Speaker 1: Pushkin. Hi, everyone, welcome back to Risky Business, our show
Speaker 1: about making better decisions. I'm Maria Kanikova and I'm Nate Silver.
Speaker 1: So today we have a slightly different and fun show
Speaker 1: for you. We're going to start off talking about some
Speaker 1: of our usual things, so we'll do a quick politics recap.
Speaker 1: So we're taping this on Tuesday, August twenty seventh. That
Speaker 1: DNC has concluded, Kamala Harris has accepted the nomination, and
Speaker 1: a lot of things are going on with Nate's election models,
Speaker 1: so we're going to talk quickly about that, and then
Speaker 1: we're going to be bringing on a very special guest,
Speaker 1: Tim Harford, who hosts another Pushkin podcast, Cautionary Tales, and
Speaker 1: we'll be talking about the intersection of risk and cautionary
Speaker 1: details from history. All right, before we bring Tim on,
Speaker 1: Nate's let's talk a little bit about politics and what
Speaker 1: has happened since the DNC. Last time you and I
Speaker 1: talked the DNC was on day one and we weren't
Speaker 1: quite sure what to expect. We weren't quite sure how
Speaker 1: it was going to go. So now here we are
Speaker 1: a week later. Let's recap and talk about what has
Speaker 1: happened since the convention, and also RFK Junior obviously dropping out,
Speaker 1: So two big things have happened since we last spoke
Speaker 1: to potentially affect the model.
Speaker 2: We still don't know that much, but so far it's
Speaker 2: been kind of a bunch of rand not crap, but
Speaker 2: like kind of by definition, the polls that are done
Speaker 2: in one or two days are either online tracking polls
Speaker 2: which are fine but sometimes don't really capture change some
Speaker 2: voter sentiment. It's gonna be very stable or quick and
Speaker 2: dirty fly by night polls that are also not very good.
Speaker 2: So by Thursday, well, no, so far it seems like
Speaker 2: Harris is poling as well. She has all campaign, But
Speaker 2: is it gonna Is she gonna three points or four
Speaker 2: points or five or six or seven? The model will
Speaker 2: care about that a lot, but like we don't. We
Speaker 2: just don't know quite yet. I mean, I thought it
Speaker 2: was an effective convention, you know, maybe will. I thought
Speaker 2: the gender politics of her speech were interesting. It was
Speaker 2: a very male coded speech talking of like the like
Speaker 2: the most lethal military force. It was a very risk
Speaker 2: taking speech. Actually right, She's like it was we're privileged,
Speaker 2: so we should fucking kick ass America. Like I'm like, oh,
Speaker 2: my gosh, I love this.
Speaker 1: It was a it was a good speech to speak,
Speaker 1: It was.
Speaker 2: Interesting, it was like not a typical speech. And again
Speaker 2: I'm a fan of good strategy, and so anybody who
Speaker 2: shows good strategic instincts I think Harris has repeatedly. Now
Speaker 2: at this point, I just kind of my estimation of
Speaker 2: their intellect and their skills goes up a little bit.
Speaker 2: But but we'll see. I mean, if a speech appeals
Speaker 2: to me is probably somewhat negatively correlated with it's appealing
Speaker 2: to the general population, I'd.
Speaker 1: Say, I don't know. It appealed to me as well.
Speaker 2: Well.
Speaker 1: I think she she walked a fine line in I
Speaker 1: think talking about all of the things that matter, having
Speaker 1: it actually been heavier on policy than I think a
Speaker 1: lot of people thought it was going to be, and
Speaker 1: appealing to a lot of different voters. Right. She didn't.
Speaker 1: She didn't hew to just one audience or kind of
Speaker 1: one one topic, and I think that that was actually
Speaker 1: quite an effective way for her to go.
Speaker 2: No, she avoided some of the presumptuousness, and I think
Speaker 2: we saw with Hillary. I watched her speech in Hillary
Speaker 2: Clinton's intersperse with one another, and she avoided that presumptuousness,
Speaker 2: and she is playing to the center right, kind of unapologized.
Speaker 2: I mean that's the basic gto game, theoreptical strategy. Most
Speaker 2: of the time, you want to you want to appear
Speaker 2: more moderate.
Speaker 1: Yeah. And then, of course after the convention, we had
Speaker 1: news on Friday of last week with RFK Junior dropping
Speaker 1: out of the race and throwing his support.
Speaker 2: What is Cheryl Hines doing? Can we talk about that?
Speaker 1: Okay, yes, I don't know.
Speaker 2: I mean, what is Cheryl Hines doing?
Speaker 1: I don't know.
Speaker 2: Yeah. Anyway, when you have polls that test the matchup
Speaker 2: both with him without RFK Junior, then Trump does better
Speaker 2: in polls without him. In other words, RFK is taking
Speaker 2: more votes from Trump than from Harris in our model.
Speaker 2: We adjusted the model on Saturday to make it rfkless.
Speaker 2: It didn't hurt Harris kind of like coincidental reasons, which
Speaker 2: his name was. Like, she is getting like somewhat of
Speaker 2: a convention bounce. I just said, like, oh, it's like
Speaker 2: too early to pay attention to it. But like, but
Speaker 2: she's doing okay, and that was enough to offset this
Speaker 2: RFK maneuver. But yeah, it's a little bit of a
Speaker 2: risk factor. Look I think anything involving RFK is kind
Speaker 2: of over it. He was getting like, you know, three
Speaker 2: and a half four percent in the polls. A lot
Speaker 2: of those books will go to other third party candidates.
Speaker 2: By the way, he'll still be on the ballot technically
Speaker 2: speaking in a number of states. So anyway, I think
Speaker 2: it's like an overrated storyline. But you know, it's one
Speaker 2: of the better things Trump has going for him right now.
Speaker 2: I suppose after a very bad month, you know, whatever,
Speaker 2: he whatever quid pro quo there was, and I'm not
Speaker 2: accusing anybody of anything, but like, look, RFK Junior was
Speaker 2: negotiating with both campaigns for some type of position. What
Speaker 2: ambassadorship do you predict that he'll get. Malta might be one.
Speaker 1: Yeah, No, I think I think getting an ambassadorship to
Speaker 1: a country like Malta might might be a yeah, might
Speaker 1: be a way forward for our FKA. He was very
Speaker 1: mad that. You know, in the past he has been
Speaker 1: promised positions in the Trump administration that never materialized.
Speaker 2: Anyway, future ambassador to Malta RFK Junior and doors Stunnel Trump,
Speaker 2: which should help Trump a little bit, but probably not
Speaker 2: that big a deal.
Speaker 1: And one more question for you. Last time we spoke,
Speaker 1: I kind of I don't know if this was last time,
Speaker 1: but I've definitely asked you whether you thought that Trump
Speaker 1: was actually going to be debating Kamala in September, and
Speaker 1: I express skepticism. Now we see that he might be
Speaker 1: paving the way for not doing that. Have you changed
Speaker 1: your thinking about it at all?
Speaker 2: You know, Marie, you can go to polymarket dot com,
Speaker 2: to which I'm a paid advisor, by the way, and
Speaker 2: bet on this.
Speaker 1: I know I can'tnate because I live in the United States.
Speaker 2: Okay, not if you're an American. I think Donald Trump
Speaker 2: would be incredibly stupid not to debate he needs at
Speaker 2: this point. Currently he's losing, right. The reason why we
Speaker 2: have it closer to fifty to fifty in the model
Speaker 2: is because you know, there are reasons the model expects
Speaker 2: the race to tighten up again, and Trump has electoral
Speaker 2: college advantage if it's really close. But if you have
Speaker 2: the election today, Harris might be a two to one
Speaker 2: favorite or something like that. So Trump wants to introduce
Speaker 2: obstacles for her and variants. So I think it's a bluff.
