August 29, 2024 • 54 mins
Nate and Maria briefly discuss the latest election news. Then Tim Harford, author and host of Cautionary Tales, joins to discuss two of history’s most compelling con artists: Sam Israel III and John Law. Risk-related lessons are learned.
Further Reading:
A Con Man Who Lives Between Truth and Fiction from the New York Times
The Murderer, The Boy King, and The Invention of Modern Finance from NPR (featuring our EP Jacob Goldstein!)
For more from Nate and Maria, subscribe to their newsletters:
The Leap from Maria Konnikova
Silver Bulletin from Nate Silver
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:15):
Pushkin. Hi, everyone, welcome back to Risky Business, our show
about making better decisions. I'm Maria Kanikova and I'm Nate Silver.
So today we have a slightly different and fun show
(00:37):
for you. We're going to start off talking about some
of our usual things, so we'll do a quick politics recap.
So we're taping this on Tuesday, August twenty seventh. That
DNC has concluded, Kamala Harris has accepted the nomination, and
a lot of things are going on with Nate's election models,
so we're going to talk quickly about that, and then
(00:57):
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
details from history. All right, before we bring Tim on,
Nate's let's talk a little bit about politics and what
(01:21):
has happened since the DNC. Last time you and I
talked the DNC was on day one and we weren't
quite sure what to expect. We weren't quite sure how
it was going to go. So now here we are
a week later. Let's recap and talk about what has
happened since the convention, and also RFK Junior obviously dropping out,
So two big things have happened since we last spoke
(01:44):
to potentially affect the model.
Speaker 2 (01:46):
We still don't know that much, but so far it's
been kind of a bunch of rand not crap, but
like kind of by definition, the polls that are done
in one or two days are either online tracking polls
which are fine but sometimes don't really capture change some
voter sentiment. It's gonna be very stable or quick and
dirty fly by night polls that are also not very good.
(02:07):
So by Thursday, well, no, so far it seems like
Harris is poling as well. She has all campaign, But
is it gonna Is she gonna three points or four
points or five or six or seven? The model will
care about that a lot, but like we don't. We
just don't know quite yet. I mean, I thought it
was an effective convention, you know, maybe will. I thought
the gender politics of her speech were interesting. It was
(02:29):
a very male coded speech talking of like the like
the most lethal military force. It was a very risk
taking speech. Actually right, She's like it was we're privileged,
so we should fucking kick ass America. Like I'm like, oh,
my gosh, I love this.
Speaker 1 (02:40):
It was a it was a good speech to speak,
It was.
Speaker 2 (02:43):
Interesting, it was like not a typical speech. And again
I'm a fan of good strategy, and so anybody who
shows good strategic instincts I think Harris has repeatedly. Now
at this point, I just kind of my estimation of
their intellect and their skills goes up a little bit.
But but we'll see. I mean, if a speech appeals
to me is probably somewhat negatively correlated with it's appealing
(03:06):
to the general population, I'd.
Speaker 1 (03:07):
Say, I don't know. It appealed to me as well.
Speaker 2 (03:09):
Well.
Speaker 1 (03:09):
I think she she walked a fine line in I
think talking about all of the things that matter, having
it actually been heavier on policy than I think a
lot of people thought it was going to be, and
appealing to a lot of different voters. Right. She didn't.
She didn't hew to just one audience or kind of
one one topic, and I think that that was actually
(03:33):
quite an effective way for her to go.
Speaker 2 (03:35):
No, she avoided some of the presumptuousness, and I think
we saw with Hillary. I watched her speech in Hillary
Clinton's intersperse with one another, and she avoided that presumptuousness,
and she is playing to the center right, kind of unapologized.
I mean that's the basic gto game, theoreptical strategy. Most
of the time, you want to you want to appear
(03:57):
more moderate.
Speaker 1 (03:58):
Yeah. And then, of course after the convention, we had
news on Friday of last week with RFK Junior dropping
out of the race and throwing his support.
Speaker 2 (04:09):
What is Cheryl Hines doing? Can we talk about that?
Speaker 1 (04:13):
Okay, yes, I don't know.
Speaker 2 (04:14):
I mean, what is Cheryl Hines doing?
Speaker 1 (04:16):
I don't know.
Speaker 2 (04:16):
Yeah. Anyway, when you have polls that test the matchup
both with him without RFK Junior, then Trump does better
in polls without him. In other words, RFK is taking
more votes from Trump than from Harris in our model.
We adjusted the model on Saturday to make it rfkless.
