Cautionary Tales with Tim Harford - Cautionary Tales Presents: Death Fraud and Other Risky Business

Episode Date: October 14, 2024

Tim Harford joined Nate Silver and Maria Konnikova on their podcast Risky Business to discuss two of history’s most compelling swindlers: Sam Israel III and John Law. We hope you enjoy this episode of Risky Business. It's available wherever you listen to podcasts.See omnystudio.com/listener for privacy information.

Pushkin Hackers and cyber criminals have always held this kind of special fascination. Obviously I can't tell you too much about what I do. It's a game. Who's the best hacker? And I was like, well, this is child's play. I'm Dina Temple-on. And on the Click Here podcast, you'll meet them and the people trying to stop them. We're not afraid of the attack. We're afraid of the creativity and the intelligence of the human being behind it. Click Here, stories about the people making and breaking our digital world.

AI machines, satellites, engine ignition. Click Here and lift up. Click Here every Tuesday and Friday, wherever you get your podcasts. Over the years, cautionary tales has warned you about Ponzi schemes, dodgy Christmas savings clubs and promotions that are too good to be true. So it may come as a surprise when I urge you to get into Risky Business. Don't worry, I'm not trying to pull a fast one. I just want you to try out a podcast I think you'll enjoy. Risky Business is a weekly show about making better decisions. The hosts, Maria Konikova and Nate Silver are both writers and high stakes poker players. Maria and Nate cover everything from politics to poker to personal

decisions. So when they asked me to join them for an episode, I was eager to try. I even got the chance to talk to Maria about one of the fraudsters featured in Cautionary Tales. She has met him and he assured her, yes, he was a liar. You can listen to Risky Business wherever you get your podcasts. But for now, here's the episode featuring me. I hope you like it. There are duels, prison breaks, banking bubbles, poetry and Nate reveals he has a relative who faked his own death. Hey everyone, welcome back to Risky Business, our show about making better decisions. I'm Maria Konikova.

And I'm Nate Silver. So today we have a slightly different and fun show for you. We're going to be bringing on a very special guest, Tim Harford, who hosts another Pushkin podcast, Cautionary Tales, and we'll be talking about the intersection of risk and cautionary tales from history. Tim, welcome to the show. Tim Goodman Thank you. To be on the show.

Thank you. So for listeners of Pushkin, you're probably familiar with Tim as the host of Cautionary Tales. I've been lucky enough to be on the show and to have been a listener of the show. I think it's wonderful. My episodes are obviously the best, but it's all pretty good. Tim is an economist, a journalist. He has a column in the Financial Times.

He's written multiple amazing books, you know, longtime friend of the two of us. Nate, I don't know if you want to add anything else, but we're so happy to be here and to do kind of an episode where cautionary tales and risky business intersect, where we talk about cautionary tales that are about risky business, that are about risk, about taking risks, about how risk-taking can go wrong, and how sometimes the lines between legitimate risks and cons and deceptions might get blurred a little bit and cross over into territory that goes from legitimate to illegitimate very quickly.

Do you mean to say that gambling doesn't always work out, Maria? It's weird. It's so weird. The chance of loss is, in fact, 100%, which I guess we'll get to that. But yes. That is absolutely true. The chance of loss is in fact 100%, which I guess we'll get to that. That is absolutely true.

So when we were kind of thinking about ways to make this episode work, Tim, you thought about one particular story where you and I have actually intersected on this because we've both thought about this person. And he's someone who I actually had on my previous podcast, The Grift. And he is a, well, let's have you lay him out. Let us meet Sam Israel, the first, kind of our first subject for today. Sam Israel, the third, I think is his full name. The third. Absolutely remarkable gentleman, if gentleman is the right term and it probably isn't. So we did a cautionary

tales episode live on stage about pyramid schemes and Ponzi schemes and why people fall for them but also why people set them up and this kind of strange snowball of disaster where the Ponzi scheme becomes increasingly difficult to cover. And the most amazing example I've ever come across is Bayou Capital, which was set up by Sam Israel. I saw one writer described Sam Israel and Bayou Capital. It's like somebody took the Bernie Madoff story but was told to write a Hollywood script and to punch it up a bit, make it sing a bit more. And everything that made Madoff's Ponzi scheme notorious applies to Sam Israel, but it just all gets crazier. So Sam came from a wealthy family, I think,

of commodity traders in Louisiana, but he wanted to show he could make it himself and he got into Wall Street at an early age, absorbed that Wall Street culture, all that kind of bro-ish culture of Wall Street in the 1980s. So he takes all this in, he keeps his mouth shut, he watches various dubious activities and not just the kind of the sex work and the excess, but also illegality, financial illegality, observes people kind of inside a trading, for example. And then he sets up his own firm, Bayou Capital, which is a hedge fund. And very quickly, Bayou Capital turns from being a hedge fund into being a Ponzi scheme. And just to remind people what a Ponzi scheme is, it's very simple.

