:08
Speaker 1: success of generation, things went went went to hell in
26:12
Speaker 1: a handbasket until you know, they were in the current
26:15
Speaker 1: generation when no one respected their elders and the world
26:19
Speaker 1: was corrupt and things were generally generally awful. Uh. It was,
26:23
Speaker 1: you know, the origin of kids these days. Two areas
26:26
Speaker 1: where people tend to go mad our religion and money.
26:29
Speaker 1: And some people have talked about some current assets that
26:34
Speaker 1: have run up as combining the two. And I think
26:38
Speaker 1: you could look at bitcoin that way, you could look
26:40
Speaker 1: at Tesla that way. What are your thoughts on on
26:43
Speaker 1: those two particular assets. Well, I think certainly bitcoin is
26:49
Speaker 1: exhibits all the behavior of a bubble. Uh. You you
26:54
Speaker 1: see large groups of people who think that they're going
26:57
Speaker 1: to become effortlessly rich investing in bitcoin. Uh. You see
27:02
Speaker 1: people quitting their jobs to trade it. Uh. You see
27:08
Speaker 1: uh anger directed at you when you express skepticism. My
27:12
Speaker 1: favorite bit of anger uh was uh John McAfee's famous
27:19
Speaker 1: statement that he would perform an act on himself that
27:22
Speaker 1: requires great spinal flexibility on national TV if it didn't
27:27
Speaker 1: hit a half a million dollars and then finally a
27:29
Speaker 1: date that's already passed right here, he lost that bad Yeah. Yeah,
27:37
Speaker 1: so so you see that. Uh, you know, with with with,
27:42
Speaker 1: certainly with bitcoin. Now Tesla is a more difficult case.
27:46
Speaker 1: I mean, Tesla may actually wind up being a very
27:49
Speaker 1: successful uh company. Whether it will justify it it's evaluation
27:54
Speaker 1: is another story. There are other people in the world,
27:57
Speaker 1: you know, how to make electric vehicles besides figuring on
27:59
Speaker 1: a musk uh, And so it's not immediately clear that's
28:04
Speaker 1: what's going on. I don't see the kind of mania
28:08
Speaker 1: surrounding Tesla stock. What I see the mania surrounding is
28:12
Speaker 1: the Tesla car, which is a different thing. Uh. The
28:16
Speaker 1: real passion that I see, but not the people love
28:18
Speaker 1: their Tesla stock. It's it's the the the evangelicism of
28:23
Speaker 1: people who love the Tesla cars. I'm going to take
28:26
Speaker 1: it a step further than that. I just had the
28:28
Speaker 1: Mustang Machee for a week to play with. And it's
28:31
Speaker 1: not even the cars, it's the software within the car.
28:36
Speaker 1: Whenever I've discussed the Mustang with other Tesla owners, the
28:40
Speaker 1: comparing contrast is not the build quality or the design
28:45
Speaker 1: or some of the things that Ford does really well.
28:49
Speaker 1: It's the network of superchargers. It's the order over the
28:53
Speaker 1: air automatic updates, it's the self driving. It's all these
28:57
Speaker 1: software things that Tesla has created beyond the actual vehicle itself.
29:02
Speaker 1: It's kind of fascinating. Yeah, well, that's because you and
29:05
Speaker 1: I are older than dirt and we you know, of
29:09
Speaker 1: a generation when cars were really really important. Uh you know,
29:12
Speaker 1: to young people, their their phones and the capability of
29:15
Speaker 1: their phones are much more important in the capability of
29:18
Speaker 1: their cars. So my generation, a car meant freedom. But
29:22
Speaker 1: the current generation, I don't think, feels the same way
29:26
Speaker 1: about escaping a small town as Bruce Springsteen did in
29:31
Speaker 1: in Born to Run. It's it's certainly a generational difference.
29:35
Speaker 1: So what's interesting to me. There's a lot of things
29:39
Speaker 1: interesting to me about this book. But you discussed in
29:42
Speaker 1: the introduction on how Charles McKay was really the influence
29:47
Speaker 1: and the inspiration for this. So what motivated you to
29:51
Speaker 1: want to update the original work by Charles McKay about
29:57
Speaker 1: the Madness of crowds. Well, yeah, the I was uh
30:02
Speaker 1: a journalist who in eighteen four you and writes this
30:05
Speaker 1: book Memoirs of Extraordinarily Popular Delusions in the Madness of Crowds,
30:10
Speaker 1: And as you and I both well know, it's a
30:12
Speaker 1: seminal book in finance. It's one of those books that
30:15
Speaker 1: you tell every practitioner at some point to read because
30:18
Speaker 1: it described the two great bubbles of the of the
30:23
Speaker 1: eighteenth century and also the supposed bubble that surrounded uh
30:28
Speaker 1: toolip bulbs in the seventeenth century, which turns out not
30:31
Speaker 1: to be as a society wide phenomenon is as mackay
30:35
Speaker 1: made it out to be. But it's the most famous
30:38
Speaker 1: chapter in the book because he coins the word tool
30:40
Speaker 1: of mania uh and gives it to the to the
30:43
Speaker 1: English language, and so for generations after that the book
30:47
Speaker 1: has remained in print and has saved people's bacon. UH.