(04:41):
It didn't hurt Harris kind of like coincidental reasons, which
his name was. Like, she is getting like somewhat of
a convention bounce. I just said, like, oh, it's like
too early to pay attention to it. But like, but
she's doing okay, and that was enough to offset this
RFK maneuver. But yeah, it's a little bit of a
risk factor. Look I think anything involving RFK is kind
of over it. He was getting like, you know, three
(05:02):
and a half four percent in the polls. A lot
of those books will go to other third party candidates.
By the way, he'll still be on the ballot technically
speaking in a number of states. So anyway, I think
it's like an overrated storyline. But you know, it's one
of the better things Trump has going for him right now.
I suppose after a very bad month, you know, whatever,
he whatever quid pro quo there was, and I'm not
(05:24):
accusing anybody of anything, but like, look, RFK Junior was
negotiating with both campaigns for some type of position. What
ambassadorship do you predict that he'll get. Malta might be one.
Speaker 1 (05:35):
Yeah, No, I think I think getting an ambassadorship to
a country like Malta might might be a yeah, might
be a way forward for our FKA. He was very
mad that. You know, in the past he has been
promised positions in the Trump administration that never materialized.
Speaker 2 (05:51):
Anyway, future ambassador to Malta RFK Junior and doors Stunnel Trump,
which should help Trump a little bit, but probably not
that big a deal.
Speaker 1 (06:01):
And one more question for you. Last time we spoke,
I kind of I don't know if this was last time,
but I've definitely asked you whether you thought that Trump
was actually going to be debating Kamala in September, and
I express skepticism. Now we see that he might be
paving the way for not doing that. Have you changed
(06:22):
your thinking about it at all?
Speaker 2 (06:24):
You know, Marie, you can go to polymarket dot com,
to which I'm a paid advisor, by the way, and
bet on this.
Speaker 1 (06:30):
I know I can'tnate because I live in the United States.
Speaker 2 (06:33):
Okay, not if you're an American. I think Donald Trump
would be incredibly stupid not to debate he needs at
this point. Currently he's losing, right. The reason why we
have it closer to fifty to fifty in the model
is because you know, there are reasons the model expects
the race to tighten up again, and Trump has electoral
college advantage if it's really close. But if you have
(06:55):
the election today, Harris might be a two to one
favorite or something like that. So Trump wants to introduce
obstacles for her and variants. So I think it's a bluff.
I mean, I think I don't know for sure. Trump's
been acting pretty irrationally. I think it's a bluff. If
it's not, I mean, if I were the Harris campaign
and be like, Okay, don't yo, bro, don't take your
(07:15):
coverage too far because you could be a good excuse
not to debate you, then we'll just ride this momentum
train through to November. And so he has very little leverage.
If he ducked the debate, he would look very weak. Yeah,
it has to be emasculating. I mean there are gender
things here too, right, Like he can't debate Kamala Harris.
Like he looks so weak that he has like very
little leverage. And if you stupd enough to do that,
(07:36):
then you know, probably he doesn't deserve to win. But
I'm skeptical that this is anything other than like tactical negotiation.
Speaker 1 (07:44):
That makes sense. I'll be very, very curious to see
how this plays out. And if I could bet on polymarket,
I would, but but I can't.
Speaker 2 (07:51):
You're going to Barcelona, right.
Speaker 1 (07:53):
I mean I am in Barcelona, Barcelona. Yes, this is
this is my Barcelona hotel room, nice with my very
own mini bar.
Speaker 2 (07:59):
I was gonna say it's a lot of booze for yes, yes,
it is for in the afternoon for me. All right,
we're we're gonna bring Tim Harford on. Then maybe you
can have a drink Maria, four pm, Barcelona.
Speaker 1 (08:13):
That sounds great. It is just about cocktail hour here
in Barcelona. But first, yes, let's welcome Tim onto the show. Tim,
welcome to the show.
Speaker 3 (08:22):
To be on the show, thank you so for.
Speaker 1 (08:26):
The 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
(08:49):
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 you know the lines
(09:12):
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.
Speaker 2 (09:24):
Do you mean to say that campling doesn't always work out, Maria?
Speaker 1 (09:26):
It's weird. It's so weird.
Speaker 3 (09:27):
The chance of loss is in fact one hundred percent,
which I guess we'll get we'll get to that. But yes, that.
Speaker 1 (09:33):
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 let's have
(09:55):
you lay him out. Let us meet Sam Israel, the
first kind of our first subject for today.
Speaker 3 (10:02):
Sam Israel, the third I think is his full name. Third,
absolutely remarkable gentlemen if gentlemen 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
white people fall for them, but also white people set
(10:24):
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 by
You Capital, which was set up by Sam Israel. I
saw one writer described Sam Israel and by You Capital.