Investors give you money, and then you announce you've made massive profits, and then more investors give you money, and you announce you've made even more massive profits, and then more investors give you money, and you keep saying you've made massive profits. And if anybody ever says, that's great, I'd like my money back. Well that's easy. You can give them the money back with the profits because more people keep giving you their money. And the insight that Sam Israel had was with a hedge fund, it's kind of open ended.

The money keeps growing. And why would anybody ever want their money back if you keep telling them they made another 20% this year, they made another 25% this year? Like no one ever asks for their money back. They just leave the money with you. And so the fraud went on for a very long time and then things started to unravel. But Maria, you met Sam in prison, so spoiler. So tell us, what did you make of him as a person? How did he get into this? Why did he get into this? Well, it's funny because my interview with him was from a while back, you know, 2017, something like that. I honestly don't remember.

He was arrested, I think, in about 2007, 2008, something like that, wasn't it? Yeah, exactly. Exactly. But so I was trying to refresh my memory and just looked at some of the transcripts and then also looked at an interview that he did with Andrew Ross Sorkin. And he told us the exact same thing at the beginning, which is like, don't believe me, I'm a liar. And it's so funny because I think that he thinks that that absolves him. Right? If he

puts that disclaimer up top, then he can sort of charm his way out and say, but actually I'm a good guy, right? I'm not like that bad guy made off. So I should say there's one amazing scene. Guy Lawson wrote this book, The Octopus, which is like the quintessential account of Sam Israel. But there's a scene in that book where his wife walks in and catches him bent over his desk snorting cocaine through a $50 bill and says, why are you taking cocaine? And he goes, how dare you accuse me of taking drugs? So yeah, sorry, I interrupted.

But that's the kind of guy he is. It is the kind of guy he is. And you know, he was incredibly charismatic. And he said, I was doing really, really well on Wall Street, right? He kind of got in, he didn't want to compete with his siblings. So he wanted to do it on his own. So he didn't want to go into the family business. Instead, he had this opportunity to go into Wall Street, worked at a very successful hedge fund and was actually making money. By the way, this is all according to Sam Israel, right? I haven't actually looked at his returns. I did not look at his balance sheets. I don't know how he did as a trader. He assures me that he was making millions for people and for himself in his prior Wall

Street days. So let's just, we'll take that on faith, but what I've learned working with con artists is you can't take anything on faith. So asterisk, but he was very successful on Wall Street. And I assume he must have been to a certain degree because he started his own hedge fund, right? And he was able to raise I think about 300 million to begin with of outside money, which back then this was 1996 I want to say something around some more around there 90s. So that was a lot of money. And he went in with a partner who was a close friend of his, who was a disgraced fund manager whose fund had just gone under, but Sam believed in him and thought that he was a good guy

and that this would work. So the way Sam told it to me was that when they started Bayou in 1996, he kind of relied on this guy to be an equal partner and that this guy started losing a lot of money. And Sam said, well, I'm a good trader, I'm good at this, I'll be able to kind of work my way out of the hole. But he couldn't, and the hole kept getting bigger.

And so at some point, he realized, shit, we've lost 12% in our first year. It's even worse in our second year. This is looking bad. And our ability to raise money is going down because our returns are shit. They're absolutely horrible. And so that's when it became a Ponzi scheme. And his accountant, who was a guy called Dan Marino, hilarious footnote.

Football player? Well, if anybody, so think about it, this is 1996. If anybody Googles, it's pre-Google, right? If anybody tries to search on the internet for Dan Marino, they get the football player. So he's working with this accountant who is completely invisible to internet searches and the accountants- Oh, that's smart. Yeah, it's really smart. That's very smart.

The accountant's completely crooked and basically sets up his own fake- Dan Marino sounds like a crooked, I don't mean to stereotype based on last, but Dan Marino sounds like a cricket accountant or an NFL quarterback. What do those do? Sure. He sets up his own fake auditing firm. So he's basically auditing his own accounts. And if anybody sort of were to really go and check the go, the guy who says that Dan Marino's accounts are genuine is an auditor called Dan Marino. And they're the same guy. So that was kind of an important part of this fraud. But yeah, Dan Marino told the author Guy Lawson that one of the problems was there's this idea, oh, we're going to have a really good year, we're going to make a lot of money for real. And when we make a lot of money for real, then it will no longer be a Ponzi scheme. It's all genuine. It'll all

come out good in the end. Dan Marino said the problem is, sometimes they did have good years, but whenever they had a good year, they would claim it was an even better year. And whenever they had a bad year, they would never admit that they had a bad year. So there was whatever it was, vanity, fear of the consequences, whatever it was, he just made it completely impossible for him ever to catch up with his own life. And I think that that's very typical of con artists, right? Where they say, I'll fix it, I'll make it better. This isn't, this is just temporary, but it never is. But the most

incredible thing about Sam Israel is that once the scheme kind of comes undone, right, which happens at some point, just like with SBF night, right, at some point people are going to ask for their money and people are going to get spooked. And when they get spooked, like there's going to be a day of reckoning. And he had a moment where he said, oh, shit, you know, I'm going to jail. And he thought he would get seven or eight years, which was pretty typical for white collar criminals. And then they switched judges and the judge gave him 240 months.