Speaker 2: I mean, I think I don't know for sure. Trump's
Speaker 2: been acting pretty irrationally. I think it's a bluff. If
Speaker 2: it's not, I mean, if I were the Harris campaign
Speaker 2: and be like, Okay, don't yo, bro, don't take your
Speaker 2: coverage too far because you could be a good excuse
Speaker 2: not to debate you, then we'll just ride this momentum
Speaker 2: train through to November. And so he has very little leverage.
Speaker 2: If he ducked the debate, he would look very weak. Yeah,
Speaker 2: it has to be emasculating. I mean there are gender
Speaker 2: things here too, right, Like he can't debate Kamala Harris.
Speaker 2: Like he looks so weak that he has like very
Speaker 2: little leverage. And if you stupd enough to do that,
Speaker 2: then you know, probably he doesn't deserve to win. But
Speaker 2: I'm skeptical that this is anything other than like tactical negotiation.
Speaker 1: That makes sense. I'll be very, very curious to see
Speaker 1: how this plays out. And if I could bet on polymarket,
Speaker 1: I would, but but I can't.
Speaker 2: You're going to Barcelona, right.
Speaker 1: I mean I am in Barcelona, Barcelona. Yes, this is
Speaker 1: this is my Barcelona hotel room, nice with my very
Speaker 1: own mini bar.
Speaker 2: I was gonna say it's a lot of booze for yes, yes,
Speaker 2: it is for in the afternoon for me. All right,
Speaker 2: we're we're gonna bring Tim Harford on. Then maybe you
Speaker 2: can have a drink Maria, four pm, Barcelona.
Speaker 1: That sounds great. It is just about cocktail hour here
Speaker 1: in Barcelona. But first, yes, let's welcome Tim onto the show. Tim,
Speaker 1: welcome to the show.
Speaker 3: To be on the show, thank you so for.
Speaker 1: The listeners of Pushkin. You're probably familiar with Tim as
Speaker 1: the host of Cautionary Tales. I've been lucky enough to
Speaker 1: be on the show and to have been a listener
Speaker 1: of the show. I think it's wonderful. My episodes are
Speaker 1: obviously the best, but it's all pretty good. Tim is
Speaker 1: an economist, a journalist. He has a column in the
Speaker 1: Financial Times. He's written multiple amazing books. You know, longtime
Speaker 1: friend of the two of us, Nate, I don't know
Speaker 1: if you want to add anything else, but we're so
Speaker 1: happy to be here and to do kind of an
Speaker 1: episode where Cautionary Tales and Risky Business intersect, where we
Speaker 1: talk about cautionary tales that are about risky business, that
Speaker 1: are about risk, about taking risks, about how risk taking
Speaker 1: can go wrong, and how sometimes you know the lines
Speaker 1: between legitimate risks and cons and deceptions might get blurred
Speaker 1: a little bit and cross over into territory that goes
Speaker 1: from legitimate to illegitimate very quickly.
Speaker 2: Do you mean to say that campling doesn't always work out, Maria?
Speaker 1: It's weird. It's so weird.
Speaker 3: The chance of loss is in fact one hundred percent,
Speaker 3: which I guess we'll get we'll get to that. But yes, that.
Speaker 1: Is absolutely true. So when we were kind of thinking
Speaker 1: about ways to make this episode work, Tim, you thought
Speaker 1: about one particular story where you and I have actually
Speaker 1: intersected on this because we've both thought about this person
Speaker 1: and he's someone who I actually had on my previous podcast,
Speaker 1: The Grift, and he is a well, let's let's have
Speaker 1: you lay him out. Let us meet Sam Israel, the
Speaker 1: first kind of our first subject for today.
Speaker 3: Sam Israel, the third I think is his full name. Third,
Speaker 3: absolutely remarkable gentlemen if gentlemen is the right term, and
Speaker 3: it probably isn't. So we did a Cautionary Tales episode
Speaker 3: live on stage about pyramid schemes and Ponzi schemes and
Speaker 3: white people fall for them, but also white people set
Speaker 3: them up, and this kind of strange snowball of disaster
Speaker 3: where the Ponzi scheme becomes increasingly difficult to cover. And
Speaker 3: the most amazing example I've ever come across is by
Speaker 3: You Capital, which was set up by Sam Israel. I
Speaker 3: saw one writer described Sam Israel and by You Capital.
Speaker 3: It's like somebody took the Bernie made Off story but
Speaker 3: was told to write a Hollywood script and to punch
Speaker 3: it up a bit, you know, make it sing a
Speaker 3: bit more. And everything that made made Off's Ponzi scheme
Speaker 3: notorious applies to Sam Israel. But it just all gets crazier.
Speaker 3: So Sam came from a wealthy family I think of
Speaker 3: commodity traders in Louisiana, but he wanted to show he
Speaker 3: could make it himself. And he got into Wall Street
Speaker 3: at an early age, absorbed that Wall Street culture, you know,
Speaker 3: all that kind of broish culture of Wall Street in
Speaker 3: the nineteen eighties. And so he takes all this in,
Speaker 3: He keeps his mouth shut, He watches various dubious activities,
Speaker 3: and not just the kind of the sex work and
Speaker 3: the excess, but also illegality, financial illegality, observes people kind
Speaker 3: of insider trading, for example, and then he sets up
Speaker 3: his own firm, by You Capital, which is a hedge fund,
Speaker 3: and very quickly By You Capital turns from being a
Speaker 3: hedge fund into being a ponzi scheme. And just to
Speaker 3: remind people what a ponzi scheme is, it's very simple.
Speaker 3: Investors give you money, and then you announce you've made
Speaker 3: massive profits, and then more investors give you money, and
Speaker 3: you announce you made even more massive profit, and then
Speaker 3: more investors give you money, and you keep saying you've
Speaker 3: made massive profits. And if anybody ever says, that's great,
Speaker 3: I'd like my money back, well that's easy. You can
Speaker 3: give them the money back with the profits because more
Speaker 3: people keep giving you, keep giving you their money. And
Speaker 3: the insight that Sam Israel had was with a hedge fund,
Speaker 3: it's kind of open ended. The money keeps growing, and
Speaker 3: why would anybody ever want their money back if you
Speaker 3: keep telling them they made another twenty percent this year,
Speaker 3: they made another twenty five percent this year, Like no
Speaker 3: one ever asks for their money back. They just leave
Speaker 3: the money with you. And so the fraud went on
Speaker 3: for a very long time, and then things started to unravel.
Speaker 3: But Maria, you met Sam So, and you met Sam
Speaker 3: in prison. So a spoiler. So tell us what did
Speaker 3: you make for as a person? How did he get
Speaker 3: into this? Why did he get into this?
Speaker 1: Well, it's funny because my interview with him was from
Speaker 1: a while back, you know, twenty seventeen something like that.
Speaker 1: I honestly don't remember.
Speaker 3: We should say he was arrested, I think in about
Speaker 3: two thousand and seven, two thousand and eight something like that.