30:52
Speaker 1: Bernard Baruke famously read the book in n right before
30:55
Speaker 1: the crash in nineteen o seven and recognized the signs
30:59
Speaker 1: of the time, and he loved the book so much
31:02
Speaker 1: that he actually wrote the introduction to the nineteen thirty
31:05
Speaker 1: two edition of the book. And of course I read
31:10
Speaker 1: the book in the mid nineteen nineties, just before the
31:13
Speaker 1: tech bubble started to really get going, and I thought
31:16
Speaker 1: it was vaguely interesting, was sort of like a bad
31:19
Speaker 1: B movie about the Roman Empire. It wasn't really relevant
31:22
Speaker 1: to the financial markets at the time, which were pretty
31:25
Speaker 1: well behaved in retrospect. Uh. And then all of a sudden,
31:30
Speaker 1: before my very eyes, I saw this bubble blow, and
31:34
Speaker 1: you know, it saved my bacon the way it did
31:36
Speaker 1: probably most other people who had read the book, So
31:39
Speaker 1: that sort of stayed in my memory banks. Uh. And
31:44
Speaker 1: then you know, five or six years ago, Uh, I
31:49
Speaker 1: observed the way everybody else did, the ability of the
31:52
Speaker 1: Islamic state to attract tens of thousands of people from
31:55
Speaker 1: around the world, uh, including from some a prosperous and
32:00
Speaker 1: secure Western nations, to go to one of the most
32:03
Speaker 1: dangerous and worst places on the world and to you know,
32:07
Speaker 1: to be make cases to to die or to become
32:11
Speaker 1: seriously injured. And the way they did it, it turns out,
32:15
Speaker 1: was not by deploying this end Times narrative, which Mackay
32:19
Speaker 1: had also written about in in his book, and I
32:21
Speaker 1: realized at that point I had to update the book
32:24
Speaker 1: because you know, we now know a lot more about
32:27
Speaker 1: the neuropsychology of why these things occur, which mackay couldn't
32:31
Speaker 1: know because of the state of science at the time.
32:33
Speaker 1: So I love this quote from Charles McKay quote, men,
32:37
Speaker 1: it has been said thinking herds, it will be seen
32:40
Speaker 1: that they go mad and herds while they only recover
32:43
Speaker 1: their senses more slowly and one by one. Why is that, Well,
32:49
Speaker 1: it's because this confirmation is is a solitary process. It's
32:54
Speaker 1: a process where you have to look inside yourself and say,
32:57
Speaker 1: my god, I was an idiot. Uh. And it's a
33:00
Speaker 1: very individual process, whereas the spreading of the media, the
33:03
Speaker 1: spreading of the virus of the contagion is is a
33:07
Speaker 1: is a social process. So you mentioned social networks earlier,
33:11
Speaker 1: whether it's Facebook or Twitter, or or TikTok or what
33:14
Speaker 1: have you. Um, they seem to be accelerating both the
33:19
Speaker 1: creation of these memes and the way they're propagated. Do
33:23
Speaker 1: you think they're a key factor in some of these episodes,
33:28
Speaker 1: how quickly they seem to come out of nowhere, how
33:30
Speaker 1: big they blow up, And then what happens to them
33:33
Speaker 1: after the fact. Yes, I think that's that's absolutely true.
33:38
Speaker 1: A meania can spread more rapidly and more widely today
33:42
Speaker 1: than it ever could before. The thing that's that's really
33:46
Speaker 1: interesting is that, you know, with each iteration, with each
33:49
Speaker 1: advance in communications technology, you have the potential for accelerating delusions.
33:56
Speaker 1: For example, it's no accident that uhs that I wrote
34:00
Speaker 1: about in the book were sixteenth century episodes that's followed
34:05
Speaker 1: hard on the heels of the invention of the printing press.
34:08
Speaker 1: That wasn't an accident, all right, that we started to see,
34:12
Speaker 1: you know, several religious mass delusions in in in continental
34:17
Speaker 1: Europe starting around uh the year fifteen hundred or so.
34:21
Speaker 1: The really interesting thing is why we didn't see all
34:24
Speaker 1: that many manias with radio and television. And the answer
34:27
Speaker 1: was they had built in filters, all right. Uh you know,
34:31
Speaker 1: serious journalistic ethics. Walter Cronkite and you know Edward R.
34:36
Speaker 1: Merrow tended not to lie to people, although Adolph Hitler
34:40
Speaker 1: did and he certainly spread a mass delusion, and he
34:43
Speaker 1: did it primarily with radio. That's interesting. You know, if
34:47
Speaker 1: you look at the book pop why bubbles are great
34:50
Speaker 1: for the economy. Dan gross goes over every time a
34:55
Speaker 1: new technology comes out, if not a full blown bubble
35:00
Speaker 1: than just a massive land Russian over investment misdeployment of
35:05
Speaker 1: capital accompanied everything from railroads to radio, television, automobiles, even
35:12
Speaker 1: fiber optics. You end up with this giant investment because
35:16
Speaker 1: of a fear of missing the next big thing, and
35:20
Speaker 1: it usually ends up with a handful of winners, but
35:23
Speaker 1: most of the rest of the companies turn out to
35:26
Speaker 1: be worthless. But it doesn't necessarily become a full blown
35:29
Speaker 1: bubble across all of society. Yeah, that is that is
35:34
Speaker 1: something that that's almost the constant of financial history. Is
35:38
Speaker 1: there are technologies that really changed the world. I mean,
35:41
Speaker 1: you know, um uh, the Internet really did change everything. Okay,
35:45
Speaker 1: it's just that it didn't make the average investor who
35:49
Speaker 1: invested in the tech companies of the late nineties wealthy.
35:53
Speaker 1: The paradigm to that is something I write about in
35:55
Speaker 1: the book which is Global Crossing Gary Linno Sperm, which was,
36:00
Speaker 1: you know, a fiasco from a financial uh point of view.