So 20 years instead. And he was like, oh shit, I can't do 20 years. I'm gonna be an old man. This is not cool. I was ready for seven, I can't do 20. And so instead of figuring out how do I deal with this, he decides to fake his own death. Yeah, my gosh.

Which is obviously gonna work out really well. Oh, it's gonna work out great. We'll be back in a minute. Hackers and cyber criminals have always held this kind of special fascination. Obviously, I can't tell you too much about what I do. It's a game. Who's the best hacker? And I was like, well, this is child's play. I'm Dina Temple Reston, and on the Click Here podcast, you'll meet them and the people trying to stop them. We're not afraid of the attack. We're afraid of the creativity and the intelligence of

the human being behind it. Click Here, stories about the people making and breaking our digital world. AI machines, satellites, engine ignition. Click Here. And lift off. He only has a few months to plan, right? It's not like he has been thinking, oh, I'm going to fake my own death. This is my exit strategy. Because a lot of con artists, they don't think that far ahead, right? They don't think of the exit strategy. They think it's always going to work out. So he says, I'm going to fake my own death. I've watched this really cool movie. It's

called RV. And I'm going to buy an RV. And I'm going to just go around the country and maybe make my way to go. Oh, by the way, one of the things he told me was that after his sentencing, as he was walking out, an FBI agent, one of the ones he'd gotten friendly with, looked at him and said, I have two words for you, Costa Rica. I find it very difficult to believe that that actually happened. Yes, I also doubt. It's Dan Marino, Dan Marino, two words for you, Costa Rica. I don't know what...

Nate, I think you've got a career at this. So, but I'm curious. So Maria, you said that this is very, this is short term thinking. He didn't, he wasn't really thinking through the consequences of his actions. And that's true. Any Ponzi scheme inevitably becomes completely unsustainable. You cannot possibly keep it going. It will come to an end.

So what is the way out? And then the faking the suicide again, like, of course he's going to get caught. Of course that's not going to work. Yeah, he decided he was going to jump off a bridge. Well, not jump off. He decided he was going to pretend that he had jumped off a bridge, right? He actually jumped off a bridge. Oh, is that okay?

Because he, okay, yeah, because when you, because then he did actually claim he committed to, he tried to- No, no, no, he actually, he actually jumped off a bridge. He did, so this is the research he was doing. When you're trying to fake your own death, and I interviewed this woman, Elizabeth Greenwood, who wrote about faking your own death, you have to think very far ahead. You have to figure out money, you know, how am I gonna be off the grid, right? These days like how am I gonna survive? How am I gonna get out of the country?

And you know, where where's my cash gonna come from all of these things instead What he spends his time thinking is researching all of the bridges in New York to try to figure out Which one he could conceivably jump off of and not die he could conceivably jump off of and not die. So he finds a bridge that's under construction, so there are nets underneath. And he's like, oh, perfect. Like I'm going to jump and I'm going to land in the net, and then I'll use the net to scramble up and get out. So he does this, not realizing that those nets are pretty damn hard to climb out of. So he manages to

make the net, by the way, thinking about risk, right? Risk reward. If you miss the net, the risk reward equation there is not great. So is the net designed to catch people or just like a spanner that somebody drops? I mean, that's the- Right. No, I think it was- We're going to find out the hard way. I think it was designed to catch bricks and falling debris from construction. So when a person goes into it, it just like, whoo, goes all the way down. So then he's stuck in it. And at this point, he's like, I think I'm going to die anyway, except it's going

to be much worse because I'm going to have spent my last minutes trying to scramble up the snet. But he actually does manage to get out. And he has a driver waiting for him to take him to his RV. And he thinks he's going to drive off into the sunset. Oh, by the way, another really, really important thing. If you're trying to fake your own death, do not tell your mother, your girlfriend, your son and the driver that you're going to be faking your own death. do not tell your mother, your girlfriend, your son, and the driver that you're going to be faking your own death. Don't worry, mom, I'm not actually dead.