(10:46):
It's like somebody took the Bernie made Off story but
was told to write a Hollywood script and to punch
it up a bit, you know, make it sing a
bit more. And everything that made made Off's Ponzi scheme
notorious applies to Sam Israel. But it just all gets crazier.
So Sam came from a wealthy family I think of
(11:09):
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, you know,
all that kind of broish culture of Wall Street in
the nineteen eighties. And so he takes all this in,
(11:31):
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 insider trading, for example, and then he sets up
his own firm, by You Capital, which is a hedge fund,
and very quickly By You Capital turns from being a
(11:54):
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 made even more massive profit, and then
more investors give you money, and you keep saying you've
made massive profits. And if anybody ever says, that's great,
(12:15):
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, 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 twenty percent this year,
(12:35):
they made another twenty five percent 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 So, and you met Sam
in prison. So a spoiler. So tell us what did
you make for as a person? How did he get
into this? Why did he get into this?
Speaker 1 (12:56):
Well, it's funny because my interview with him was from
a while back, you know, twenty seventeen something like that.
I honestly don't remember.
Speaker 3 (13:07):
We should say he was arrested, I think in about
two thousand and seven, two thousand and eight something like that.
Speaker 1 (13:12):
Wasn't yeah, exactly exactly, but so I was trying to
refresh my memory, and you know, 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
(13:33):
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.
Speaker 3 (13:49):
So I should say there's one amazing scene. Gee Lawson
wrote this book The Octopus, which is like the quintessential
account of Sammue's wail. But there's a scene in that
book where his wife walks in and catches him bent
over his desk snorting cocaine through a fifty dollar bill
and says, why are you taking cocaine? And he goes,
(14:09):
how dare you accuse me of taking drugs? So yeah, sorry,
I interrupted.
Speaker 1 (14:15):
He 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
(14:36):
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 you know, millions for people and for himself in
his prior Wall Street days. So let's just we'll take
(14:57):
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 three hundred million to
begin with of outside money, which back then, this was
nineteen ninety six, I want to say something around somewhere
(15:18):
around there in ninety 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, you know, that he was a
good guy and that this would work. So the way
Sam told it to me was that when they started
(15:39):
by you in nineteen ninety six, he kind of relied
on this guy, you know, to be an equal partner,
and that this guy was 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,
(16:01):
you know, shit, we've lost twelve percent in our first year.
You know, 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.
Speaker 3 (16:16):
And his his his accountant, who was a guy called
Dan Marino. He there is footnote foroobody. Well, if anybody
so think about it, this is nineteen ninety six. If
anybody googles as pre google, right, if anybody who tries
to search on the internet for Dan Marino, they get
the football player. So he's working with this accountant who
(16:37):
is completely invisible to internet searches. And the accountants are smart.
Speaker 2 (16:41):
Yeah, it's really smart.
Speaker 1 (16:42):
It's very smart.
Speaker 3 (16:43):
The accountant's completely crooked and basically sets up his own
fake Uh.
Speaker 2 (16:49):
Sounds like a cricket I had a stereotype based on
last but sounds like a cricket account accountant or a quarterback.
Speaker 3 (16:56):
So 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 orditor called Dan Marino, and they're the same guy.
So that was kind of an important part of this fraud.
But yeah, Dan Marinos told the author Gee Lawson that
(17:20):
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. You know, we'll have
you know, 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,
(17:43):
and whenever they had a bad year, they would never
admit that they had a bad year. So there was
a you know, 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.
Speaker 1 (17:57):
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 I'm Israel is that
once the scheme kind of comes undone, right, which happens
at some point, just like with SBF night. Right, at
(18:18):
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
(18:40):
the judge gave him two hundred and forty months, so
twenty years right instead, And he was like, oh shit,
you know I can't do twenty years. I'm going to
be an old man. This is this is not cool.
I was ready for seven I can't do twenty. And
so instead of you know, figuring out how do I
(19:02):
deal with this, he decides to fake his own death.
Speaker 3 (19:04):
Yeah, which he's obviously going to work out really well.
Speaker 1 (19:07):
Oh it's going to work out great, we'll be back
in a minute. 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.
(19:28):
Because a lot of CONN 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 I'm going to fake my own death.
I've watched this really cool movie it's called r V,
and I'm going to buy an RV and I'm going to,
you know, 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 as after his sentencing,
(19:52):
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 has.
Speaker 2 (20:04):
Yes out Mano Dan Marino. Would you Costa Rica? I
don't know what.
Speaker 1 (20:14):
I think You've got a career.
Speaker 3 (20:15):
This so but I'm curious. So, Maria, you said that
this is very this is short term thinking.
