Motley Fool Money - Michael Lewis on Stock Market Overconfidence and Revisiting Moneyball

Episode Date: March 12, 2023

One sign of a true expert is they often say “I don’t know”. Best-selling author Michael Lewis wrote classics like The Big Short, Liar's Poker, and Moneyball. He also hosts the podcast Against The Rules. Chris Hill talked with Lewis last year for an episode we published on May 20, 2022. Due to time constraints we had to leave some parts of the conversation out of that episode, so we're bringing them to you now! Hill and Lewis discuss: - Unintended consequences of Moneyball - Why single men fare worse in the stock market - How Iceland responded to the Great Recession - How to spot true experts "Boys Will Be Boys" paper: https://faculty.haas.berkeley.edu/odean/papers/gender/BoysWillBeBoys.pdf Host: Chris Hill Guest: Michael Lewis Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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progress right in the app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. But I think you're right. I think it's sort of like if I were running a big organization, thank God I'm not, I would be really alive to this problem that a lot of what I need to know doesn't find its way to me naturally.

There are all these barriers coming up the chain before it gets to me. And I need to find ways to open up those barriers. And you could call it flattening the organization, whatever. But the truth is, especially in corporate America. The way we behave does not encourage this. I'm Chris Hill, and that's best-selling author Michael Lewis. I caught up with him for an episode in May of 2022 talking about his excellent podcast against the rules.

But there was stuff from that conversation we had to leave out last time that we wanted to share today, including a closer look at his book Moneyball and the takeaways that were lost. It's Michael Lewis telling stories. There's no one better. I like the fact that I, I think the first episode of season three, you play an audio clip of a radio interview from

when you're on a book tour for Liar's Poker 30 plus years ago. And you're, you know, you were getting these questions, sort of demonstrating. It reminded me of a friend of mine who's a financial analyst, and he had done a television live hit of some sort of. And I asked him how it went, and he just sort of smiled and said, you know, it was great. Do you know why? I said, no, why? And he said, because they called me an expert.

It's the only place in my life anyone ever calls me an expert. He's like, my wife doesn't think I'm an expert. My kids don't think I'm an expert, but if I go on television, they call me an expert. And you're on TV because you're an expert. You're on TV for two actually contradictory reasons. The ability to hold you, for the television people to hold you out as an expert, and your willingness to be sound completely certain about something you don't know anything about or it's or something that you're going to be completely certain about something that you know

maybe you know something about but not everything about and the the there's this um you know you every time i go on book tour this happens people want me to come on like cable news and talk about stuff that i don't know anything about it's not about i happen to have a book out about x but they want me to talk about y z and every and a and b and uh and i'll say look at I don't really know anything about that. And that's not the answer they want to hear. What they want to hear is, happy to, I got to take. You know, I'll give you, I can answer that question, me, me, me, me, me.

But I would say, you know, I was kicking around with the producers after the, we just finished the last episode of this season, which will layer in a couple of weeks, two or three weeks. They're dropping one a week. But we were sitting this kind of shooting the shit about what this was all about. And one of the producers says, you know, if we had to summarize this whole season, in a sense. It would be you can recognize the expert because he or she is the one who is not totally certain and is really quick to say, I don't know. And if you want to find the person who

actually doesn't really know what they're talking about, look for total certainty and look for people who don't admit they don't know things. And TV just isn't friendly to that. TV doesn't want you on TV saying, I don't know. I don't know the answer. Why are you on TV then? And this, so this is, we open with those clips from Liar's Poker, because I said to them, you know, as we were starting the thing, I said, you know, it could not be a more clear-cut example of the problems we have in our media environment with presenting expertise to people, to the public. That I, the whole book of, the whole of Liar's Poker was it was like a dramatization of my ignorance, a dramatization of, if you're going to listen to anybody about money, Don't make it be me. I clearly don't know what I'm talking about. And that these interviews over and over saying, like, which way is the stock market going? Or where should I, which should I invest in now? Or it was just, it was, it was a madness. Anyway, so that's what we

open with that, but we quickly get to the subject at hand in that one. But you just touched on another theme that runs through some of your books. And it's the role that confidence plays for better or for worse. And it shows up in this season, and sort of the intersection of confidence and expertise. And as you said, throughout the season of this podcast, we meet people who have great expertise and they are almost shy about it. And then there are people who have great confidence despite their complete lack of expertise. So two examples, one specific, one general.