Just call an Uber. Just call an Uber. Yeah, call an Uber. Uber Black. Do it in style. But this is what happened. So, you know, he's fucked from the beginning because he has not thought any of this through, but he does manage to make it out of the net. He's met from the beginning because he has not thought any of this through, but he does manage to make it out of the net. He's met by a driver, makes it to his RV, and for the first few weeks, it actually seems like everything is kind of okay because even though he's living in an RV, living in RV parks, he's kind of getting away with it. And then he walks into a bar one day and he sees himself on TV on

America's Most Wanted. And he goes and reads about himself on the internet, which is a big, big no-no if you're faking your own death, to start Googling yourself. But he does that. And he sees that his girlfriend has been arrested as an accomplice and that they're looking to arrest his mother. He doesn't realize that this is a trap, that the police do this kind of thing to try to get people kind of out of hiding. He thinks this is real. And so he gets on a motorcycle, goes to the police department to turn himself in, walks in. He says, you know, hey, I'm here to turn myself in. And the police officer is like, what, you know, in for what you need to use the bathroom?

Like it's over there. Anyway, there's all of this miscommunication. He says, no, you know, I, turning myself in, I'm wanted. And I just don't want any press here. And at this point, the police officer actually looks at him, realizes who he is. And that is when he gets caught and gets an additional two years added on to his sentence

for faking his own death and running away. It's astonishing. One thing you said, Maria, you said that the craziest thing about him or the most amazing thing about him, I'm not even sure that is the craziest thing about him, but we haven't got all day. So there are other stories you could tell about Sam. But I wanted to ask Nate, given that Nate you've been thinking about the habits of risk-taking individuals, these people you call Riverians, is short-termism part of the, or kind of a side effect or a glitch in the Riverian thinking system? So on the one hand you need that ability to think probabilistically, you need that ability to take calculated risks. But I mean, Sam

Israel just seems to have never been able to see past the... had no problem taking risks, but just couldn't see past the end of his nose. Yeah, no, look, I think the better investors and gamblers have a longer time horizon. That's kind of one of one of Silicon Valley's secrets, despite their many flaws that they do kind of think 10 years ahead. But yeah, some of this sounds very familiar. Maria, I know from talking to you, the notion of like a good business gone bad. I mean, even FTX was a pretty good business, right?

It was like the leading brand for crypto trading. They made legitimate profits, etc. But like, you know, it turns sour or I think, you know, Sam Bencomfrey couldn't resist the temptation to take all this money, stay on the sideline. He couldn't like resist the temptation to go and gamble with it. But yeah, the lack of advanced planning coupled with the kind of miscalculating consequences, if you're very charming, which I think Sam Israel is more so than SBF, it's a different story.

You can kind of weasel your way out of things, right? You can think you can like dance your way out of anything and you can up the con a level or two or three and then you may on some level know it's not going to work. But I don't know. I mean, at some point there's a point of no's not going to work, but I don't know. I mean, at some point there's a point of no return, right? There is a point of no return. Yeah, I think that's absolutely right.

Nate, I think one of the, this is a characteristic that you have both with reverence and non-reverence, and Tim, I'm sure you've come across this in other cautionary tales, but I think a lot of it is this overconfidence and hubris that comes with a certain level of success. And people, and I think to be an entrepreneur and to be a risk taker, you need to be overconfident to a certain extent. As we all know, if you actually know your odds of success, you're not going to start the damn company, you're not gonna try it because it's the risk of failure

and the chances of failure are so high. So it's a fine balance. And I think overconfidence turns into delusion and turns into this thinking that actually, I can keep doing this forever. And because you've gotten away with it for so long, it seems like probabilistically speaking, you know, your base rates change. I've gotten over, you know, okay, you know, one year, two years, three years, four years,

everything's good. This is this is all going good. Yeah, if the coin comes up heads, five times in a row, I mean, you see it in poker all the time, right? Yeah. You know, winner's tilt is something which is maybe under discussed. It's huge. Loser's tilt, we all have experienced. Maybe not you, Maria.

But winner's tilt, where you're on a hot streak and you're like, ah, maybe I have some gift from God to play poker really well or something, is also a big deal. It absolutely is. One of my favorite psych studies is from Ellen Langer and I think the name of the paper is something like, heads I win, tails its chance, something like that. And she had people bet, not bet, but guess the results of a coin toss. And it was actually not a fair coin. It was rigged. And there were different, basically, it came up heads and tails the exact same number of times in all of the different conditions.