36:04
Speaker 1: But the man did build, you know, a large percentage
36:07
Speaker 1: of the world's fiber optic capacity, and he didn't foresee
36:12
Speaker 1: two things, not that he should have at least one
36:14
Speaker 1: of which he should have foreseen, which was that you know,
36:17
Speaker 1: there would be competing lines UH laid that would cut
36:20
Speaker 1: into his profits. But the other thing which he didn't perceive,
36:23
Speaker 1: and I don't think anyone really foresaw, was that the
36:27
Speaker 1: improvement in dry plant, that is, the relays and the
36:30
Speaker 1: transmitters and the receivers along the fiber aphic chains would
36:35
Speaker 1: improve so dramatically that a fiber, the capacity of a
36:39
Speaker 1: fiber to carry data UH would without changing the fiber
36:44
Speaker 1: at all, would improve by orders of magnitude without laying
36:48
Speaker 1: any new fibers. So between I don't know about two
36:50
Speaker 1: thousand and two and two thousand and fifteen, there was
36:54
Speaker 1: almost no fiber new fiber laid UH and yet the capacity,
36:58
Speaker 1: the carrying capacity of the fiber up by about a thousandfold.
37:02
Speaker 1: That's amazing. Arguably, global crossing bandwidth capacity is responsible for
37:09
Speaker 1: everything from YouTube to Facebook that could not have existed
37:13
Speaker 1: in in the pre fat pipe days. Yeah, the concept
37:18
Speaker 1: that I talked about in the book is that technology
37:21
Speaker 1: investors tend to be capitalism philanthropists. Okay, they tend to
37:27
Speaker 1: put money into vitally needed infrastructure that benefits society at large,
37:32
Speaker 1: but benefits all of us, whether it's the railroads, or
37:34
Speaker 1: radio or television or aircraft manufacturer. But they don't make
37:40
Speaker 1: any money in the process. They probably be better off,
37:43
Speaker 1: as the old joke goes, uh, throwing half the money
37:46
Speaker 1: out the window and burning the other half. So I
37:49
Speaker 1: want to stick with the some of the eighteen century
37:52
Speaker 1: bubbles you write about, the south Sea bubble and the
37:55
Speaker 1: Mississippi Company bubble in Europe. One of the data points
38:00
Speaker 1: just stunned me of eighteenth century European stock issuance occurred
38:07
Speaker 1: in a single year, seventeen twenty. How on earth is
38:11
Speaker 1: that even possible. Well, we saw that that was an
38:16
Speaker 1: extreme example. I don't think we've seen anything quite like
38:19
Speaker 1: it ever since. But certainly, you know, the the the
38:24
Speaker 1: amount of I p o issuance of of new sheriffs
38:28
Speaker 1: or in the new company births in the UH was
38:33
Speaker 1: was a very similar phenomenon and left us with some
38:36
Speaker 1: you know, companies that are very important today, prime among
38:38
Speaker 1: which is Amazon. No con intended to say the least.
38:42
Speaker 1: I also want to stick with the parallel you draw
38:45
Speaker 1: from the south Sea Company and real estate. You mentioned
38:50
Speaker 1: the Sassy Company was worth twice the value of all
38:54
Speaker 1: of the lands in England, and we saw an echo
38:57
Speaker 1: of that in the nineteen eighties thanks to the Tokyo
39:01
Speaker 1: real estate bubble, when the Imperial Palace was worth more
39:07
Speaker 1: than all of the land in California. What is it
39:10
Speaker 1: about real estate that encourages this sort of interesting, bubblicious behavior. Well,
39:19
Speaker 1: you have to go back a step and ask what
39:21
Speaker 1: are the factors that underlie bubbles? Uh? And the biggest
39:25
Speaker 1: factor of all, once you get past the new technology, is,
39:29
Speaker 1: of course, the availability of easy credit. So invariably you
39:33
Speaker 1: see bubbles in times of uh lowering gradually falling interest rates,
39:40
Speaker 1: which certainly has some relevance today. UH. And what happens
39:46
Speaker 1: is is the classic real estate bubble cycle, which is,
39:49
Speaker 1: you buy a piece of real estate, Uh, it appreciates
39:52
Speaker 1: and value that enables you to borrow more when you
39:55
Speaker 1: collateralize it. UH. So you take that capital and you
39:59
Speaker 1: buy more real estate. Uh. The prices continue to rise,
40:03
Speaker 1: which enables you to borrow more and more. It becomes
40:05
Speaker 1: a self inflating cycle until it finally blows up. That's
40:09
Speaker 1: my favorite scene in the movie version of The Big Short,
40:13
Speaker 1: where Steve Carrell is talking to I don't remember for
40:17
Speaker 1: as a waitress or a stripper who owned a house
40:20
Speaker 1: and was talking about how she financed it, and uh,
40:25
Speaker 1: he asked her a question and her answer was, how
40:27
Speaker 1: is this? He's like, you have more than one? She says,
40:29
Speaker 1: I have five, And it's just that classic moment of Oh,
40:33
Speaker 1: that's what people do with free money and lots of leverage.
40:36
Speaker 1: They go out and try and uh, try and get
40:39
Speaker 1: rich as quickly as they can. Yeah. My favorite story,
40:42
Speaker 1: and I think it may have come from one of
40:44
Speaker 1: your episodes, was when Dick Sailor did beside that scene
40:49
Speaker 1: with two of the Jennifer Lopez uh, and it turned
40:53
Speaker 1: and it turned out that Jennifer Lopez didn't know who
40:55
Speaker 1: Dick Taylor was, and Dick Taylor didn't know who Jennifer
40:57
Speaker 1: Lopez was. Was it j Lower? Was it Selena Gomez?