Episode three, I think, goes back to the Moneyball material. It goes back to Bill James, who is the reason for money. He's the first person who, in a big way to a largest audience, is rethinking the game of baseball in the 70s and 80s, and is sort of showing really clearly that professional baseball people aren't making any sense, in the way they're valuing players, and the way they're thinking about strategies, that there's a fresh take on all this. And he says then that he looks at a baseball field, and what he sees is a field of ignorance. Now, we go back to him because it's so interesting to see this man who spawned a revolution,

who, you know, who has every reason to hold himself out as the world's greatest expert on baseball, the greatest thinker, whoever thought about the game. We go back to him. And one, he's really uneasy with the idea that he is the expert, because he's much more comfortable with the idea that we actually still don't know a lot. And it really bothers him the way that Moneyball has become, has created this illusion of certainty about the knowledge around the game. That this is sort of this illusion of precision, that it's all become very quantitative,

very analytical. It has gotten smarter. They have learned things. But his point is that the people who are now the experts, it's a different kind of person than it used to be. It's no longer, it's no longer, it used to be the old baseball scout who played, the person who had experience in the game. It's now the person who has analytical abilities. So the person's changed, but he says the attitude hasn't changed as much as he would have hoped.

And that back in the day, when Bill James was first making, saying things about baseball that were just shockingly true and revolutionary, you could see it. He says, you know, why was I able to do this? Why was a total outsider able to make this sort of contribution to the understanding of the game? He said, because the insiders thought they knew. They'd stop thinking altogether. Why did they stop thinking? Because they thought they knew. And he said, that's the thing that bothered him the most, that I think I know.

I'm totally sure. And he sees the same streak in people who now occupy, not every all of them, but front offices, where they are, they're very clever. they're highly educated, they do have answers to some things, but they are excessively sure about what they know. It bothers him a lot. And so he's maintained, it's very interesting, through whatever it is, 50 years, 45 years, 50 years, even as he was integrated into the game and his thinking was integrated into the game, he's preserved this distance and this humility. It's a really deep humility. Like, he points to the field, he says, that's still a field of ignorance, and we need to

respect what we don't know and don't pretend we know things we don't know. So there's kind of one example. Like, if anybody's going to be an expert, Bill James would be an expert. The second is, like the episode that we released today is about the role of male over confidence in this great problem of like, why doesn't knowledge and people, knowledgeable people, actually reach the audience that needs to reach. And it starts with the phenomenon of mansplating, and it's kind of great. It starts with the story with the writer Rebecca Solman.

This is where the man splending gets coined back in the early 2000s. She's at a dinner party in Snowmass, Colorado. She's been invited, but she doesn't actually know the host. It's a lot of old, rich, important people. She's a youngish writer. She's written seven books. The host ignores her the whole party. And at the end, he comes over and he says, oh, so I understand you've written a couple of books.

And she'd written seven books, but she said, I've written, yes, I've read a couple books. He says, what are your books about? What are your books about? She said, well, the most recent is about the photographer, Edward Moibridge. And he says, ah, there's a very important new Edward Moibridge book out that you need to know all about. And he starts to talk at great length about this book that he clearly hasn't read. He's just read some review of. And she knows he hasn't read it because she wrote it. It's her book. And he's explaining her book to her. And she, she she sits in listening, she realizes this has happened to her over and over in her life. This man is talking to her as a presenting himself as the expert on the subject of Edward

Moorbridge and everything he knows is a review of her book. So anyway, she sits on this for like a couple of years, I think, before she writes this essay, which she calls, men explain things to me. And someone reads that their essay and coins the word mansplaining. And it's sort of like, what's at the bottom of this? And we go from there to, like, where you find mailover confidence and what are its consequences. And, you know, one place where it's been pretty fantastically sort of dramatized is in the stock market. Do you know Terry O'Dine's and Brad Barber's paper, Boys Will Be Boys?

Does that, have you ever, have you, has the fool run across this about? I'm sure my company has. I'm familiar with references to it. But I haven't read it. This audience should know about this paper. Around the time Rebecca Solent is being mansplained to in Snowmass, Colorado, these two guys, economists, are working on this subject. And they've gotten access to data from one of the big online brokerage firms.