But in some of them, it was pretty random. In others, it was clustered near the end. And in the most important condition, the correct guesses were clustered near the end and in the most important condition, the correct guesses were clustered near the beginning. So basically you would say, heads you'd guess and then they'd make sure it landed on heads. It was a rig toss so that you were right. And the people who were correct clustered at the beginning would then, and these were Harvard students by the way,

then they got all sorts of questions like I'm good at predicting the outcomes of coin tosses and they would rate themselves as actually quite good at it. They would say if I had more time to practice and to guess I'd get even better. So things that made it very clear that they thought that this was a skill and not actually completely random and it was so easy to get people to believe that they were skilled at something where it was just complete randomness when they had those things happen at the beginning. So Tim, I think this goes back to the beginning of your question. This is how you get into Ponzi schemes. Think about Bernie Madoff, right? He was successful for far longer than Sam Israel. And Sam Israel,

by the way, was the single biggest Ponzi scheme before Bernie Madoff, right? He was successful for far longer than Sam Israel. And Sam Israel, by the way, was the single biggest Ponzi scheme before Bernie Madoff. Now, I'm curious. We've been talking about people who have an appetite for risk and who it all came apart for. Maria, I know you've been doing a little bit of research into one of the most important gamblers in economic history. Yeah, John Law. He was someone who I wrote about for the confidence game and I've come back to so my next book is about cheating. So I've kind of been thinking about him.

But one of the reasons I am interested in John Law, so when we're talking about someone like Sam Israel, right? it's pretty clear, con artist, right, Ponzi scheme. When you're talking about someone like John Law, it becomes much less clear because he's someone who was a huge gambler and we know that sometimes he was successful, but he also ran his father's business into the ground, if I remember correctly, through gambling. But I guess he got better with time. And killed a man. And killed a man.

Wait, literal gambling or like? Literal gambling. So yeah, so he was someone who came from money, whose parents had a financial business. And we should say this is the 1700s, just to situate people. Right, yes. For those small number of listeners who don't know who John Law is, or that everybody should. Yes. We're in the 1700s and he's going to be making friends with the Duke of Orleans, who

was then Regent of France. And he's going to be basically setting up France's banking system. So the reason why I was fascinated by him is that it's actually unclear if he was a con artist or not. Like, did he believe that because it was the kind of the end of his time at the height of finance was with the establishment of this thing called the Mississippi Company, which was a huge bubble and basically bankrupted a ton of people. And the question is, did he know what he was doing and get unlucky? Or basically, did he do this as a kind of Ponzi scheme, as a kind of con or not?

And the fact that we still don't really agree on that, I think is fascinating. I mean, we should say, so he was originally a Scot. He killed a guy in a duel, was sentenced to death for murder, escaped from prison, traveled Europe, wound up in Paris, made a few friends with some influential nobles, made a huge amount of money gambling because he would set himself up as the house and he understood the probability enough that he knew he had an edge. So he's gambling with all these nobles, he's making a huge amount of money. And then he sets up his own bank and he starts issuing paper money. This is not the first paper money in the history of the world. It's not even the first paper money in the history of France, but it's pretty new and people are still trying to figure out how it works. And of course this is revolutionary,

he's ahead of his time. Paper money is how we do things, right? It's kind of amazing. And then the whole thing just gets wrapped up with French government debt and gets wrapped up with the Mississippi bubble. And the Mississippi bubble was, it was a stock market bubble. One stock was involved, the stock of the Mississippi company and John Law controlled the Mississippi company. But it was clear that nobody really understood what was going on except that number go up. And if number go up, everyone, everyone gets very excited. Yeah. It's very intoxicating when the number goes up, right? I do wonder too, there is some survivorship bias and which kind of scams and schemes we discovered. You know, the best

frauds in history, probably nobody knows about. Yeah, yeah. Good point. SBA was convinced that he could somehow navigate his way through bankruptcy, or not through bankruptcy, navigate his way through this downfall in Bitcoin and come out the other side of it. And maybe people wouldn't really notice, right? Maybe it's like a page A16 story, not an A1 story. If there's a spontaneous rise in Bitcoin prices and they recover these losses that they have, although they were 10 billion in a hole, which is pretty hard to overcome. It's funny, Nate. I think that's a really important point that the best con artists are never caught.

When we talk about con artists and people ask me, why aren't there as many female con artists? I say a few things, but one of them is kind of a joke, but kind of not, which is that they're just better at it. So we don't know them because they haven't been caught. They don't have as much ego and they know when to disappear and how to disappear much better than the Sam Israels of the world. Or like cheating in poker.

A lot of these famous cheating scandals, like online cheating scandals, people are very greedy, where they win at like, you know, 13 centred deviations above some random rate, whereas if you won at two centred deviations above random, it would be almost impossible to detect and you'd have a great life. Although we don't find those people though, right? We don't find the people that are actually good at cheating a lot of the time. Yeah, but so as we, you know we wrap up the story of John Law, I do think that it's interesting that economists don't agree, historians don't agree, whether or not he was greedy.