41:01
Speaker 1: I don't remember, you know, I honestly don't know. Tells
41:04
Speaker 1: you what generation I belong to. But the actress didn't
41:06
Speaker 1: know who who whose failure was advice A person I
41:10
Speaker 1: thought that was hilarious, to be fair, another person a
41:14
Speaker 1: decade before they won their Nobel prize. So you know,
41:18
Speaker 1: maybe maybe it was a you know to her just
41:21
Speaker 1: an obscure economics professor toiling and obscurity in Chicago. There
41:27
Speaker 1: there's a couple of really just fascinating digressions within the book.
41:33
Speaker 1: I love this, this reference to some of Barry Iken
41:36
Speaker 1: Green's work. He's an authority on the gold standard, and
41:40
Speaker 1: his observation was that nations recovered from the Great Depression
41:45
Speaker 1: in the precise order they abandoned hard money and a
41:49
Speaker 1: currency backed by gold. I have never seen that precise quote.
41:55
Speaker 1: How significant was hard money and gold to the basic
42:02
Speaker 1: narrative and the delusion that gold was somehow special. Well,
42:07
Speaker 1: in the first place, we get that to the the
42:10
Speaker 1: Paris bubble of Mississippi company UH bubble, And that was
42:15
Speaker 1: John Law's great innovation was he realized that hard money
42:20
Speaker 1: was a drag on any company's economy UH and financial development.
42:25
Speaker 1: And so he basically introduced paper currency UH to France,
42:30
Speaker 1: and unfortunately he went he went overboard. But he's probably
42:35
Speaker 1: you know, I think it's he's arguably the the father
42:39
Speaker 1: of modern central banking and modern finance. He invented the
42:43
Speaker 1: system that we have today. Just that he you know,
42:46
Speaker 1: he and the Duke door Land or they all blew
42:50
Speaker 1: it blew it up, so I can Green is of course,
42:55
Speaker 1: you know, did the seminal research in this area. You're
42:57
Speaker 1: talking about a book called Golden Setters U and the
43:00
Speaker 1: research behind it. When you ever you hear the mainstream economist, uh,
43:06
Speaker 1: you know, gag when you mentioned the gold standard. Uh,
43:09
Speaker 1: it's Barry I can Green there channeling and and his work.
43:13
Speaker 1: My favorite trope of the gold bug is that gold
43:16
Speaker 1: has been money for five thousand years. It certainly has
43:19
Speaker 1: not been money for five thousand years. The money, you know,
43:23
Speaker 1: it wasn't started to be used as money until the
43:26
Speaker 1: Hellenistic period. Uh in in Greece, which was not much
43:31
Speaker 1: more than two thousand years ago. And before that, lack
43:34
Speaker 1: of things were money. You know, a leader of grain
43:36
Speaker 1: was money, ahead of cattle was money. Uh. If you
43:40
Speaker 1: wanted something that looked more like hard money back in
43:43
Speaker 1: the ancient world, silver was was the real hard money
43:46
Speaker 1: at that error, it wasn't gold. Yeah, it's going to
43:48
Speaker 1: be curious to see what happens to the goldbubs when
43:51
Speaker 1: we um last. So some asteroid with you know, a
43:55
Speaker 1: billion metric tons of gold and platinum in it, it
43:59
Speaker 1: might change the belief and hard hard money There's another
44:03
Speaker 1: issue we really didn't get to, which is the overwhelming
44:07
Speaker 1: proclivity of human beings to imitate the behavior of of
44:11
Speaker 1: those around them, regardless of how baseless or self destructive
44:15
Speaker 1: that behavior. Maybe what's behind our propensity for imitation? Well,
44:21
Speaker 1: in the first place, we really haven't talked about this.
44:24
Speaker 1: When you ask what is the primary uh psychological mechanism
44:28
Speaker 1: of manias, it's our proclivity to imitate U from something
44:33
Speaker 1: as basic as just yawning. It's why yawning is infectious.
44:37
Speaker 1: And the infectiousness of yawning is something that's actually been
44:39
Speaker 1: studied in some detail, and I won't get into how
44:42
Speaker 1: interesting it is, but trust me, yawning is is very
44:45
Speaker 1: very interesting. But what is behind that is something that's
44:50
Speaker 1: that's very simple, and that's the paradigm of thinking of
44:55
Speaker 1: the human occupation of the New World North and South America,
44:59
Speaker 1: which began some around fifteen twenty thousand uh years ago,
45:03
Speaker 1: and within the space of several thousand years, human kind
45:08
Speaker 1: spread from the frozen Arctic wastes down through the North
45:13
Speaker 1: American continent and into South America and the Andy's and
45:16
Speaker 1: all the way down to the Tierra del Fuego. And
45:19
Speaker 1: along the way human beings had to learn how to
45:22
Speaker 1: make kayaks uh and how to hunt bison and how
45:27
Speaker 1: to make poison blow darts, and all of those endeavors
45:30
Speaker 1: are very complex, they're very hard to learn, and no
45:33
Speaker 1: one person is going to figure out how to do
45:35
Speaker 1: it well on their own. And so the way that
45:39
Speaker 1: you will survive, in the way your tribe will survive,
45:42
Speaker 1: is if you're very good at imitating. You know, if
45:45
Speaker 1: Joe and his friends figure out how to build a
45:48
Speaker 1: kayak from from scratched and rather than figure it out yourself,
45:52
Speaker 1: you're going to imitate that, all right. So the ability
45:55
Speaker 1: to imitate carries enormous sur value of value not only
46:00
Speaker 1: for individuals, but for entire societies as well. And unfortunately,
46:06
Speaker 1: it's a good deal more dysfunctional uh in the in
46:11
Speaker 1: the modern world, because that ability to imitate carries with
46:14
Speaker 1: it the proclivity to nnias and the proclivity of nnias
46:19
Speaker 1: It may not be that dangerous in the in a
46:22
Speaker 1: state of nature, but in a world of social media,
46:25
Speaker 1: it's deadly interesting. So, you know, we we briefly touched
46:30
Speaker 1: on on some of the evolutionary adaptations that work so
46:34
Speaker 1: well on the Savannah, but hurt us um in modern times.