Speaker 1: Wasn't yeah, exactly exactly, but so I was trying to
Speaker 1: refresh my memory, and you know, just looked at some
Speaker 1: of the transcripts and then also looked at an interview
Speaker 1: that he did with Andrew Ross Sorkin, and he told
Speaker 1: us the exact same thing at the beginning, which is like,
Speaker 1: don't believe me, I'm a liar. And it's so funny
Speaker 1: because I think that he thinks that that absolves him, right,
Speaker 1: if he puts that disclaimer up top, then he can
Speaker 1: sort of charm his way out and say, but actually,
Speaker 1: I'm a good guy, right, I'm not like that bad
Speaker 1: guy made off.
Speaker 3: So I should say there's one amazing scene. Gee Lawson
Speaker 3: wrote this book The Octopus, which is like the quintessential
Speaker 3: account of Sammue's wail. But there's a scene in that
Speaker 3: book where his wife walks in and catches him bent
Speaker 3: over his desk snorting cocaine through a fifty dollar bill
Speaker 3: and says, why are you taking cocaine? And he goes,
Speaker 3: how dare you accuse me of taking drugs? So yeah, sorry,
Speaker 3: I interrupted.
Speaker 1: He it is the kind of guy he is, and
Speaker 1: you know, he was incredibly charismatic, and he said, I
Speaker 1: was doing really really well on Wall Street. Right, he
Speaker 1: kind of got in. He didn't want to compete with
Speaker 1: his siblings, so he wanted to do it on his own,
Speaker 1: so he didn't want to go into the family business. Instead,
Speaker 1: he had this opportunity to go into Wall Street, worked
Speaker 1: at a very successful hedge fund and was actually making money.
Speaker 1: By the way, this is all according to Sam Israel, Right,
Speaker 1: I haven't actually looked at his returns. I did not
Speaker 1: look at his balance sheets. I don't know how he
Speaker 1: did as a trader. He assures me that he was
Speaker 1: making you know, millions for people and for himself in
Speaker 1: his prior Wall Street days. So let's just we'll take
Speaker 1: that on faith. But what I've learned working with con
Speaker 1: artists is you can't take anything on faith. So asterisk
Speaker 1: but he was very successful on Wall Street, and I
Speaker 1: assume he must have been to a certain degree because
Speaker 1: he started his own hedge fund right and he was
Speaker 1: able to raise I think about three hundred million to
Speaker 1: begin with of outside money, which back then, this was
Speaker 1: nineteen ninety six, I want to say something around somewhere
Speaker 1: around there in ninety so that was a lot of money.
Speaker 1: And he went in with a partner who was a
Speaker 1: close friend of his, who was a disgraced fund manager
Speaker 1: whose fund had just gone under. But Sam believed in
Speaker 1: him and thought that, you know, that he was a
Speaker 1: good guy and that this would work. So the way
Speaker 1: Sam told it to me was that when they started
Speaker 1: by you in nineteen ninety six, he kind of relied
Speaker 1: on this guy, you know, to be an equal partner,
Speaker 1: and that this guy was started losing a lot of money,
Speaker 1: and Sam said, well, I'm a good trader, I'm good
Speaker 1: at this. I'll be able to kind of work my
Speaker 1: way out of the hole. But he couldn't, and the
Speaker 1: hole kept getting bigger, and so at some point he realized,
Speaker 1: you know, shit, we've lost twelve percent in our first year.
Speaker 1: You know, it's even worse in our second year. This
Speaker 1: is looking bad, and our ability to raise money is
Speaker 1: going down because our returns are shit. They're absolutely horrible.
Speaker 1: And so that's when it became a Ponzi scheme.
Speaker 3: And his his his accountant, who was a guy called
Speaker 3: Dan Marino. He there is footnote foroobody. Well, if anybody
Speaker 3: so think about it, this is nineteen ninety six. If
Speaker 3: anybody googles as pre google, right, if anybody who tries
Speaker 3: to search on the internet for Dan Marino, they get
Speaker 3: the football player. So he's working with this accountant who
Speaker 3: is completely invisible to internet searches. And the accountants are smart.
Speaker 2: Yeah, it's really smart.
Speaker 1: It's very smart.
Speaker 3: The accountant's completely crooked and basically sets up his own
Speaker 3: fake Uh.
Speaker 2: Sounds like a cricket I had a stereotype based on
Speaker 2: last but sounds like a cricket account accountant or a quarterback.
Speaker 3: So he sets up his own fake auditing firm. So
Speaker 3: he's basically auditing his own accounts. And if anybody sort
Speaker 3: of were to really go and check the go the
Speaker 3: guy who says that Dan Marino's accounts are genuine is
Speaker 3: an orditor called Dan Marino, and they're the same guy.
Speaker 3: So that was kind of an important part of this fraud.
Speaker 3: But yeah, Dan Marinos told the author Gee Lawson that
Speaker 3: one of the problems was, there's this idea, Oh, we're
Speaker 3: going to have a really good year. We're going to
Speaker 3: make a lot of money for real. And when we
Speaker 3: make a lot of money for real, then it will
Speaker 3: no longer be a Ponzi scheme. You know, we'll have
Speaker 3: you know, it's all genuine, It'll all come out good
Speaker 3: in the end. Dan Marino said. The problem is sometimes
Speaker 3: they did have good years, but whenever they had a
Speaker 3: good year, they would claim it was an even better year,
Speaker 3: and whenever they had a bad year, they would never
Speaker 3: admit that they had a bad year. So there was
Speaker 3: a you know, whatever it was, vanity, fear of the consequences,
Speaker 3: whatever it was, he just made it completely impossible for
Speaker 3: him ever to catch up with his own life.
Speaker 1: And I think that that's very typical of con artists,
Speaker 1: right where they say I'll fix it, I'll make it better,
Speaker 1: this isn't this is just temporary, but it never is.
Speaker 1: But the most incredible thing about I'm Israel is that
Speaker 1: once the scheme kind of comes undone, right, which happens
Speaker 1: at some point, just like with SBF night. Right, at
Speaker 1: some point people are going to ask for their money
Speaker 1: and people are going to get spooked, and when they
Speaker 1: get spooked, like there's going to be a day of reckoning.
Speaker 1: And he had a moment where he said, oh shit,
Speaker 1: you know I'm going to jail. And he thought he
Speaker 1: would get seven or eight years, which was pretty typical
Speaker 1: for white collar criminals. And then they switched judges and
Speaker 1: the judge gave him two hundred and forty months, so
Speaker 1: twenty years right instead, And he was like, oh shit,
Speaker 1: you know I can't do twenty years. I'm going to
Speaker 1: be an old man. This is this is not cool.
Speaker 1: I was ready for seven I can't do twenty. And
Speaker 1: so instead of you know, figuring out how do I
Speaker 1: deal with this, he decides to fake his own death.
Speaker 3: Yeah, which he's obviously going to work out really well.
Speaker 1: Oh it's going to work out great, we'll be back
Speaker 1: in a minute. He only has a few months to plan, right,
Speaker 1: It's not like he has been thinking, oh, I'm going
Speaker 1: to fake my own death. This is my exit strategy.
Speaker 1: Because a lot of CONN artists they don't think that
Speaker 1: far ahead, right, they don't think of the exit strategy.
Speaker 1: They think it's always going to work out. So he says,
Speaker 1: I'm going to I'm going to fake my own death.
Speaker 1: I've watched this really cool movie it's called r V,
Speaker 1: and I'm going to buy an RV and I'm going to,
Speaker 1: you know, just go around the country and maybe make
Speaker 1: my way to go oh, by the way. One of
Speaker 1: the things he told me was that as after his sentencing,
Speaker 1: as he was walking out, an FBI agent, one of
Speaker 1: the ones he'd gotten friendly with, looked at him and said,
Speaker 1: I have two words for you, Costa Rica. I find
Speaker 1: it very difficult to believe that that actually has.