He was obviously greedy. I think everyone agrees on that. But whether he thought that this could actually all worked out, I found a rhyme that I would love to share if you guys are in poetry mode from the time about what happened with the Mississippi bubble. And it goes like this, my shares, which on Monday I bought, were worth millions on Tuesday, I thought. So on Wednesday, I chose my abode. In my carriage on Thursday I rode, to the ballroom on Friday I went,

to the workhouse next day I was sent." First poetry reading on the Risky Business podcast, I believe. It is. I think that should start a tradition. That's very good. And one nobleman of the time said, the sense the system of paper money, which has enriched a thousand beggars and impoverished a hundred thousand men. And obviously that's not true, which is why we, you know, that was not the end of the system of paper money. It was just, it just happened to be

the end of John Law. He had to escape France by the way, because he was convicted and was going to be sent to prison there. So he dressed up as a beggar, ran away to Italy and died in Venice, totally impoverished. And I guess the cautionary tale is a cautionary tale. And I guess the lesson or maybe the lesson is that, or the economics lesson is if you're going to have paper money, if you're going to have somebody who has the right to just create money with a printing press, you've got to make sure you have the right controls over that person or over that institution. It can't just be some guy who

killed a guy in a duel and came over, won a lot of money in gambling, and then he's the guy who can do it. You need this institutional scaffolding, which when we have it, it seems to work just fine. We'll be back right after this. Hackers and cybercriminals have always held this kind of special fascination. Obviously I can't tell you too much about what I do. It's a game. Who's the best hacker? And I was like, well, this is child's play.

I'm Dina Temple-Reston, and on the Click Here podcast, you'll meet them and the people trying to stop them. We're not afraid of the attack. We're afraid of the creativity and the intelligence of the human being behind it. Click Here, stories about the people making and breaking our digital world. AI machines, satellite, engine ignition. Click here and lift off. Click here every Tuesday and Friday, wherever you get your podcasts.

I mean, are there like two or three or one big takeaways, like common patterns, and when, I mean, are there like two or three or one big takeaways, like common patterns and when you know something is becoming a cautionary tale or a con? At the risk of quoting that classic opening line of Anna Karenina, that every, all happy families are alike and every unhappy family is unhappy in its own way. I think one of the striking things about cautionary tales is there are a lot of different ways for things to go wrong. There are organisational problems, informational problems, engineering problems, hubris and arrogance, shortsightedness, lots and lots of self-delusion, lots of wishful

thinking. It's a miracle that human civilization survives, actually, given how many different ways there are to go wrong. That is part of the slightly perverse joy of researching and writing these cautionary tales, is There is always a new disaster and always a new way for disaster to happen. You make that sound almost gleeful. Yeah, I mean sometimes I have to remind myself that like I'm not supposed to be enjoying this because some of them are very, very sad. Some of them are straightforwardly hilarious and no great harm is done, but a lot of them are pretty painful.

Yeah, Maria, I remember you telling me that like, cons are most likely to occur when you're in an upcycle or a downcycle, right? Not in the steady state, but when there's something new and novel and people are panicking. Yeah, moments of transition. So whether those are societal transitions or whether they're personal transitions is when you're most vulnerable to get conned. So it's not a personality trait, it's not intelligence, it's not anything like that. It is this kind of moment of either up or down, euphoria or, you know, despondency. But when things are uncertain and your worldview gets challenged, gets shattered,

gets displaced, you look for certainty. And that's when con artists swoop in and give that certainty to you. So as long as nothing ever changes, we're all safe from cons. We're good. You know, my great grandfather faked his death and got away with it. Okay, Nate. Can we just, can we, we need this story. I'm sorry. We're pausing everything. Nate, please. I mean, his name was Ferdinand Thrun, which is a great name. It's an amazing name. He was written up in the Chicago Tribune and the New York Times and places like that. Yeah,

he was like an insurance fraudster. We should do this as a separate segment sometime. But basically his technique was to commit crimes so devious that there was no law to charge them with because they hadn't figured out like this particular type of fraud. But we should do proper research and do an episode on this, Maria. Yeah, absolutely. So, Maria, Nate, now we've discussed Sam as well, we discussed John Law. I actually had a couple of questions, given that you guys are absolutely experts on this sort of thing. I had a couple of questions for you that I hope you won't mind me asking. And the first one is, I have your two most

recent books in front of me. I have Nate's On the Edge, I have Maria's The Biggest Bluff, Stone Cold Classic. Amazing. I looked in the index. The word experiments does not appear in the index of either of your books. Expected value of course does appear, but experiments does not. And I just wondered whether you two are brilliant risk takers, analysts, poker players. But I thought a poker player can't really experiment. Like if you want to find out, you need to make the bet. You need to put down the money. There's no cheap way to find out what the other person's cards are.

And maybe that is a blind spot in poker playing relative to decision making advice in everyday life. Because what I've always been saying to people is okay, if you're facing an uncertain situation, you know, you don't know what the right thing to do is, maybe there's an experiment, maybe that you can run a little pilot, maybe you can run a little, you know, A-B test, maybe there's a cheap way to find out without betting all your chips, metaphorically speaking. So I just wanted to ask why did neither of you talk about experiments and is this in fact a blind spot in the poker player's view of the world?