46:40
Speaker 1: What is some of the anthropology behind this? Why are
46:44
Speaker 1: we simply status seeking, narrative believing imitators. Give us a
46:50
Speaker 1: little more background about some of the academic work that
46:53
Speaker 1: that's been done in this space. Well, the narrative proclivity
47:00
Speaker 1: is something that you think about. It is fairly obvious,
47:03
Speaker 1: which is that when you and your your colleagues fifteen
47:07
Speaker 1: thousand years ago went out to hunt wily wily mammoth,
47:11
Speaker 1: you didn't issue mathematical vectors to each other. That's not
47:14
Speaker 1: the way the human mind works. We use We use
47:17
Speaker 1: our left hemisphere seric ability to communicate with words. So
47:21
Speaker 1: you know, Joe, you go left, Fred you go right,
47:24
Speaker 1: and you'll both spear the mathodon from both sides. That's
47:29
Speaker 1: that's how we communicate with each other UH. And that's
47:32
Speaker 1: how we transmit our values. We don't do it mathematically
47:35
Speaker 1: or with analytical UH rigor. And the example of that
47:39
Speaker 1: that I use in the book was very early in
47:43
Speaker 1: the UH the Republican nominating process in late two thousand
47:47
Speaker 1: and fifteen, when you know, the Republicans had these enormous
47:51
Speaker 1: UH primary UH debates and you know, no one no
47:55
Speaker 1: one took Donald Trump seriously. Someone asked Ben Carson, who,
48:00
Speaker 1: for whatever you think of him, was a very famous neurosurgeon. Uh.
48:04
Speaker 1: And they asked him what he thought of vaccination, and
48:06
Speaker 1: he thought the science and back of it was pretty
48:09
Speaker 1: far many, you know, gave the typical Republican answer, which was,
48:12
Speaker 1: but you know, no one's going to force you to
48:13
Speaker 1: take you know, I don't want anybody to be forced
48:15
Speaker 1: to take a vaccination. Uh. And Donald Trump interrupted him
48:20
Speaker 1: and said, I had an employed you who had a
48:22
Speaker 1: daughter who's got vaccinated, a beautiful child. This was a
48:26
Speaker 1: beautiful child and she developed autism. It's an epidemic. I
48:30
Speaker 1: tell you, it's an epidemic. And he knew exactly what
48:33
Speaker 1: he was doing. Uh. He knew that. You know, Ben
48:36
Speaker 1: Carson's data were nothing compared to his narratives. All right,
48:41
Speaker 1: So that's why you know, that's that's an example of
48:44
Speaker 1: the importance of of narratives. Now status thinking again, Uh,
48:49
Speaker 1: is is something that has to do with with sexual selection. Uh.
48:55
Speaker 1: If you're a female and you're looking for a mate,
48:58
Speaker 1: your major concern is passing on your d N A.
49:01
Speaker 1: And the way your DNA gets passed on is if
49:04
Speaker 1: you and your progeny are well provided for all right,
49:08
Speaker 1: and your your progeny will be well provided for. If
49:11
Speaker 1: your mate, uh, if the father of the children U
49:15
Speaker 1: is a mocker, You someone who can bring home the
49:18
Speaker 1: meat and command other people. If you don't, you're not
49:21
Speaker 1: going to take a weekly because if you take a weekly, uh,
49:24
Speaker 1: then that that person, that man will not provide for
49:27
Speaker 1: you and your children. And you are less likely to
49:30
Speaker 1: pass your your June's on. And we see it today. Uh.
49:34
Speaker 1: You know in society today are a lot more likely
49:37
Speaker 1: to pass your jeans on if you're a rock star
49:39
Speaker 1: or athlete, then you know, if you're someone who didn't
49:44
Speaker 1: graduate high school and can't jump. Interesting, So let's go
49:48
Speaker 1: to our favorite questions that we ask all of our guests,
49:52
Speaker 1: starting with what are you streaming these days? Give us
49:55
Speaker 1: your favorite Netflix podcast, Amazon Prime? What what's keeping you
50:00
Speaker 1: entertained during a lockdown? Well, I'm afraid I'm not much
50:05
Speaker 1: unpopular culture. That the the the series that we're into
50:09
Speaker 1: right now, uh is Green Leaf, which is about a
50:13
Speaker 1: African American evangelical church, and it's just it's just a
50:18
Speaker 1: great soap opera. The acting, it's spectacular, the move the
50:21
Speaker 1: music is is fantastic, This cinematography is is you know,
50:26
Speaker 1: is Amy class. I mean, it's just absolutely a spectacular
50:29
Speaker 1: series and best of all, as sixty five episodes, so
50:32
Speaker 1: it'll keep you occupied for for a while. And you know,
50:36
Speaker 1: like everybody else's my ilk, I'm waiting for the next
50:39
Speaker 1: season of Succession and better call Saul and Ozark. Uh.