They never say which one. And so they can see how the accounts performed. And they carve all the accounts at this online brokerage firm. into three buckets. Accounts run by in households with just a single man, accounts with a household just a single woman, and accounts with a household that have a man and a woman in it. And they see, well, how did, so how did the various households perform? And the, the house with a single guy in it is the worst. He underperforms the, he remembers the house with a single woman in it by 1.4% a year, which sounds like, you know, not much, but you compound that over a lifetime of trading,

and it's forever, right? It's a huge sum of money. And they kind of get it why this is happening. And why it's happening is the men are trading, the single guy is trading way too much. He's just like, he's churning. He's churning because he thinks he knows something. He says like, oh, it's doing, there's a smart move to buy IBM today, whatever it is. And he's paying, he's bleeding commissions, and he's also his judgments to know better than the market. But he doesn't know it. And it's like a distillation of the problem of mailover confidence in the marketplace. And I don't know, I've seen this over and over in my writing life. I mean, one way to describe the financial crisis of 2008 is a byproduct of mailover confidence. And in fact, I wrote a piece once,

one of my favorite pieces of material, sort of chunks of material I ever got handed, about what happened in Iceland during the financial crisis. Because in Iceland, it's this great little laboratory because it's only 350,000 people. It's like the size of Peoria, Illinois. And they're all related to one another. So they all kind of know each other. And so you can't really fool anybody. After the financial crisis, the women of Iceland turned to the men.

And they said, you know, five years ago, you said you were going to stop fishing and become a banker because we Icelandic men are more gifted in financial markets than anybody on there. That our Viking heritage has left us predisposed to being financial wizards. And so you've built three of the biggest and most risky banks in the world, three big banks in Peoria, Illinois, basically. And they've all come crashing down and has ruined our society. And when I walked into this, the women had figured out, this is male overconfidence at work, that they elected a prime minister, they kicked out the prime minister who was a guy, they elected a female prime minister who said, no more men in the banks.

The only functioning money management firm in Iceland at the time was run by a woman, and her selling point, which her marketing was simply, if you give me your money to manage, I promise no man will ever touch it. And it worked. Men were giving her money because they didn't want men to touch the money. And it's kind of, so anyway, this, the financial sector provides us with examples of the idiocy of male overconfidence and how it gets in the way of perhaps deep understanding. It's one example of a larger phenomenon.

And the final speaks to our whole season, which is like, all right, why is it so hard for the real expert to be heard? One of the reasons is people who don't know are shouting very loudly. Let me do this before I finish, because when you start poking at this, you can't believe how deeply it runs. We interview a woman, female doctor, who is on a plane, like some commercial flight, some dude gets up, you know, collapses in the aisle, heart attack, stroke, no one knows what it is. But it's like, he's out. The flight attendant gets on the horn and says, any doctor's here, she raises her hand. The guy is prone, you know, next to her, really, and says, I'm a doctor.

the flight attendant comes back, looks at her, sees a guy who's behind her who says, I have some nursing experience, and picks the guy to come and work. And she says, wait, wait, I'm a doctor. And she said, like the flight attendant looked and said, you're a doctor? How curious. But didn't it? So, so, so wait a minute, it gets better. She thinks like, well, that was weird. This guy was dying, you know, could be dying at my feet. I'm a doctor. I was actually trained. I was trained. in ways that were exactly suited to dealing with this particular problem, and nobody ever acknowledged that I might be the one. Instead, they picked this guy who knew less to come and service this poor man. But she thinks like that was just a weird thing, a one-off. Until she stumbles on Facebook into a group of doctors, female doctors, all of whom have had the same experience on airplanes. And there are lady doctors who've been ignored on airplanes in favor of some guy.

And the sort of invisible female on doctor on a plane, to me, it's like a little metaphor for the problem. Anyway, I'm blathering on, but I tell you, I can tell you that the podcast generally has been a joy to kind of like explore things that I might not otherwise explore in print. And it's just taking us places that I just might not otherwise go. And this was one of them. So when you think about expertise being hidden, this is. something that comes up in the very first episode of the season, an episode called Six Levels Down. I have a couple of questions about it.

But before that, for people who have not yet listened to the episode, and I can't encourage people enough to do so, can you give a summary of what the episode explores? Because six levels down, I listened to that episode twice, and the second time through, I thought about it just from the standpoint of investing. and I feel like it is an episode that every CEO of every public company should listen to. Yeah, it's the phenomenon. So what we're described, I'll tell you what the general thing is, I'll tell you the specific story. The general idea was, and it is an idea that I stumbled across while I was working on the most recent book on the premonition,

that in a complicated society, in complicated systems, a big corporation, a federal government agency, a state government, whatever it is, a big system, when there is a crisis or a problem, the person who has the expertise to respond to that, the answer to the question, is very seldom the person who's like running the operation, very seldom the person underneath that person, that often it's someone who's six levels down on the organization chart, who has a very specific knowledge. In some ways, this is revealing something because it's a generally true about expertise. It's kind of quiet and local. Like people who really know something are spending their time knowing, learning about that thing and not advertising their expertise, not being big

picture of people. They're little picture people. So you need to find the right little picture person six levels down in your organization to answer the question that happens. And the story that we, the idea was introduced to me by an entrepreneur who also public service. fellow named Todd Park, extraordinary character. He's created three different multi-billion dollar companies in health care. He was the chief technology officer for the United States brought in by Obama and dealt with multiple crises at the federal government. And he was filling my ear about this while I was working on the premonition.