Speaker 2 (20:21):
He didn't.
Speaker 3 (20:21):
He wasn't really think to the consequences of his actions,
and that 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.
Speaker 1 (20:41):
So he decided he was going to jump off a bridge.
Speaker 3 (20:44):
Well, not just he was decided he was going to
pretend that he had jumped off a bridge, right, he
actually jumped off a bridge because he because he then
he did actually actually claimed.
Speaker 1 (20:55):
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 going to be
off the grid right these days? Like how am I
going to survive? How am I going to get out
of the country, and you know where, where's my cash
(21:18):
going to 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.
So he finds a bridge that's under construction, so there
are nets underneath, and he's like, oh, perfect, Like I'm
gonna jump and I'm going to land in the net
(21:41):
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 you know, the risk reward equation there is not great.
Speaker 3 (22:04):
So the net deigning to catch people or just like
a spat of that somebody drops, I mean that's the.
Speaker 1 (22:10):
Right, No, it's I think it was. I think it
was designed to catch bricks and you know, falling debris
from construction. So when a person goes into it, it
just like you know, it 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 gonna have
spent my last minutes trying to scramble up this net.
(22:30):
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
(22:51):
the driver that you're going to be faking your own death.
Don't worry, momb I'm not actually dead, calling uber.
Speaker 2 (23:01):
Do it in style.
Speaker 1 (23:03):
But that's this is what happened. So you know, he
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 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
(23:25):
RV parks, you know, 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,
(23:45):
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,
(24:06):
you know, hey, I'm here to turn myself in, and
the police officer 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
(24:28):
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.
Speaker 3 (24:35):
It's astonishing. I'm not 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 you know, 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,
(24:58):
these people you call Riverians. Is short termism part of
the or kind of a side effect or a glitch
in the Riveria and 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 Samme's meel
(25:19):
just seems to have never been able to see past
the It had no problem taking risks, but just couldn't
see past the end of his nose.
Speaker 2 (25:27):
Yeah. No, look, I think the better investors in 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 ten years ahead. But yeah,
some of this sounds very familiar, Marie, I know if
I'm talking to you, the notion of like a good
business gone bad. I mean, even FTX was a pretty
(25:48):
good business, right, it was like the leading brand for
crypto trading. They made legitimate profits, et cetera. But like
you know, it turns sour or I think you know,
Sam bacon Free couldn't resist the temptation to take all
this money sitting 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 kind of miscalculating
(26:10):
consequences you know, if you're very charming, which I think
Sam Israel is more so than SBF, it's a different story.
You can kind of easle 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, no,
it's not going to work. But I don't know. I mean,
(26:31):
at some point there's a point of no return, right, there.
Speaker 1 (26:35):
Is a point of no return. Yeah, I think I
think that's absolutely right, Nate. I think one of the
this is a characteristic that you have both uh, both
with raverians and non reveriance and Tim. I'm sure you've
come across this in other cautionary tales, but I think
a lot of it is this over confidence in hubris, right,
that comes with a certain level of success and people.
(26:58):
And I think to be an entrepreneur and to be
a risk taker, you need to be over confident to
a certain extent. You know, as as we all know,
if you actually know your odds of access, you're not
gonna you're not gonna start the damn company. You're not
gonna you're not gonna try it, because it's the risk
of failure, and the chances of failure are so high,
(27:18):
so it's a it's this fine balance and I think
overconfidence so turns into delusion and turns into this thinking
that actually, you know, 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,
(27:40):
I've gotten you know, okay, you know one year, two years,
three years, four years, everything's good. This is this is
all going good.
Speaker 2 (27:47):
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 loser tilt we all have experienced.
Uh maybe not a Maria, uh, but winter'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
(28:07):
well or something is also a big deal.
Speaker 1 (28:12):
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, It's chance
something like that. Yeah, And she had people be not
bet but guess the results of a coin toss and
(28:33):
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
(28:53):
clustered near the beginning, right, So basically you would say,
you know, heads, you'd guess, and then they'd make sure
it landed on heads. It was a rigged toss, so
that you were right it was yeah, 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
(29:15):
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
(29:36):
was just complete randomness when they had those 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 Madeoff, right,
He was successful for far longer than Sam Israel, and
Sam Israel, by the way, was the single biggest Ponzi
scheme before Bernie made Off.
Speaker 3 (29:54):
Now I'm curious, we've been talking about people who were
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.
Speaker 1 (30:13):
Yeah, John Law. He was. He was someone who I
wrote about for The Confidence Game and I've come back
to so my my next book is about cheating, So
I've 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's game. When you're talking
(30:36):
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 literal gambling or like literal gambling.