50:45
Speaker 1: As far as podcast, uh go, I'm afraid that most
50:50
Speaker 1: of my reading bandwidth and my podcast Bandwich gets taken
50:53
Speaker 1: up by the Economist, and it's almost overkill to do
50:57
Speaker 1: both of those with the Economists. But the thing you
50:59
Speaker 1: get from Economists podcast that you don't get from reading
51:02
Speaker 1: the magazine is the flavor of just how smart and
51:05
Speaker 1: funny these people are. And you have to put names
51:07
Speaker 1: on them too. Of course, you know the the the
51:10
Speaker 1: the Economist doesn't have bylines, so you actually get to
51:14
Speaker 1: listen to the people who hear about who excuse me,
51:18
Speaker 1: you get to listen to people who are writing the articles,
51:19
Speaker 1: and that is marvelously entertaining. I love Silent Money, I
51:23
Speaker 1: love your shows. Uh And and of course On the
51:28
Speaker 1: Media is another series that's very, very smart. I also
51:32
Speaker 1: like uh The New Yorker just because I simply can't
51:36
Speaker 1: get enough of David Remnick. He's certainly amusing. Uh. Let's
51:41
Speaker 1: talk about some mentors. Who are the people who influenced
51:45
Speaker 1: your thought process, your philosophy, your career well. First of all,
51:49
Speaker 1: career wise, I have to give credit to two people
51:53
Speaker 1: who most people haven't heard of. One of whom is
51:57
Speaker 1: um Scott Burns, who wrote finance for the Dallas Morning
52:02
Speaker 1: uh news. Uh. He's not your typical personal finance writer.
52:06
Speaker 1: He went to uh M I p uh and then
52:11
Speaker 1: he would go over Harvard Harvard to take writing lessons
52:14
Speaker 1: from Archibald Mcalish uh. And he was the first person
52:17
Speaker 1: who who basically encouraged me and told me that very
52:22
Speaker 1: few people had the ability both to do the mass
52:24
Speaker 1: and right well. And if I had that ability, and
52:26
Speaker 1: he thought I did, I should be encouraged to do it.
52:29
Speaker 1: And I was, you know, very discouraged at that point
52:32
Speaker 1: in my career. So he gave me the impetus. And
52:34
Speaker 1: the other person and someone who's even more obscure financial advisor, right,
52:37
Speaker 1: and the Frank Armstrong, who was the right first person
52:40
Speaker 1: I'm aware of to put a finance book on the web,
52:43
Speaker 1: investing for the twentieth century or investing for the twenty
52:45
Speaker 1: first century. I think he had two different editions, and
52:48
Speaker 1: he was the one who told me to put my
52:50
Speaker 1: book The Intelligent Asset Allocator on the web, which jump
52:54
Speaker 1: started my writing career. Now, as far as investing goes,
52:57
Speaker 1: you know, it's the usual suspects, Um, it's it's going
53:00
Speaker 1: to be Jack Burgel. So I did have some personal
53:02
Speaker 1: contact with and of course Farmer and French, who had
53:05
Speaker 1: almost no personal contact with, who were my intellectual mentors,
53:10
Speaker 1: and then they were the people who have helped me
53:11
Speaker 1: along in my career, prime among which are John Raiken,
53:15
Speaker 1: Pauler at Morning Star, and Jonathan Clements at the at
53:19
Speaker 1: the Journal. And then he was succeeded by Jason's Wide,
53:24
Speaker 1: who is someone that I derived a great deal of
53:26
Speaker 1: uh personal inspiration from as well. That's a great list.
53:32
Speaker 1: Let's talk about some of your favorite books and and
53:35
Speaker 1: what you're reading right now. Okay, Well, the two favorite
53:38
Speaker 1: books that I always mentioned to everybody are Expert Political
53:41
Speaker 1: Judgment by philth Catlock, which talks about just how difficult
53:46
Speaker 1: it is uh to forecast well, how poorly people do
53:51
Speaker 1: at and particularly the characteristics of poor forecasters. Which is
53:56
Speaker 1: which is immensely valuable since that turns out to me
53:58
Speaker 1: most of the people on EV And he explains exactly
54:01
Speaker 1: why people on TV UH talking heads tend to be
54:05
Speaker 1: miserable UH forecasters and identifies in fact that they that
54:10
Speaker 1: they that they are. UH. The other book that I recommend,
54:13
Speaker 1: it's kind of a grim book and it seems irrelevant
54:15
Speaker 1: to finance, but I think it's just so very important,
54:19
Speaker 1: which is Lawrence Reaves's History of Ashwitz Ashwitz New History.
54:23
Speaker 1: And it was a history of Ashwitz from the perspective
54:25
Speaker 1: of the camp personnel. UH. And the bottom line is,
54:29
Speaker 1: if you can understand how very ordinary Germans became mass murderers,
54:34
Speaker 1: then you can certainly understand Enron UH and world com
54:39
Speaker 1: and and we work all right, uh and and it's
54:44
Speaker 1: it's just a very important for people in finance if
54:46
Speaker 1: you can make that jump. Now. The book that I'm
54:49
Speaker 1: reading right now and not even done with it, but
54:51
Speaker 1: it's one of the most brilliant books I've ever read,
54:54
Speaker 1: is a book called The Weirdest People in the World. UH.