Speaker 2: Yes out Mano Dan Marino. Would you Costa Rica? I
Speaker 2: don't know what.
Speaker 1: I think You've got a career.
Speaker 3: This so but I'm curious. So, Maria, you said that
Speaker 3: this is very this is short term thinking.
Speaker 2: He didn't.
Speaker 3: He wasn't really think to the consequences of his actions,
Speaker 3: and that that's true. Any Ponzi scheme inevitably becomes completely unsustainable.
Speaker 3: You cannot possibly keep it going. It will come to
Speaker 3: an end. So what is the way out? And then
Speaker 3: the faking the suicide again like of course he's going
Speaker 3: to get caught. Of course, that's not going to work.
Speaker 1: So he decided he was going to jump off a bridge.
Speaker 3: Well, not just he was decided he was going to
Speaker 3: pretend that he had jumped off a bridge, right, he
Speaker 3: actually jumped off a bridge because he because he then
Speaker 3: he did actually actually claimed.
Speaker 1: Actually he actually jumped off a bridge. He did. So
Speaker 1: this is the research he was doing. When you're trying
Speaker 1: to fake your own death, and I interviewed this woman,
Speaker 1: Elizabeth Greenwood, who wrote about faking your own death, you
Speaker 1: have to think very far ahead. You have to figure
Speaker 1: out money. You know, how am I going to be
Speaker 1: off the grid right these days? Like how am I
Speaker 1: going to survive? How am I going to get out
Speaker 1: of the country, and you know where, where's my cash
Speaker 1: going to come from? All of these things. Instead, what
Speaker 1: he spends his time thinking is researching all of the
Speaker 1: bridges in New York to try to figure out which
Speaker 1: one he could conceivably jump off of and not die.
Speaker 1: So he finds a bridge that's under construction, so there
Speaker 1: are nets underneath, and he's like, oh, perfect, Like I'm
Speaker 1: gonna jump and I'm going to land in the net
Speaker 1: and then I'll use the net to scramble up and
Speaker 1: get out. So he does this not realizing that those
Speaker 1: nets are pretty damn hard to climb out of. So
Speaker 1: he manages to make the net. By the way, thinking
Speaker 1: about risk right, risk reward. If you miss the net,
Speaker 1: the you know, the risk reward equation there is not great.
Speaker 3: So the net deigning to catch people or just like
Speaker 3: a spat of that somebody drops, I mean that's the.
Speaker 1: Right, No, it's I think it was. I think it
Speaker 1: was designed to catch bricks and you know, falling debris
Speaker 1: from construction. So when a person goes into it, it
Speaker 1: just like you know, it goes all the way down.
Speaker 1: So then he's stuck in it. And at this point
Speaker 1: he's like, I think I'm going to die anyway, except
Speaker 1: it's going to be much worse because I'm gonna have
Speaker 1: spent my last minutes trying to scramble up this net.
Speaker 1: But he actually does manage to get out, and he
Speaker 1: has a driver waiting for him to take him to
Speaker 1: his RV and he thinks he's going to drive off
Speaker 1: into the sunset. Oh, by the way, another really really
Speaker 1: important thing if you're trying to fake your own death,
Speaker 1: do not tell your mother, your girlfriend, your son, and
Speaker 1: the driver that you're going to be faking your own death.
Speaker 1: Don't worry, momb I'm not actually dead, calling uber.
Speaker 2: Do it in style.
Speaker 1: But that's this is what happened. So you know, he
Speaker 1: he's fucked from the beginning because he has not thought
Speaker 1: any of this through. But he does manage to make
Speaker 1: it out of the net. He's met by a driver,
Speaker 1: makes it to his RV, and for the first few
Speaker 1: weeks it actually seems like everything is kind of okay
Speaker 1: because even though he's living in an RV, living in
Speaker 1: RV parks, you know, he's kind of getting away with it.
Speaker 1: And then he walks into a bar one day and
Speaker 1: he sees himself on TV on America's Most Wanted, and
Speaker 1: he goes and reads about himself on the internet, which
Speaker 1: is a big, big no no if you're faking your
Speaker 1: own death to start googling yourself, but he does that,
Speaker 1: and he sees that his girlfriend has been arrested as
Speaker 1: an accomplice and that they're looking to arrest his mother.
Speaker 1: He doesn't realize that this is a trap, that the
Speaker 1: police do this kind of thing to try to get
Speaker 1: people kind of out of hiding. He thinks this is real,
Speaker 1: and so he gets on a motorcycle, goes to the
Speaker 1: police department to turn himself in, walks in. He says,
Speaker 1: you know, hey, I'm here to turn myself in, and
Speaker 1: the police officer like what you know? In for what?
Speaker 1: You need to use the bathroom? Like it's over there anyway,
Speaker 1: there's all of this miscommunication. He says, no, you know,
Speaker 1: I turning myself in. I'm wanted and I just don't
Speaker 1: want any press here. And at this point the police
Speaker 1: officer actually looks at him, realizes who he is, and
Speaker 1: that is when he gets caught and gets an additional
Speaker 1: two years added on to his sentence for faking his
Speaker 1: own death and running away.
Speaker 3: It's astonishing. I'm not one thing you said, Maria. You
Speaker 3: said that the craziest thing about him, or the most
Speaker 3: amazing thing about him. I'm not even sure that is
Speaker 3: the craziest thing about him. But you know, we haven't
Speaker 3: got all day, so there are other stories you could
Speaker 3: tell about Sam. But I wanted to ask Nate. Given that, Nate,
Speaker 3: you've been thinking about the habits of risk taking individuals,
Speaker 3: these people you call Riverians. Is short termism part of
Speaker 3: the or kind of a side effect or a glitch
Speaker 3: in the Riveria and thinking system. So on the one hand,
Speaker 3: you need that ability to think probabilistically, you need that
Speaker 3: ability to take calculated risks. But I mean Samme's meel
Speaker 3: just seems to have never been able to see past
Speaker 3: the It had no problem taking risks, but just couldn't
Speaker 3: see past the end of his nose.
Speaker 2: Yeah. No, look, I think the better investors in gamblers
Speaker 2: have a longer time horizon. That's kind of one of
Speaker 2: one of Silicon Valley's secrets, despite their many flaws, that
Speaker 2: they do kind of think ten years ahead. But yeah,
Speaker 2: some of this sounds very familiar, Marie, I know if
Speaker 2: I'm talking to you, the notion of like a good
Speaker 2: business gone bad. I mean, even FTX was a pretty
Speaker 2: good business, right, it was like the leading brand for
Speaker 2: crypto trading. They made legitimate profits, et cetera. But like
Speaker 2: you know, it turns sour or I think you know,
Speaker 2: Sam bacon Free couldn't resist the temptation to take all
Speaker 2: this money sitting on the sideline. He couldn't like resist
Speaker 2: the temptation to go and gamble with it. But yeah,
Speaker 2: the lack of advanced planning coupled with kind of miscalculating
Speaker 2: consequences you know, if you're very charming, which I think
Speaker 2: Sam Israel is more so than SBF, it's a different story.
Speaker 2: You can kind of easle your way out of things, right.
Speaker 2: You can think you can like dance your way out
Speaker 2: of anything, and you can up the con a level
Speaker 2: or two or three, and then you may on some level, no,
Speaker 2: it's not going to work. But I don't know. I mean,
Speaker 2: at some point there's a point of no return, right, there.