(31:01):
So yeah, so he was someone who came from money.
Who's you know who whose parents had a financial business.
Speaker 3 (31:08):
We should say this is it was seventeen hundreds, just
to situate, right, Yes, for those small number of listeners
who don't know who John Lauri is or that everybody should.
Speaker 1 (31:17):
We're in the seventeen hundreds and he's going to be
making friends with the Duke of Orleans or 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,
(31:37):
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, you know,
(31:59):
did he know what he was doing and get unlucky
or did he like basically, did he do this as
a kind of Ponzi scheme, as a kind of con
or not.
Speaker 3 (32:07):
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 Scott, a Scott. He killed a guy
and 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
(32:29):
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
(32:52):
in the history of the world, it's not even the
first paper money in the history of France, but it is.
It's pretty new and people are still trying to figure
out kind of how it works. And of course this
is revolutionary. He's ahead of his time, like 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
(33:13):
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 Misissippi 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.
Speaker 2 (33:32):
Yeah, it's very intoxicating when the number goes up. Right.
I did wonder too, there is some survivorship bias in
which kind of scams and schemes we discover. You know,
the best frauds in history, probably nobody knows about it.
Speaker 3 (33:47):
Yeah, a good point.
Speaker 2 (33:48):
SPF was convinced that he could somehow navigate his way
through bankruptcy, or not through bankruptcy, now his way through
this downfall and bitcoin and come out on either side
of it. And maybe people wouldn't really notice, right, Maybe
it's like a page a sixteen story and not inn
a one story. If he like, if there's a spontaneous
rise in bitcoin prices and they recover these losses that
(34:08):
they have, they were ten million and ten billion in
a hole, which is pretty hard to overcome.
Speaker 1 (34:13):
It's funny, Nate. I think that's a really important point
that the best con artists are never caught. When people
when we talk about conn artists and people ask me,
you know, 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
(34:34):
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 Is reels of
the world.
Speaker 2 (34:45):
Or like cheating in poker, a lot of these famous
cheating scandals, like online cheating scandals, people are are very
greedy where they win at like, you know, thirteen centered
deviations above some random rate, whereas if you won at
two center deviations above random, it would be almost possible
to detect and you'd have a great life. Although we
don't find those people though, right, we don't find the
(35:05):
people that are that are actually good at cheating a
lot of time.
Speaker 1 (35:09):
Yeah, but so as we you know, wrap up the
story of John law I do think that it's interesting that,
I mean, economists don't agree, historians don't agree whether whether
or not he was you know, 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
(35:29):
rhyme that I would love to share if you guys
are in poetry mode, that come 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.
(35:51):
On Friday I went to the workhouse. Next day I was.
Speaker 2 (35:54):
Sent first poetry reading on the Risky Business podcast.
Speaker 1 (35:59):
I believe it is it is think that should style tradition.
Speaker 3 (36:02):
That's very good.
Speaker 1 (36:05):
And one nobleman of the time said, thus sends the
system of paper money, which which has enriched a thousand
beggars and impoverished one 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
(36:27):
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 talesary.
Speaker 3 (36:37):
It is a cautionary tale. And I guess the lesson,
or maybe the lesson is that 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 what a
(36:59):
lot of money in gambling, and then he's the guy
who can do it. You need this institutional scaffolding, which
you know, when we have it, it seems to work just fine.
Speaker 2 (37:10):
We'll be back right after this. I mean, are there
like two or three or one big takeaways, like common
(37:31):
patterns and when you know something is becoming a cautionary
tale or a can.
Speaker 3 (37:38):
At the risk of quoting that classic opening line of
Ana Karenina that 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 that
there are a lot of different ways for things to
go wrong. There's there are organizational problems, informational problems, engineering problems,
(38:06):
hubrisk and arrogance, as short sightedness, lots and lots of
self delusion, lots of wishful thinking. I mean, it's a
miracle that human civilization survives, actually, given how many different
ways there are to go wrong. I mean that is
part of the slightly perverse joy of researching and writing
(38:27):
these cautionary tales. There is always a new disaster, and
always a new way for disaster to happen.
Speaker 1 (38:35):
You make that sound almost gleeful.
Speaker 3 (38:38):
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.
Speaker 2 (38:53):
Yeah, Maria, I remember you telling me that, like, cons
are most likely to occur when you're in an upcycle
or a down cycle, right, not in the steady state,
but when there's something new and novel and people are panicking.
Speaker 1 (39:04):
Yeah, moments of transition. So whether those are societal transitions
or whether their personal transitions is when you're most vulnerable
to get cons So it's not a personality trade. It's
not intelligence, it's not 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
(39:30):
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.
