More from Tony Horton

Natalie and I recently ordered Volume 1 of the One-on-One with Tony Horton workouts. We had to move a newer dvd player in the workout room to get them to play, but they are excellent. I miss having the graphics showing the amount of time left in the workout and on each exercise, but the workouts are great. Thirty-Fifteen is a real challenge, and I really like the under an hour yoga routine (although I am not bendy in any way, shape, or form).

The Michael Lewis Challenge

I recently finished Michael Lewis' book The Big Short and enjoyed it immensely. I thint it would be interesting one day to teach an economics for business class just using his books. A consistent theme in Lewis' books Liar's Poker, Moneyball, and The Big Short is that many people in the business world just don't know their business. As Lewis puts it in the preface:

This woman [Meredith Lewis] wasn't saying that Wall Street Bankers were corrupt.
She was saying that they were stupid. These people whose job it was to allocate
capital apparently didn't even know how to manage their own. (xvii)

The necessity of a division of knowledge makes it difficult to evaluate charges of ignorance. Bosses probably shouldn't understand all of the jobs which people working for their company (or their division even), and so some ignorance is consistent with a well-functioning economy. But the level of ignorance Lewis describes seems to really challenge the efficiency of markets.

What supports such ignorance? In Lewis' view, the potential of all the parties, at least the players in financial markets, to profit from the system:

What's strange and complicated about it, however, is that pretty much all the
important people on both sides of the gamble left the table rich. Steve Eisman and
Michael Burry and the young men at Cornwall Capital each made tens of millions
of dollars for themselves, of course. Greg Lippmann was paid $47 million in 2007
... But all of these people had been right; they'd been on the winning side of the bet.
Wing Chau's CDO managing business went bust, but he, too, left with tens of millions
of dollars ... Hower Hubler lost more money than any single trader in the history
of Wall Street - and yet he was permitted to keep the tens of millions he had made.
The CEOs of every major Wall Street firm ... without exception, either ran their
public corporations into bankruptcy or were saved from bankruptcy by the United
States government. They all got rich too.
What are the odds that people will make smart decisions about money if they
don't need to make smart decisions - if they can get rich making dumb decisions?
(pp.256-7)

Of course not every body in the game got rich - a lot of shareholders in Wall Street companies and other investors lost milions. If all of the regulars - the players who might be subject to government regulation - got rich regardless, then Lewis is right. A part of this is a result of the socialization of risk through government guarantees, whic clearly undermine market efficiency. More of it may be a result of players receiving bonuses when they earn profits but not negative bonuses as a result of losses. And the fact that some of the Wall Street firms were corporations with limited liability for the investors would contribute to this. The result would be an asymmetry which will lead to excessive risk taking. If Wall Street firms are collectively like the house in sports bettin or poker and can cooperate to share the risk, then all of the players can indeed profit.

Often free market economists take it for granted that there is no easy money to be made and that markets punish stupidity. Michael Lewis' book reminds us that this proposition that markets really punish stupidity requires empirical validation, and may not hold, at least in a strong fashion.