I stumbled into him when I was working on the book. At that moment, he was looking for the expertise to help Gavinor, Governor Gavin Newsom in California figure out how to respond to COVID back in March of 2020. And he found it six levels down in the California state government. And that woman he found happened to be the main character of the book. But I leave that to one side. I was talking to him. I said, well, how did you even know to go looking in the bowels of the state government

for this particular epidemic expertise? He said, well, Michael, he said my whole career, entire career, has been premised on this understanding. And I myself only accidentally came across this understanding. He was 24, 25 years old, fresh out of the Harvard Business School. He was like a McKinsey consultant. Wanted to start his own business. Formed a business with a friend. And the idea for the business was we're going to make pregnancy better for women and reduce

catastrophic outcomes, make the whole thing. Care for the mom better from conception to birth. And it will actually reduce health care costs. because they will have been so well taken care of that they're not going to be the bad really bad outcomes at the end and they buy a clinic a pregnancy a maternity clinic in San Diego to try their idea out it's a it's a disaster nobody the health care firms don't want to insurers don't want to pay for like preventative care you know nobody gets the idea and however while they're managing this disaster

or losing like a million dollars a year on this clinic. They realize that, oh, there's this other problem. The health clinic we bought is losing all this money because it's not even getting paid for the stuff it's doing by insurance companies because the insurance billing has gotten so complicated that like half our bills are just rejected because we put the wrong item on the wrong line.

And they realize, oh, we're in the wrong business. We need to be in the business of figuring out how to get doctors in hospitals paid. And it turns out it's like a national crisis at that time. It's like the 1990s insurance complexity is exploding. They're like 18 different health care plans in 50 different insurance companies, and each one has all these permutations on it. Everybody's having trouble getting paid.

They go casting around for someone who knows how to get hospitals paid. And they find literally in the basement of a big hospital in Boston, Massachusetts, a woman named Sue Henderson, who's in her 50s, and who is the littlest picture person you ever met, who knows more about how to, it's not game, how to solve the game that the health insurers have created to get people paid than anybody on the planet. And they essentially try to code all of her knowledge into software,

and they do, and this business becomes Athena Health, which is a monster. They end up selling it for $5 billion. But Susan was literally six levels down on the hospital organization chart, And she had the only person in the whole operation who had the answers to the question that if the hospital doesn't answer, they go out of business. And even the hospital did not appreciate what they had or her knowledge. So the episode is exploring this.

He calls it the L6. The L6 is the of the world. The people who have this sort of critical, some sort of critical understanding of a problem and who have real trouble. for odd reasons being heard. So, you know, one other examples, Todd Parker has, when he gets to the White House, he has his career of, like, looking for the person who knows the answer

the question buried in the organization. He gets there, right as Obamacare is cratering. I don't know if you remember, but the, right, the legislation gets passed, and then the website. Yeah. I mean, it was like, it was the biggest public relations disaster

in the Obama presidency. It was just like, how did that happen? They worked so hard to get this thing passed. And the website crashes. So Todd goes in, Chief Technology Officer, what the hell happened? And he knows, like, the secretary of the department's not going to know. The undersecretary's not going to know. So he just went right down to a contractor who is, again, I think he was seven levels

down from the top, who actually had an answer to what was wrong with the software. And they fixed the software. But I think you're right. I think it's sort of like if I were running a big organization, thank God. I'm not, I would be really alive to this problem that a lot of what I need to know doesn't find its way to me, naturally. There are all these barriers coming up the chain before it gets to me. And I need to find ways to open up those barriers.

And you could call it flattening the organization, whatever. But the truth is, especially in corporate America, the way we behave does not encourage this. I mean, just with like pay. You've got a CEO who's being paid like $50 million a year. That is not a person who the L6 is going to feel comfortable dialing up and saying, I can fix your problem. The status differences are so great. I put it another way, the greater the status differences that you introduce in your organization

between L1 and L6, the less likely the L6, the critical things that the L6 knows is going to find its way to the L1. It's just going to be the status differences end up being barriers to understanding. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.