Speaker 1: Is a point of no return. Yeah, I think I
Speaker 1: think that's absolutely right, Nate. I think one of the
Speaker 1: this is a characteristic that you have both uh, both
Speaker 1: with raverians and non reveriance and Tim. I'm sure you've
Speaker 1: come across this in other cautionary tales, but I think
Speaker 1: a lot of it is this over confidence in hubris, right,
Speaker 1: that comes with a certain level of success and people.
Speaker 1: And I think to be an entrepreneur and to be
Speaker 1: a risk taker, you need to be over confident to
Speaker 1: a certain extent. You know, as as we all know,
Speaker 1: if you actually know your odds of access, you're not
Speaker 1: gonna you're not gonna start the damn company. You're not
Speaker 1: gonna you're not gonna try it, because it's the risk
Speaker 1: of failure, and the chances of failure are so high,
Speaker 1: so it's a it's this fine balance and I think
Speaker 1: overconfidence so turns into delusion and turns into this thinking
Speaker 1: that actually, you know, I can keep doing this forever.
Speaker 1: And because you've gotten away with it for so long,
Speaker 1: it seems like probabilistically speaking, you know, your base rates change,
Speaker 1: I've gotten you know, okay, you know one year, two years,
Speaker 1: three years, four years, everything's good. This is this is
Speaker 1: all going good.
Speaker 2: Yeah, if the coin comes up heads five times in
Speaker 2: a row, I mean you see it in poker all
Speaker 2: the time, right, Yeah. You know, winner's tilt is something
Speaker 2: which is maybe under discussed loser tilt we all have experienced.
Speaker 2: Uh maybe not a Maria, uh, but winter's tilt where
Speaker 2: you're on a hot streak and you're like, ah, maybe
Speaker 2: I have some gift from God to play poker really
Speaker 2: well or something is also a big deal.
Speaker 1: It absolutely is. One of my favorite psych studies is
Speaker 1: from Ellen Langer, and I think the name of the
Speaker 1: paper is something like heads, I win tails, It's chance
Speaker 1: something like that. Yeah, And she had people be not
Speaker 1: bet but guess the results of a coin toss and
Speaker 1: it was actually not a fair coin. It was rigged,
Speaker 1: and there were different Basically, it came up heads and
Speaker 1: tails the exact same number of times in all of
Speaker 1: the different conditions, but in some of them it was
Speaker 1: pretty random. In others it was clustered near the end,
Speaker 1: and in the most important condition, the correct guesses were
Speaker 1: clustered near the beginning, right, So basically you would say,
Speaker 1: you know, heads, you'd guess, and then they'd make sure
Speaker 1: it landed on heads. It was a rigged toss, so
Speaker 1: that you were right it was yeah, And the people
Speaker 1: who were correct clustered at the beginning would then and
Speaker 1: these were Harvard students, by the way. Then they got
Speaker 1: all sorts of questions like I'm good at predicting the
Speaker 1: outcomes of coin tosses, and they would rate themselves as
Speaker 1: actually quite good at it. They would say, if I
Speaker 1: had more time to practice and to guess, I'd get
Speaker 1: even better. So things that made it very clear that
Speaker 1: they thought that this was a skill and not actually
Speaker 1: completely random. And it was so easy to get people
Speaker 1: to believe that they were skilled at something where it
Speaker 1: was just complete randomness when they had those those things
Speaker 1: happen at the beginning, so Tim, I think this goes
Speaker 1: back to the beginning of your question. This is how
Speaker 1: you get into Ponzi schemes. Think about Bernie Madeoff, right,
Speaker 1: He was successful for far longer than Sam Israel, and
Speaker 1: Sam Israel, by the way, was the single biggest Ponzi
Speaker 1: scheme before Bernie made Off.
Speaker 3: Now I'm curious, we've been talking about people who were
Speaker 3: have an appetite for risk and who it all came
Speaker 3: apart for Maria, I know you've been doing a little
Speaker 3: bit of research into one of the most important gamblers
Speaker 3: in economic history.
Speaker 1: Yeah, John Law. He was. He was someone who I
Speaker 1: wrote about for The Confidence Game and I've come back
Speaker 1: to so my my next book is about cheating, So
Speaker 1: I've I've kind of been thinking about him. But one
Speaker 1: of the reasons I am interested in John Law. So
Speaker 1: when we're talking about someone like Sam Israel, right, it's
Speaker 1: pretty clear con artist, right, Ponzi's game. When you're talking
Speaker 1: about someone like John Law, it becomes much less clear
Speaker 1: because he's someone who was a huge gambler, and we
Speaker 1: know that sometimes he was successful, but he also ran
Speaker 1: his father's business into the ground if I remember correctly,
Speaker 1: through gambling. But I guess he got better with time
Speaker 1: and killed a man literal gambling or like literal gambling.
Speaker 1: So yeah, so he was someone who came from money.
Speaker 1: Who's you know who whose parents had a financial business.
Speaker 3: We should say this is it was seventeen hundreds, just
Speaker 3: to situate, right, Yes, for those small number of listeners
Speaker 3: who don't know who John Lauri is or that everybody should.
Speaker 1: We're in the seventeen hundreds and he's going to be
Speaker 1: making friends with the Duke of Orleans or the Duke
Speaker 1: of Orleans who was then Regent of France, and he's
Speaker 1: going to be basically setting up France's banking system. So
Speaker 1: the reason why I was fascinated by him is that
Speaker 1: it's actually unclear if he was a con artist or not,
Speaker 1: Like did he believe that? Because it was the kind
Speaker 1: of the end of his time at the height of
Speaker 1: finance was with the establishment of this thing called the
Speaker 1: Mississippi Company, which was a huge bubble and basically bankrupted
Speaker 1: a ton of people. And the question is, you know,
Speaker 1: did he know what he was doing and get unlucky
Speaker 1: or did he like basically, did he do this as
Speaker 1: a kind of Ponzi scheme, as a kind of con
Speaker 1: or not.
Speaker 3: And the fact that we still don't really agree on that,
Speaker 3: I think is fascinating. I mean, we should say so.
Speaker 3: He was originally Scott, a Scott. He killed a guy
Speaker 3: and a duel, was sentenced to death for murder, escaped
Speaker 3: from prison, traveled Europe, wound up in Paris, made a
Speaker 3: few friends with some influential nobles, made a huge amount
Speaker 3: of money gambling because he would set himself up as
Speaker 3: the house and he understood the probability enough that he
Speaker 3: knew he had an edge. So he's gambling with all
Speaker 3: these nobles. He's making a huge amount of money. And
Speaker 3: then he sets up his own bank and he starts
Speaker 3: issuing paper money. This is not the first paper money
Speaker 3: in the history of the world, it's not even the
Speaker 3: first paper money in the history of France, but it is.
Speaker 3: It's pretty new and people are still trying to figure
Speaker 3: out kind of how it works. And of course this
Speaker 3: is revolutionary. He's ahead of his time, like paper money
Speaker 3: is how we do things right. It's kind of amazing.
Speaker 3: And then the whole thing just gets wrapped up with
Speaker 3: French government debt and gets wrapped up with the Mississippi
Speaker 3: bubble and the Mississippi Bubble was it was a stock
Speaker 3: market bubble. One stock was involved, the stock of the
Speaker 3: Mississippi Company, and John Law controlled the Misissippi Company. But
Speaker 3: it was clear that nobody really understood what was going
Speaker 3: on except that number go up. And if number go up,
Speaker 3: everyone everyone gets very excited.
Speaker 2: Yeah, it's very intoxicating when the number goes up. Right.