It's a great point, Tim. I have a home game I play maybe every third week. That's a $1, $2 game, which for me is, you know, on the lower side of the stakes I play. And I probably am doing some experimenting in that game, right? You know, last night I made, I had a nut flush draw, which some of our audience will know what that means. I had the ace high flush draw on a board that was King, XX. I made like a 3X overbent shove on the turn. I'm just going to experiment. I bet probably there's some frequency at which you're supposed to do this in game theory.

But like, but if I lose this pot, then, you know, I'll win. Sometimes I'll catch my flush and like it'll be a fun hand to show down and whatever. But I did feel I think we do probably experiment a little bit and that kind of like naughty feeling you have of like having an experiment and getting away with it. Like you're kind of taking the piss to use a, is that the British term? Yeah, yeah. Taking the piss and you kind of get away with it.

Like it's a very satisfying feeling and I think it encourages current artistry sometimes. Yeah. Yeah, I think that there, so two things. One, yes, I think that you can experiment this way. And to me, I do it when I move down in stakes as well, right? When the money is not as meaningful, and you get to test certain theories out, right? So if I'm studying and I'm kind of figuring out different possibilities

for playing similar spots, I might test those out and feel comfortable testing them out when I don't care as much about the stakes when it's not as important. Now that said, we can't experiment as in the traditional, so I'm a trained psychologist, right? So when I was doing studies for my PhD, you have to have a very strict experimental design where you have your control group and you have your test groups and you have all of these things where you're trying to subtly change the conditions and see if the outcome changes. That obviously you can't do because in some ways, my whole book was an experiment.

So experiments not in the index, but the biggest bluff all of it was experiment. And I saw Poker as kind of a psychology laboratory of testing out a lot of the psychological theories that I had kind of known in theory and putting them into practice at the table and being able to see, oh, you know, this is how this plays out. This is how that plays out. And I do think that poker is great for that. But of course, you can't when you're playing in a tournament, when you're playing in a tournament when you're playing in a game, you can't Have the exact same conditions where you say, okay on this exact same board. I'm gonna do this Let's see what happens. All right, pretend I didn't do that. Let's go back

I'm gonna do something else and we'll see what happens there because even if Nate and I were thinking oh, Okay, let's see what it feels like to overbent three times the pot in this particular spot. And Nate says, okay, I'm going to do this. And then Maria, you do why. That's not in poker, that experiment is actually not a valid control group because Nate and I are so different. People respond to us differently. And all of a sudden, you can't control the environment because it's a different environment the moment you switch out the players, right? All of a sudden the experimental conditions change, even if you've changed literally nothing except who's sitting in that chair.

And I think that's actually fascinating and that's how life works. That's why sometimes psych studies from the laboratory don't generalize well to the real world because the real world does get messier and it's much more difficult to control. No look, I think as someone who's self-reflectively kind of seen his social status rise and fall different times, if you're charming and privileged and are seen as being on a winning streak, you can get away with a lot. People really are afraid to call you on your bullshit. Yeah. Okay, second quick question. Second quick question, because I have to take advantage

of the opportunity to tap into your wisdom. Okay, so you, I think it's fair to say that both of you would advocate putting a probability on something. If you're going to make a risky decision you have to have an idea, is this a 5 to 1, is it a 3 to 1, is there a 20% chance this is going to happen, is there a 70% chance this is going to happen. And there's a difference between say a 53% chance and a 48% chance even though they're both close to 50-50. So it's important to quantify as much as you can even though you don't always have the data. Okay, so two very little stories to get you to reflect on. The case in favour of quantification.

Apparently when the US government was pondering the Bay of Pigs invasion, the Joint Chiefs of Staff thought that the chance of success was 30 percent. And a report was prepared for President Kennedy. And 30 percent was presumably, they thought, the president won't understand percentages. So he was told there is a fair chance of success. And by fair chance of success, they meant 30 percent. Now we don't know what Kennedy understood by a fair chance of success, they meant, well, 30%. Now, we don't know what Kennedy understood by a fair chance of success, but he seems to have thought, it was a good chance of success.

And so, and he approved this total fiasco. So it might seem more user-friendly to express things as well. This is common or uncommon or likely or unlikely, but actually none of those words really mean the same thing to the person who's uttering the word as to the person who's receiving it. So you should always put probabilities on things. Here's the counter example. Think back to the financial crisis 2007-2008. You had quants putting probabilities on things.