54:57
Speaker 1: Weird is an acreneym W I l D, which stands
55:01
Speaker 1: for Western educated, UH, Industrialized, rich and Democratic, which is
55:07
Speaker 1: all of Western society. And it's a book, first of all,
55:10
Speaker 1: about how unusual we are. It's a book by man
55:13
Speaker 1: by Joseph Henrick, who is an interesting guy in himself,
55:17
Speaker 1: which I'll get to in in a minute. And he
55:20
Speaker 1: has this bizarre thesis which you know, strikes most people
55:23
Speaker 1: is outrageous, and if the reason why the book is
55:26
Speaker 1: more widely read than it is. And the thesis is
55:29
Speaker 1: that we are who we are in Western society and
55:31
Speaker 1: we're rich the way we are because, uh, the Church
55:35
Speaker 1: forbade cousin marriage, which seems like a really weird hypothesis
55:41
Speaker 1: until he explains it to you. And then he goes
55:44
Speaker 1: into the data and back of it, which is just
55:46
Speaker 1: absolutely steel trapped. Uh. He brings an enormous amount of
55:51
Speaker 1: data from anthropology and social psychology, uh, to bear on it,
55:56
Speaker 1: and he makes an extremely convincing case. Uh. And it's
56:00
Speaker 1: just that the the you know, the Church forbade the
56:03
Speaker 1: marriage of first cousins. They forbade the marriage of even
56:06
Speaker 1: fifth cousins in some instances. And if you can't marry
56:09
Speaker 1: your fifth cousin basically means you have to get out
56:11
Speaker 1: of town to find a mate. And what that does
56:15
Speaker 1: is it greatly increases your radius of trust. Okay, you
56:18
Speaker 1: start trusting people who are outside your immediate family and tribe,
56:23
Speaker 1: and that is the essential characteristic of the wealthiest modern society.
56:28
Speaker 1: The reason why the dames in the Norwegians, uh and
56:32
Speaker 1: the Germans do so well is because they trust strangers,
56:36
Speaker 1: all right. And if you look at the places in
56:38
Speaker 1: the world that don't do well, that have poor poor
56:42
Speaker 1: economies and poor politics and poor institutions, its societies with
56:46
Speaker 1: very low radius of trust. So, for example, it's the
56:49
Speaker 1: difference between northern and southern Italy. The radius of trust
56:52
Speaker 1: in northern Italy is very high. The radius of trust
56:55
Speaker 1: in in um In uh sard in Italy is very
57:00
Speaker 1: very low, and something that sociologists have known about for years,
57:03
Speaker 1: for decades. So it's it's a book that explains all that,
57:07
Speaker 1: and it's it's just, uh, it's an amazing read and
57:10
Speaker 1: I can't recommend the book highly enough. Interesting, you mentioned
57:13
Speaker 1: he has an unusual background. He didn't start act with
57:16
Speaker 1: the usual four star you know, academic background. He started
57:21
Speaker 1: out as an aerospace engineer, I think at a state
57:23
Speaker 1: university somewhere, but he's been a minor in anthropology and
57:27
Speaker 1: after working in aerospace for a while, and you look
57:30
Speaker 1: at his pictures and he looks like your typical aerospace engineer,
57:32
Speaker 1: you know, with the find horns and glasses. He doesn't
57:35
Speaker 1: have a pocket protector, but he should have one. Uh
57:39
Speaker 1: and uh. And he starts doing He gets a PhD
57:42
Speaker 1: in anthropology, and he starts doing his research. And the
57:46
Speaker 1: research is so so remarkably good that he just gradually
57:50
Speaker 1: ascends the academic um uh ladder. First the University of
57:55
Speaker 1: British Columbia, and now he's gotten endowed share of anthropology
57:59
Speaker 1: at Harvard and this enormous team of multidiscipcenary researchers in
58:05
Speaker 1: under him, you know, psychologists and economists, uh and social psychologists,
58:11
Speaker 1: and his his work is just absolutely brilliant. Once once
58:15
Speaker 1: you start reading the book, if you're academically inclined, that
58:18
Speaker 1: you'll get lost in the thicket of his references because
58:21
Speaker 1: the references are so fascinating. So he's another left brain
58:25
Speaker 1: right brain person who could do both the math and
58:29
Speaker 1: the narrative side. Yes, you're going to have a mentioned
58:32
Speaker 1: is fact. He also writes very well, right, you're another
58:35
Speaker 1: one of those people who have the ability to deal
58:38
Speaker 1: with the underlying mathematics and the language side. And that's
58:43
Speaker 1: a relatively rare combination of skills. Shucks, belly, I'm just
58:47
Speaker 1: a simple country neurologist. That's right. Let's get to our
58:52
Speaker 1: last two questions. What sort of advice would you give
58:56
Speaker 1: to a recent college graduate who was interested in career
59:00
Speaker 1: in either neurology, investing, or writing. Well, the usual admonission
59:08
Speaker 1: to follow your bliss uh is just awful advice. Um.
59:13
Speaker 1: You know, my favorite of my favorite New Yorker cartoons
59:16
Speaker 1: is the typical cartoon where they have a guy with
59:19
Speaker 1: you know, sitting on the street and shambles with a
59:22
Speaker 1: with a with a hat in front of them, and
59:23
Speaker 1: his sign says, followed my bliss. Uh. You know you
59:27
Speaker 1: have to you have to make a living. Uh. And
59:31
Speaker 1: the best thing you can do is to melt those
59:33
Speaker 1: two things. You shouldn't. You shouldn't take a job if
59:35
Speaker 1: you despise just to make money. But on the other hand,
59:39
Speaker 1: you know you shouldn't get a degree in ethno musicology
59:43
Speaker 1: as well and expect to have a happy existence. Uh.