Speaker 2: I did wonder too, there is some survivorship bias in
Speaker 2: which kind of scams and schemes we discover. You know,
Speaker 2: the best frauds in history, probably nobody knows about it.
Speaker 3: Yeah, a good point.
Speaker 2: SPF was convinced that he could somehow navigate his way
Speaker 2: through bankruptcy, or not through bankruptcy, now his way through
Speaker 2: this downfall and bitcoin and come out on either side
Speaker 2: of it. And maybe people wouldn't really notice, right, Maybe
Speaker 2: it's like a page a sixteen story and not inn
Speaker 2: a one story. If he like, if there's a spontaneous
Speaker 2: rise in bitcoin prices and they recover these losses that
Speaker 2: they have, they were ten million and ten billion in
Speaker 2: a hole, which is pretty hard to overcome.
Speaker 1: It's funny, Nate. I think that's a really important point
Speaker 1: that the best con artists are never caught. When people
Speaker 1: when we talk about conn artists and people ask me,
Speaker 1: you know, why aren't there as many female con artists,
Speaker 1: I say a few things, but one of them is
Speaker 1: kind of a joke but kind of not, which is
Speaker 1: that they're just better at it. So we don't know
Speaker 1: them because they haven't been caught. They don't have as
Speaker 1: much ego, and they know when to disappear and how
Speaker 1: to disappear much better than the sam Is reels of
Speaker 1: the world.
Speaker 2: Or like cheating in poker, a lot of these famous
Speaker 2: cheating scandals, like online cheating scandals, people are are very
Speaker 2: greedy where they win at like, you know, thirteen centered
Speaker 2: deviations above some random rate, whereas if you won at
Speaker 2: two center deviations above random, it would be almost possible
Speaker 2: to detect and you'd have a great life. Although we
Speaker 2: don't find those people though, right, we don't find the
Speaker 2: people that are that are actually good at cheating a
Speaker 2: lot of time.
Speaker 1: Yeah, but so as we you know, wrap up the
Speaker 1: story of John law I do think that it's interesting that,
Speaker 1: I mean, economists don't agree, historians don't agree whether whether
Speaker 1: or not he was you know, greedy, he was obviously greedy.
Speaker 1: I think everyone agrees on that, but whether he thought
Speaker 1: that this could actually all worked out. I found a
Speaker 1: rhyme that I would love to share if you guys
Speaker 1: are in poetry mode, that come from the time about
Speaker 1: what happened with the Mississippi bubble. And it goes like this.
Speaker 1: My shares, which on Monday I bought, were worth millions.
Speaker 1: On Tuesday, I thought so. On Wednesday, I chose my
Speaker 1: abode in my carriage. On Thursday, I rode to the ballroom.
Speaker 1: On Friday I went to the workhouse. Next day I was.
Speaker 2: Sent first poetry reading on the Risky Business podcast.
Speaker 1: I believe it is it is think that should style tradition.
Speaker 3: That's very good.
Speaker 1: And one nobleman of the time said, thus sends the
Speaker 1: system of paper money, which which has enriched a thousand
Speaker 1: beggars and impoverished one hundred thousand men. And obviously that's
Speaker 1: not true, which is why we you know, that was
Speaker 1: not the end of the system of paper money. It
Speaker 1: was just it just happened to be the end of
Speaker 1: John Law. He had to escape France, by the way,
Speaker 1: because he was convicted and was going to be sent
Speaker 1: to prison there. So he dressed up as a beggar
Speaker 1: ran away to Italy and died in Venice, totally impoverished.
Speaker 1: And I guess the cautionary talesary.
Speaker 3: It is a cautionary tale. And I guess the lesson,
Speaker 3: or maybe the lesson is that the economics lesson is,
Speaker 3: if you're going to have paper money, if you're going
Speaker 3: to have somebody who has the right to just create
Speaker 3: money with a printing press, you've got to make sure
Speaker 3: you have the right controls over that person or over
Speaker 3: that institution. It can't just be some guy who killed
Speaker 3: a guy in a duel and came over what a
Speaker 3: lot of money in gambling, and then he's the guy
Speaker 3: who can do it. You need this institutional scaffolding, which
Speaker 3: you know, when we have it, it seems to work just fine.
Speaker 2: We'll be back right after this. I mean, are there
Speaker 2: like two or three or one big takeaways, like common
Speaker 2: patterns and when you know something is becoming a cautionary
Speaker 2: tale or a can.
Speaker 3: At the risk of quoting that classic opening line of
Speaker 3: Ana Karenina that all happy families are alike, and every
Speaker 3: unhappy family is unhappy in its own way. I think
Speaker 3: one of the striking things about cautionary tales is that
Speaker 3: there are a lot of different ways for things to
Speaker 3: go wrong. There's there are organizational problems, informational problems, engineering problems,
Speaker 3: hubrisk and arrogance, as short sightedness, lots and lots of
Speaker 3: self delusion, lots of wishful thinking. I mean, it's a
Speaker 3: miracle that human civilization survives, actually, given how many different
Speaker 3: ways there are to go wrong. I mean that is
Speaker 3: part of the slightly perverse joy of researching and writing
Speaker 3: these cautionary tales. There is always a new disaster, and
Speaker 3: always a new way for disaster to happen.
Speaker 1: You make that sound almost gleeful.
Speaker 3: Yeah, I mean sometimes I have to remind myself that, like,
Speaker 3: I'm not supposed to be enjoying this, because some of
Speaker 3: them are very very sad. Some of them are straightforwardly
Speaker 3: hilarious and no great harm is done, but a lot
Speaker 3: of them are pretty painful.
Speaker 2: Yeah, Maria, I remember you telling me that, like, cons
Speaker 2: are most likely to occur when you're in an upcycle
Speaker 2: or a down cycle, right, not in the steady state,
Speaker 2: but when there's something new and novel and people are panicking.
Speaker 1: Yeah, moments of transition. So whether those are societal transitions
Speaker 1: or whether their personal transitions is when you're most vulnerable
Speaker 1: to get cons So it's not a personality trade. It's
Speaker 1: not intelligence, it's not it's not anything like that. It
Speaker 1: is this kind of moment of either up or down
Speaker 1: euphoria or you know, despondency. But when things are uncertain
Speaker 1: and your worldview gets challenged, gets shattered, gets displaced, you
Speaker 1: look for certainty, and that's when con artists swoop in
Speaker 1: and give that certainty to you.
Speaker 3: As long as nothing ever changes, we will say from
Speaker 3: cons we're good.
Speaker 2: You know, my great grandfather faked his death and got a.
Speaker 1: Wait what okay, Nate, can we just can we we
Speaker 1: need this story. Sorry, we're pausing everything, Nate, please.
Speaker 2: I mean his name was Ferdinand Thrunn, which is a
Speaker 2: great name.
Speaker 1: It's an amazing name.
Speaker 2: He was written up in the Chicago Tribune and the
Speaker 2: New York Times and places like that. Yeah, he was
Speaker 2: like a insurance fraudster. We should do this as separate
Speaker 2: segments sometime, yeah, But basically his technique was to commit
Speaker 2: crimes so devious that there is no law to charge
Speaker 2: them with because I haven't figured out like this particular
Speaker 2: type of fry. But we should do proper research and
Speaker 2: do an episode on this. Maria.
Speaker 1: Yeah, absolutely so, Maria, Nate.
Speaker 3: I now we've discussed Sam as well, we discussed John Law.
Speaker 3: I actually had a couple of questions, given that you
Speaker 3: guys are absolutely experts on this sort of thing, I
Speaker 3: had a couple of questions for you that I hope
Speaker 3: you won't mind me asking, and that The first one is,
Speaker 3: I have your two most recent books in front of me.