This is the probability that such and such a thing will default based on what we know about history, based on what we know about other things that are correlated with it. But actually all of those probabilities were spuriously precise. People had too much confidence in the probabilities. And it's fine to say, oh, we think there's like a 0.5% chance that this will default. That's fine. Then the problem is you feed the 0.5% into a model which gets fed into another model, which gets fed into another model. And in the end you'd be like, oh, well, we've repackaged this thing and now there's like only a one in a trillion chance that this will default. And it turns out that that's all dependent on the quality

of your original assumption. And you shouldn't be betting the existence of Western civilization on that calculation and people got it wrong. So the case against quantification is once you have a number, then you are tempted to rely on that number too much and to analyze or to manipulate or to remodel or to reanalyze that number too much and to forget that actually the number was always basically just an educated guess. Well, I think that when you're talking about quantification and when you're talking about probabilities, it's the exact same logic that you have to apply to algorithms and to kind of building algorithms, which is something that Nate and I have talked about on the pod with AI, which is garbage in, garbage out, right?

If your assumptions are garbage, then your probabilistic assessment is going to be garbage. So I actually think that both of these things, they're not counter examples. The 30% chance of the Bay of Pigs, I just think that these were people who had a lot of qualifications had done the research, had done rigorous analysis, and that was not garbage in right there. They had assumptions that were there for a good reason. They had good historical data. I have no idea how they came upon the 30%. I'm just- It seems quite high to me, Yeah. Yeah. Hindsight bias. Exactly. And and so you get 30%. And by the way, you should absolutely have told Kennedy 30% and

not fair chance. There are so many psych studies about this, that trying to put words with percentages backfires because people do not understand. It's like if you have a weatherman and says a fair chance of rain, right? Let's talk about not a fair chance that the Bay of Pigs is a success. Fair chance of rain. Do you bring an umbrella? You want to know what the percentage chance is. You want to know that actual number because otherwise the quantification gets all out of whack.

Financial crisis. When you have those numbers in the models, those were people whose incentives were not aligned with giving you a correct probabilistic assessment. Their incentives were to make money. That's also a question that you have to make. You always have to ask, and this is something that Nate and I talk about as well, when you're making these assumptions, do the incentives align? Where are the assumptions coming from?

And do you have an incentive to be correct? And in this particular case, their incentive was to make money for them today and to make their company think that this was going to be a great bet and okay, that it was going to work out. And so those percentages are not something that you want to rely on. Now if my incentive is, if my percentage is wrong, I'm getting fired, right? If my percentage is wrong, then I'm making zero dollars. Then all of a sudden, I come up with different percentages.

I use different inputs. My model looks very, very different. But Wall Street didn't work that way, still doesn't work that way. That's not how you're incentivized. Yeah, look, I think there's a risk of laundering subjective opinions through probabilities and forgetting they're subjective, right? If I'm running late to the airport, there's traffic on the Van Wick or whatever, right? I might say to myself, oh, it's a 5% chance I'm going to miss my flight, right? That's not coming out of any regression analysis or anything. You know, I've probably used the phrase on this show, like, quoting

Vice President Harris, a model does not fall out of a coconut tree. It exists in the context of that, which became before it or whatever else. You're trying to get at the truth with a model and I think mediocre modelers in particular will publish a number and then forget how many assumptions are driven into that, right? Look, I still think it's worth quantifying things. I mean, at the end of the day, probability is defined as a number between 0.0 and 1. And you have to make decisions even in conditions of uncertainty. But to Tim's point, yeah, I think there are cases where people don't forget how provisional a guess is when you put a number on it.

Yeah. And I think it is always important to not have a false sense of certainty. And there's also a lot of data that shows that when you have numbers and when you have a lot of these things, it does give you a false sense of certainty, right? That you often do become a little bit overconfident when you're like, well, I have this model and this model. So it must be. And there you have the bias that we've talked about a lot where it goes from being probabilistic to seeming much more certain, like this will not default. This will not happen because you forget that it ain't zero. Thank you so much, guys. Fantastic.

Tim, thank you so much for coming on the pod today. It's been such a pleasure having you. It's been really, really fun. Thank you for sharing your wisdom. And if people want to hear more about Sam Israel or any other stories of things going disastrously wrong and me trying to investigate the social science behind why they went wrong, cautionary tales with Tim Hartford is one of Risky Business's sister podcasts on Pushkin. It is. And there are lots of tales of risk-taking assessments that do not turn out quite the way the risk taker thought they would.

Risky Business is hosted by me, Maria Konikova. And me, Nate Silver. The show is a co-production of Pushkin Industries and iHeart Media. This episode was produced by Isabel Carter. Our associate producer is Gabriel Hunter Chang. Our executive producer is Jacob Goldstein. And if you want to listen to an ad-free version, sign up for Pushkin Plus for $6.99 a month. You get access to ad-free listening. Thanks for tuning in. Hackers and cyber criminals have always held this kind of special fascination.

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