Speaker 3 (39:41):
As long as nothing ever changes, we will say from
cons we're good.
Speaker 2 (39:46):
You know, my great grandfather faked his death and got a.
Speaker 1 (39:50):
Wait what okay, Nate, can we just can we we
need this story. Sorry, we're pausing everything, Nate, please.
Speaker 2 (39:58):
I mean his name was Ferdinand Thrunn, which is a
great name.
Speaker 1 (40:01):
It's an amazing name.
Speaker 2 (40:02):
He was written up in the Chicago Tribune and the
New York Times and places like that. Yeah, he was
like a insurance fraudster. We should do this as separate
segments sometime, yeah, But basically his technique was to commit
crimes so devious that there is no law to charge
them with because I haven't figured out like this particular
type of fry. But we should do proper research and
do an episode on this. Maria.
Speaker 1 (40:23):
Yeah, absolutely so, Maria, Nate.
Speaker 3 (40:26):
I 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 that The first one is,
I have your two most recent books in front of me.
(40:47):
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
(41:08):
two a brilliant risk takers, analysts poker players. But I
thought a poker player can't really experiment, like if you
want to, if you want to find out, you need
to you need to make the bet. You know, you
need to put down the money. There's no cheap way
to find out what the other person's cards are. And
(41:29):
maybe that is a blind spot in poker playing relative
to decision making advice in everyday life. Because what I've
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, ab test. Maybe there's
a cheap way to find out without betting all your
(41:53):
chips metaphorically speaking. So I just wanted to ask why
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.
Speaker 2 (42:04):
It's a great point, Tim. I have a home game
I play maybe every third week. That's a one dollar
two dollars 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 straw,
which some of our artists will know what that means.
I had the ace I flush straw on a board
(42:26):
that was King Queen x X and we made like
a three x overbet shove on the turn. I'm just
going to experiment, I bet. Probably there's some frequency which
you're supposed to do. This is in game theory, but
like but if I lose this pot, then you know,
I'll win sometimes to 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
(42:48):
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. Is
that the British term. Yeah, you're taking the piss. You
kind of get away with it like It's a very
satisfying feeling, and I think encourages kurrent artistries sometimes.
Speaker 3 (43:02):
Yeah.
Speaker 1 (43:03):
Yeah, I think that there are 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 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
(43:24):
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 kind of as important.
Now that said, we can't experiment as in the traditional
so I'm you know, 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
(43:45):
your control group, and you have your test groups, and
you know, 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,
you know, my whole book was an experiment. So experiments
not in the index, but the biggest bluff, all of
it was was experiment. And I saw poker as kind
(44:07):
of a psychology laboratory of 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
(44:27):
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 going to do this. Let's see what happens. All right,
Pretend I didn't do that. Let's go back. Now I'm
going to 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 over bet three
(44:49):
times the pot in this particular spot, and Nate says, okay,
I'm going to do this, and then Maria, you do
why people 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 different environment.
(45:10):
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 a Really 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,
(45:33):
I think all of your variables.
Speaker 2 (45:35):
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. Yeah, people really
are afraid to call you on your bullshit.
Speaker 3 (45:52):
Yeah, okay, yes, 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 I think
it's fair to say that both of you would advocate
putting a probability on on something. If you're going to
make a risky decision, you have to have an idea.
(46:12):
Is this like a five to one? Is it a
three to one? Is there twenty percent chances is going
to happen? Is there are seventy percent chances is going
to happen? And you know, and there's a difference between
say a fifty three percent chance and a forty eight
percent chance, even though they're both close to fifty to fifty.
So it's important to quantify as much as you can,
even though you don't always have the data. Okay, So
(46:36):
two very little stories to get you to reflect on
the case in favor 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
thirty percent, and a report was prepared for President Kennedy
(46:56):
and Kennedy and thirty percent was Presumably they thought, oh,
the president wanting to understand percentages, so he was told
there is a fair chance of success, and by fair
chance of success, they meant well, thirty percent. 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 he approved this total fiasco. So
(47:21):
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, counterexample. Think back to
(47:42):
the financial crisis two thousand and seven, two thousand and eight.
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
(48:05):
too much confidence in the probabilities, and it's fine to say, oh,
we think there's like antin five percent chance that this
will default. That's fine. But then the problem is you
feed the zero point five percent 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
(48:25):
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
(48:46):
or to reanalyze that number too much, and to forget
that actually the number was always basically just an educated guess.
Speaker 1 (48:56):
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,
(49:17):
then your probabilistic assessment is going to be garbage. So
I actually think that both of these things, they're not
counter examples. The thirty percent 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 regulous,
rigorous analysis, and that was not garbage in right there.