59:47
Speaker 1: You know you need to to have a decent standard
59:50
Speaker 1: of living. You need to provide for your family, and
59:52
Speaker 1: you need to save up so that if you ever
59:54
Speaker 1: get sick of your job, you can follow your bliss
59:56
Speaker 1: at that point and I have to worry about your
59:58
Speaker 1: next your net to meal. And the best part of
1:00:01
Speaker 1: doing that is if you can wind up with reasonable
1:00:05
Speaker 1: savings at age forty or fifty, you don't have to
1:00:08
Speaker 1: worry about what to do with the last twenty or
1:00:09
Speaker 1: thirty years of your life because you'll have whole in
1:00:11
Speaker 1: your careers in front of you and usibly things that
1:00:14
Speaker 1: you genuinely enjoy doing. So don't follow your bliss, don't
1:00:18
Speaker 1: take a job just for the money. Try and mel
1:00:20
Speaker 1: those through things intelligently and balanced them off. I have
1:00:23
Speaker 1: to ask, since you you referenced, what what's your take
1:00:27
Speaker 1: on the whole early retirement fire community that that seems
1:00:33
Speaker 1: to believe you can save enough money and tap out
1:00:38
Speaker 1: at in your thirties or forties. Oh, it's a great idea,
1:00:41
Speaker 1: as long as you don't get sicker have kids. So
1:00:46
Speaker 1: not a fan, let me uh, I think I think
1:00:49
Speaker 1: the hardest in the right place. I think they're a
1:00:53
Speaker 1: little delusional, and of course they also ignore you know,
1:00:56
Speaker 1: about the realities of life. And I think they also
1:00:59
Speaker 1: ignore Uh, you know, what do you do with your
1:01:02
Speaker 1: life when you go to the beach at age thirty
1:01:04
Speaker 1: or forty? You better have something worthwhile that you want
1:01:07
Speaker 1: to do with your life. You better have a mission
1:01:09
Speaker 1: in life, because if you're don't, you're going to wind
1:01:12
Speaker 1: up coffering from industrial grade on the way. I don't
1:01:16
Speaker 1: want to trash them too much. I mean, I like
1:01:17
Speaker 1: these people, and I think that their message for our
1:01:20
Speaker 1: society that we live in a corrosive consumer culture that
1:01:23
Speaker 1: has to be resisted and you should keep your living
1:01:26
Speaker 1: expenses down, is certainly a very salutary message. Fair enough,
1:01:30
Speaker 1: And our final question, what do you know about the
1:01:33
Speaker 1: world of investing today that you wish you knew thirty
1:01:37
Speaker 1: plus years ago or so when you were first getting
1:01:40
Speaker 1: started in finance. Well, you know, academics like to play
1:01:45
Speaker 1: this parlor game of do equities become riskier? Uh? You know,
1:01:51
Speaker 1: over over less riskier, more risky over over time? And
1:01:55
Speaker 1: there are an instant both sides that most academ missions
1:01:57
Speaker 1: will tell you that they become riskier with time. But
1:02:00
Speaker 1: what I only fully understood, you know, after until after
1:02:05
Speaker 1: doing it. I didn't understand until after doing finance for
1:02:07
Speaker 1: a couple of decades, was that that's kind of a
1:02:09
Speaker 1: silly question. Uh. The real question is how risky are
1:02:13
Speaker 1: stocks at a given stage in your life cycle? Uh.
1:02:18
Speaker 1: And so if you are retired and you don't have
1:02:21
Speaker 1: any human capital left, then stocks are three mile Island
1:02:25
Speaker 1: chernewbyl toxic. They're very dangerous because you know, if you
1:02:30
Speaker 1: have a bear market, bad bear market, uh that's prolonged,
1:02:35
Speaker 1: you've got bad sequence risk and you may wind up
1:02:37
Speaker 1: eating eating out out. At the other end of the spectrum,
1:02:40
Speaker 1: if you're young, there's almost no risk to earning stocks
1:02:43
Speaker 1: because you're periodically saving, and at some point in your
1:02:47
Speaker 1: thirty or four year saving career, you're gonna buy a
1:02:49
Speaker 1: lot of stocks very cheap, and you're gonna wind up
1:02:52
Speaker 1: doing very very well. And I wish I had understood
1:02:55
Speaker 1: that earlier in my career, so I could have been
1:02:58
Speaker 1: more aggressive earlier in my career. But you know, as
1:03:01
Speaker 1: it was at the time, So I don't feel too
1:03:03
Speaker 1: bad about doot. But if there was one lesson I
1:03:04
Speaker 1: wish I had had I had learned I had internalized
1:03:08
Speaker 1: it was I could have been a lot more aggressive
1:03:10
Speaker 1: when I was younger. Very interesting, Bill Bernstein, Thank you
1:03:14
Speaker 1: so much for being so generous with your time. We
1:03:17
Speaker 1: have been speaking with William Bernstein, author most recently of
1:03:21
Speaker 1: the Delusion of Crowds, Why People Go Mad in Groups,
1:03:24
Speaker 1: as well as a dozen other books. If you enjoy
1:03:28
Speaker 1: this conversation, well be sure and check out any of
1:03:30
Speaker 1: the previous three hundred and ninety conversations we've had over
1:03:34
Speaker 1: the past seven years. You can find that at iTunes, Spotify,
1:03:39
Speaker 1: where wherever you feed your podcast fix. We love your comments,
1:03:43
Speaker 1: feedback and suggestions right to us at m IB podcast
1:03:48
Speaker 1: at Bloomberg dot net. Give us a review on Apple iTunes.
1:03:52
Speaker 1: You can sign up for my Daily reads at Ridolts
1:03:55
Speaker 1: dot com. Check out my weekly column on Bloomberg dot
1:03:59
Speaker 1: com slash Opinion. Follow me on Twitter at rid Halts.
1:04:03
Speaker 1: I would be remiss if I did not thank the
1:04:05
Speaker 1: crack staff that helps us put these conversations together each
1:04:09
Speaker 1: and every week. Tim Harrow is my audio engineer. Atico
1:04:13
Speaker 1: val Brond is my project manager. Michael Boyle is my producer.
1:04:18
Speaker 1: Michael Batnick is my head of research. I'm Barry rit Halts.
1:04:22
Speaker 1: You've been listening to Masters in Business. I'm Bloomberg Radio