Speaker 3: I have Nate's On the Edge, I have Maria's The
Speaker 3: Biggest Bluff, Stone Cold Classic Amazing. I looked in the index.
Speaker 3: The word experiments does not appear in the index of
Speaker 3: either of your books. Expected value, of course does appear,
Speaker 3: but experiments does not. And I just wondered whether you
Speaker 3: two a brilliant risk takers, analysts poker players. But I
Speaker 3: thought a poker player can't really experiment, like if you
Speaker 3: want to, if you want to find out, you need
Speaker 3: to you need to make the bet. You know, you
Speaker 3: need to put down the money. There's no cheap way
Speaker 3: to find out what the other person's cards are. And
Speaker 3: maybe that is a blind spot in poker playing relative
Speaker 3: to decision making advice in everyday life. Because what I've
Speaker 3: what I've always been saying to people, is okay, if
Speaker 3: you're facing an uncertain situation, you know, you don't know
Speaker 3: what the right thing to do is. Maybe there's an experiment,
Speaker 3: maybe that you can run a little pilot, Maybe you
Speaker 3: can run a little you know, ab test. Maybe there's
Speaker 3: a cheap way to find out without betting all your
Speaker 3: chips metaphorically speaking. So I just wanted to ask why
Speaker 3: why did neither of you talk about experiments? And is
Speaker 3: this in fact a blind spot in the poker player's
Speaker 3: view of the world.
Speaker 2: It's a great point, Tim. I have a home game
Speaker 2: I play maybe every third week. That's a one dollar
Speaker 2: two dollars game, which for me is you know, on
Speaker 2: the lower side of the stakes. I play, and I
Speaker 2: probably am doing some experimenting in that game, right. You know,
Speaker 2: last night I made I had a nut flush straw,
Speaker 2: which some of our artists will know what that means.
Speaker 2: I had the ace I flush straw on a board
Speaker 2: that was King Queen x X and we made like
Speaker 2: a three x overbet shove on the turn. I'm just
Speaker 2: going to experiment, I bet. Probably there's some frequency which
Speaker 2: you're supposed to do. This is in game theory, but
Speaker 2: like but if I lose this pot, then you know,
Speaker 2: I'll win sometimes to catch my flush and like it'll
Speaker 2: be a fun hand to show down and whatever. But
Speaker 2: I did feel I think we do probably experiment a
Speaker 2: little bit, and that kind of like naughty feeling you
Speaker 2: have of like having an experiment and getting away with it,
Speaker 2: like you're kind of taking the piss to use. Is
Speaker 2: that the British term. Yeah, you're taking the piss. You
Speaker 2: kind of get away with it like It's a very
Speaker 2: satisfying feeling, and I think encourages kurrent artistries sometimes.
Speaker 3: Yeah.
Speaker 1: Yeah, I think that there are so two things. One, yes,
Speaker 1: I think that you can experiment this way, and to me,
Speaker 1: I do it when I move down in stakes as well,
Speaker 1: right when the money is not not as meaningful and
Speaker 1: you get to test certain theories out right, So if
Speaker 1: I'm studying and I'm kind of figuring out different possibilities
Speaker 1: for playing similar spots, I might test those out and
Speaker 1: feel comfortable testing them out when I don't care as
Speaker 1: much about the stakes, when it's not kind of as important.
Speaker 1: Now that said, we can't experiment as in the traditional
Speaker 1: so I'm you know, I'm a trained psychologist, right, so
Speaker 1: when I was doing studies for my PhD. You have
Speaker 1: to have a very strict experimental design where you have
Speaker 1: your control group, and you have your test groups, and
Speaker 1: you know, you have all of these things where you're
Speaker 1: trying to subtly change the conditions and see if the
Speaker 1: outcome changes. That obviously you can't do because in some ways,
Speaker 1: you know, my whole book was an experiment. So experiments
Speaker 1: not in the index, but the biggest bluff, all of
Speaker 1: it was was experiment. And I saw poker as kind
Speaker 1: of a psychology laboratory of out a lot of the
Speaker 1: psychological theories that I had kind of known in theory
Speaker 1: and putting them into practice at the table and being
Speaker 1: able to see, oh, you know, this is how this
Speaker 1: plays out, this is how that plays out. And I
Speaker 1: do think that poker is great for that. But of
Speaker 1: course you can't when you're playing in a tournament, when
Speaker 1: you're playing in a game, you can't have the exact
Speaker 1: same conditions where you say, Okay, on this exact same board,
Speaker 1: I'm going to do this. Let's see what happens. All right,
Speaker 1: Pretend I didn't do that. Let's go back. Now I'm
Speaker 1: going to do something else, and we'll see what happens there.
Speaker 1: Because even if Nate and I were thinking, oh, okay,
Speaker 1: let's see what it feels like to over bet three
Speaker 1: times the pot in this particular spot, and Nate says, okay,
Speaker 1: I'm going to do this, and then Maria, you do
Speaker 1: why people that's not in poker, that experiment is actually
Speaker 1: not a valid control group because Nate and I are
Speaker 1: so different. People respond to us differently, and all of
Speaker 1: a sudden, you can't control the environment because it's different environment.
Speaker 1: The moment you switch out the players, right, all of
Speaker 1: a sudden, the experimental conditions change, even if you've changed
Speaker 1: literally nothing except who's sitting in that chair. And I
Speaker 1: think that's actually fascinating and a Really that's how life works.
Speaker 1: That's why sometimes psych studies from the laboratory don't generalize
Speaker 1: well to the real world because the real world does
Speaker 1: get messier and it's much more difficult to control. No. Look,
Speaker 1: I think all of your variables.
Speaker 2: As someone who's self reflectively kind of seen his social
Speaker 2: status rise and fall different times. If you're charming and
Speaker 2: privileged and are seen as being on a winning streak,
Speaker 2: you can get away with a lot. Yeah, people really
Speaker 2: are afraid to call you on your bullshit.
Speaker 3: Yeah, okay, yes, second quick question. Second quick question, because
Speaker 3: I have to take advantage of the opportunity to tap
Speaker 3: into your wisdom. Okay, So you I think I think
Speaker 3: it's fair to say that both of you would advocate
Speaker 3: putting a probability on on something. If you're going to
Speaker 3: make a risky decision, you have to have an idea.
Speaker 3: Is this like a five to one? Is it a
Speaker 3: three to one? Is there twenty percent chances is going
Speaker 3: to happen? Is there are seventy percent chances is going
Speaker 3: to happen? And you know, and there's a difference between
Speaker 3: say a fifty three percent chance and a forty eight
Speaker 3: percent chance, even though they're both close to fifty to fifty.
Speaker 3: So it's important to quantify as much as you can,
Speaker 3: even though you don't always have the data. Okay, So
Speaker 3: two very little stories to get you to reflect on
Speaker 3: the case in favor of quantification. Apparently, when the US
Speaker 3: government was pondering the Bay of Pigs invasion, the Joint
Speaker 3: chiefs of Staff thought that the chance of success was
Speaker 3: thirty percent, and a report was prepared for President Kennedy
Speaker 3: and Kennedy and thirty percent was Presumably they thought, oh,
Speaker 3: the president wanting to understand percentages, so he was told
Speaker 3: there is a fair chance of success, and by fair
Speaker 3: chance of success, they meant well, thirty percent. Now we
Speaker 3: don't know what Kennedy understood by a fair chance of success,
Speaker 3: but he seems to have thought it was a good
Speaker 3: chance of success, and he approved this total fiasco. So
Speaker 3: it might seem more user friendly to express things as well,
Speaker 3: this is common or uncommon, or likely or unlikely. But
Speaker 3: actually none of those words really mean the same thing
Speaker 3: to the person who's uttering the word as to the
Speaker 3: person who's receiving it. So you should always put probabilities
Speaker 3: on things. Here's the counter example, counterexample. Think back to
Speaker 3: the financial crisis two thousand and seven, two thousand and eight.