(49:40):
They had assumptions that were there for a good reason.
They had good historical data. I have no idea how
they came upon the thirty percent. I'm just see making
your SUPs. Yeah, hindsight bias exactly, and so you get
thirty percent. And by the way, you should absolutely have
told Kennedy thirty percent and not fair chance. There are
(50:01):
so many psych studies about this that trying to put
words with percentages backfires because people do not understand. And
it's like if you have a weather man 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?
(50:21):
You want to know what the percentage chances. You want
to know that actual number, because otherwise a 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
(50:43):
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? Right? And in this particular case,
their incentive was to make money for them today and
(51:05):
to make their company think that this was going to
be a great bet 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
(51:29):
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.
Speaker 2 (51:37):
Yeah, look, I think there's a risk of laundering subjective
opinions through probabilities and forgetting their subjective right. If I'm
running nak the airport, there's traffic on the Vanwick or whatever. Right,
I might say myself, Oh, it's a five percent chance
going to miss my flight. Right, It's not coming out
of any regression analysis or anything. You know. I've probably
used the phrase in the show, like quoting Vice President Harris.
(52:01):
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 the model. And I think mediocre modelers in particular
will publish a number and then forget how many assumptions
are driven into that. Right. I still think it's worth
quantifying things. I mean, at the end of the day,
(52:23):
probability is defined as a number between point zero and one,
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.
Speaker 1 (52:40):
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 over confident when
you're like, well, I have this model, in this model,
so this it must be. And there you have the
(53:02):
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.
Speaker 3 (53:16):
Thank you so much, guys, fantastic Tim.
Speaker 1 (53:19):
Thank you so much for coming on the pod today.
It's been such a pleasure, havn't you.
Speaker 3 (53:23):
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. Caution ne Tales with Tim Harford is one
of Risky Business's sister podcasts on Pushkin.
Speaker 1 (53:43):
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
(54:08):
by Me kind of Cova and me Mate Silver. The
show is a co production of Pushkin Industries and iHeartMedia.
This episode was produced by Isabel Carter. Our associate producer
is Gabriel Hunter Chang. Our executive producer is Jacob Eldstein.
Speaker 2 (54:23):
And if you want to listen to an AD free version,
sign up for Pushkin Plus. For six seventy nine a month,
you get access to ad free listening. Thanks for tuning in.
Pushkin. Hi, everyone, welcome back to Risky Business, our show
about making better decisions. I'm Maria Kanikova and I'm Nate Silver.
So today we have a slightly different and fun show
(00:37):
for you. We're going to start off talking about some
of our usual things, so we'll do a quick politics recap.
So we're taping this on Tuesday, August twenty seventh. That
DNC has concluded, Kamala Harris has accepted the nomination, and
a lot of things are going on with Nate's election models,
so we're going to talk quickly about that, and then
(00:57):
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
details from history. All right, before we bring Tim on,
Nate's let's talk a little bit about politics and what
(01:21):
has happened since the DNC. Last time you and I
talked the DNC was on day one and we weren't
quite sure what to expect. We weren't quite sure how
it was going to go. So now here we are
a week later. Let's recap and talk about what has
happened since the convention, and also RFK Junior obviously dropping out,
So two big things have happened since we last spoke
(01:44):
to potentially affect the model.
Speaker 2 (01:46):
We still don't know that much, but so far it's
been kind of a bunch of rand not crap, but
like kind of by definition, the polls that are done
in one or two days are either online tracking polls
which are fine but sometimes don't really capture change some
voter sentiment. It's gonna be very stable or quick and
dirty fly by night polls that are also not very good.
(02:07):
So by Thursday, well, no, so far it seems like
Harris is poling as well. She has all campaign, But
is it gonna Is she gonna three points or four
points or five or six or seven? The model will
care about that a lot, but like we don't. We
just don't know quite yet. I mean, I thought it
was an effective convention, you know, maybe will. I thought
the gender politics of her speech were interesting. It was
(02:29):
a very male coded speech talking of like the like
the most lethal military force. It was a very risk
taking speech. Actually right, She's like it was we're privileged,
so we should fucking kick ass America. Like I'm like, oh,
my gosh, I love this.
Speaker 1 (02:40):
It was a it was a good speech to speak,
It was.
Speaker 2 (02:43):
Interesting, it was like not a typical speech. And again
I'm a fan of good strategy, and so anybody who
shows good strategic instincts I think Harris has repeatedly. Now
at this point, I just kind of my estimation of
their intellect and their skills goes up a little bit.