Speaker 3: You had quants putting probabilities on things. This is the
Speaker 3: probability that such and such a thing will default based
Speaker 3: on what we know about history, based on what we
Speaker 3: know about other things that are correlated with it. But
Speaker 3: actually all of those probabilities were spuriously precise. People had
Speaker 3: too much confidence in the probabilities, and it's fine to say, oh,
Speaker 3: we think there's like antin five percent chance that this
Speaker 3: will default. That's fine. But then the problem is you
Speaker 3: feed the zero point five percent into a model, which
Speaker 3: gets fed into another model, which gets fed into another model,
Speaker 3: and in the end you'd be like, oh, well, we've
Speaker 3: repackaged this thing, and now there's like only a one
Speaker 3: in a trillion chance that this will default. And it
Speaker 3: turns out that that's all dependent on the quality of
Speaker 3: your original assumption and you shouldn't be betting the existence
Speaker 3: of Western civilization on that calculation. And people got it wrong.
Speaker 3: So the case against quantification is once you have a number,
Speaker 3: then you are tempted to rely on that number too
Speaker 3: much and to analyze or to manipulate or to remodel
Speaker 3: or to reanalyze that number too much, and to forget
Speaker 3: that actually the number was always basically just an educated guess.
Speaker 1: Well. I think that when you're talking about quantification and
Speaker 1: when you're talking about probabilities, it's the exact same logic
Speaker 1: that you have to apply to algorithms and to kind
Speaker 1: of building algorithms. Which is something that Nate and I
Speaker 1: have talked about on the pod with AI, which is
Speaker 1: garbage in garbage out right. If your assumptions are garbage,
Speaker 1: then your probabilistic assessment is going to be garbage. So
Speaker 1: I actually think that both of these things, they're not
Speaker 1: counter examples. The thirty percent chance of the Bay of pigs.
Speaker 1: I just think that these were people who had a
Speaker 1: lot of qualifications, had done the research, had done regulous,
Speaker 1: rigorous analysis, and that was not garbage in right there.
Speaker 1: They had assumptions that were there for a good reason.
Speaker 1: They had good historical data. I have no idea how
Speaker 1: they came upon the thirty percent. I'm just see making
Speaker 1: your SUPs. Yeah, hindsight bias exactly, and so you get
Speaker 1: thirty percent. And by the way, you should absolutely have
Speaker 1: told Kennedy thirty percent and not fair chance. There are
Speaker 1: so many psych studies about this that trying to put
Speaker 1: words with percentages backfires because people do not understand. And
Speaker 1: it's like if you have a weather man and says
Speaker 1: a fair chance of rain, right, let's talk about not
Speaker 1: a fair chance that the Bay of pigs is a
Speaker 1: success fair chance of rain? Do you bring an umbrella?
Speaker 1: You want to know what the percentage chances. You want
Speaker 1: to know that actual number, because otherwise a quantification gets
Speaker 1: all out of whack. Financial crisis when you have those
Speaker 1: numbers in the models. Those were people whose incentives were
Speaker 1: not aligned with giving you a correct probabilistic assessment. Their
Speaker 1: incentives were to make money. That's also a question that
Speaker 1: you have to make. You always have to ask, and
Speaker 1: this is something that Nate and I talk about as well.
Speaker 1: When you're making these assumptions, do the incentives align, Where
Speaker 1: are the assumptions coming from, and do you have an
Speaker 1: incentive to be correct? Right? And in this particular case,
Speaker 1: their incentive was to make money for them today and
Speaker 1: to make their company think that this was going to
Speaker 1: be a great bet that it was going to work out.
Speaker 1: And so those percentages are not something that you want
Speaker 1: to rely on. Now, if my incentive is if my
Speaker 1: percentage is wrong, I'm getting fired. Right. If my percentage
Speaker 1: is wrong, then I'm making zero dollars. Then all of
Speaker 1: a sudden, I come up with different percentages, I use
Speaker 1: different inputs. My model looks very, very different. But Wall
Speaker 1: Street didn't work that way, still doesn't work that way.
Speaker 1: That's not how you're incentivized.
Speaker 2: Yeah, look, I think there's a risk of laundering subjective
Speaker 2: opinions through probabilities and forgetting their subjective right. If I'm
Speaker 2: running nak the airport, there's traffic on the Vanwick or whatever. Right,
Speaker 2: I might say myself, Oh, it's a five percent chance
Speaker 2: going to miss my flight. Right, It's not coming out
Speaker 2: of any regression analysis or anything. You know. I've probably
Speaker 2: used the phrase in the show, like quoting Vice President Harris.
Speaker 2: A model does not fall out of a coconut tree.
Speaker 2: It exists in the context of that which became before it,
Speaker 2: or whatever else you're trying to get at the truth
Speaker 2: with the model. And I think mediocre modelers in particular
Speaker 2: will publish a number and then forget how many assumptions
Speaker 2: are driven into that. Right. I still think it's worth
Speaker 2: quantifying things. I mean, at the end of the day,
Speaker 2: probability is defined as a number between point zero and one,
Speaker 2: and you have to make decisions even in conditions of uncertainty.
Speaker 2: But to Tim's point, yeah, I think there are cases
Speaker 2: where people don't forget how provisional a guess is when
Speaker 2: you put a number on it.
Speaker 1: Yeah, And I think it is always important to not
Speaker 1: have a false sense of certainty. And there's also a
Speaker 1: lot of data that shows that when you have numbers,
Speaker 1: and when you have a lot of these things, it
Speaker 1: does give you a false sense of certainty, right that
Speaker 1: you often do become a little bit over confident when
Speaker 1: you're like, well, I have this model, in this model,
Speaker 1: so this it must be. And there you have the
Speaker 1: bias that we've talked about a lot, where it goes
Speaker 1: from being probabilistic to seeming much more certain like this
Speaker 1: will not default, this will not happen because you forget
Speaker 1: that it ain't zero.
Speaker 3: Thank you so much, guys, fantastic Tim.
Speaker 1: Thank you so much for coming on the pod today.
Speaker 1: It's been such a pleasure, havn't you.
Speaker 3: It's been really really fun. Thank you for sharing your wisdom.
Speaker 3: And if people want to hear more about Sam Israel
Speaker 3: or any other stories of things going disastrously wrong and
Speaker 3: me trying to investigate the social science behind why they
Speaker 3: went wrong. Caution ne Tales with Tim Harford is one
Speaker 3: of Risky Business's sister podcasts on Pushkin.
Speaker 1: It is and there are lots of tales of risk
Speaker 1: taking assessments that do not turn out quite the way
Speaker 1: the risk taker thought they would. Risky Business is hosted
Speaker 1: by Me kind of Cova and me Mate Silver. The
Speaker 1: show is a co production of Pushkin Industries and iHeartMedia.
Speaker 1: This episode was produced by Isabel Carter. Our associate producer
Speaker 1: is Gabriel Hunter Chang. Our executive producer is Jacob Eldstein.
Speaker 2: And if you want to listen to an AD free version,
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