But but we'll see. I mean, if a speech appeals
to me is probably somewhat negatively correlated with it's appealing
(03:06):
to the general population, I'd.
Speaker 1 (03:07):
Say, I don't know. It appealed to me as well.
Speaker 2 (03:09):
Well.
Speaker 1 (03:09):
I think she she walked a fine line in I
think talking about all of the things that matter, having
it actually been heavier on policy than I think a
lot of people thought it was going to be, and
appealing to a lot of different voters. Right. She didn't.
She didn't hew to just one audience or kind of
one one topic, and I think that that was actually
(03:33):
quite an effective way for her to go.
Speaker 2 (03:35):
No, she avoided some of the presumptuousness, and I think
we saw with Hillary. I watched her speech in Hillary
Clinton's intersperse with one another, and she avoided that presumptuousness,
and she is playing to the center right, kind of unapologized.
I mean that's the basic gto game, theoreptical strategy. Most
of the time, you want to you want to appear
(03:57):
more moderate.
Speaker 1 (03:58):
Yeah. And then, of course after the convention, we had
news on Friday of last week with RFK Junior dropping
out of the race and throwing his support.
Speaker 2 (04:09):
What is Cheryl Hines doing? Can we talk about that?
Speaker 1 (04:13):
Okay, yes, I don't know.
Speaker 2 (04:14):
I mean, what is Cheryl Hines doing?
Speaker 1 (04:16):
I don't know.
Speaker 2 (04:16):
Yeah. Anyway, when you have polls that test the matchup
both with him without RFK Junior, then Trump does better
in polls without him. In other words, RFK is taking
more votes from Trump than from Harris in our model.
We adjusted the model on Saturday to make it rfkless.
(04:41):
It didn't hurt Harris kind of like coincidental reasons, which
his name was. Like, she is getting like somewhat of
a convention bounce. I just said, like, oh, it's like
too early to pay attention to it. But like, but
she's doing okay, and that was enough to offset this
RFK maneuver. But yeah, it's a little bit of a
risk factor. Look I think anything involving RFK is kind
of over it. He was getting like, you know, three
(05:02):
and a half four percent in the polls. A lot
of those books will go to other third party candidates.
By the way, he'll still be on the ballot technically
speaking in a number of states. So anyway, I think
it's like an overrated storyline. But you know, it's one
of the better things Trump has going for him right now.
I suppose after a very bad month, you know, whatever,
he whatever quid pro quo there was, and I'm not
(05:24):
accusing anybody of anything, but like, look, RFK Junior was
negotiating with both campaigns for some type of position. What
ambassadorship do you predict that he'll get. Malta might be one.
Speaker 1 (05:35):
Yeah, No, I think I think getting an ambassadorship to
a country like Malta might might be a yeah, might
be a way forward for our FKA. He was very
mad that. You know, in the past he has been
promised positions in the Trump administration that never materialized.
Speaker 2 (05:51):
Anyway, future ambassador to Malta RFK Junior and doors Stunnel Trump,
which should help Trump a little bit, but probably not
that big a deal.
Speaker 1 (06:01):
And one more question for you. Last time we spoke,
I kind of I don't know if this was last time,
but I've definitely asked you whether you thought that Trump
was actually going to be debating Kamala in September, and
I express skepticism. Now we see that he might be
paving the way for not doing that. Have you changed
(06:22):
your thinking about it at all?
Speaker 2 (06:24):
You know, Marie, you can go to polymarket dot com,
to which I'm a paid advisor, by the way, and
bet on this.
Speaker 1 (06:30):
I know I can'tnate because I live in the United States.
Speaker 2 (06:33):
Okay, not if you're an American. I think Donald Trump
would be incredibly stupid not to debate he needs at
this point. Currently he's losing, right. The reason why we
have it closer to fifty to fifty in the model
is because you know, there are reasons the model expects
the race to tighten up again, and Trump has electoral
college advantage if it's really close. But if you have
(06:55):
the election today, Harris might be a two to one
favorite or something like that. So Trump wants to introduce
obstacles for her and variants. So I think it's a bluff.
I mean, I think I don't know for sure. Trump's
been acting pretty irrationally. I think it's a bluff. If
it's not, I mean, if I were the Harris campaign
and be like, Okay, don't yo, bro, don't take your
(07:15):
coverage too far because you could be a good excuse
not to debate you, then we'll just ride this momentum
train through to November. And so he has very little leverage.
If he ducked the debate, he would look very weak. Yeah,
it has to be emasculating. I mean there are gender
things here too, right, Like he can't debate Kamala Harris.
Like he looks so weak that he has like very
little leverage. And if you stupd enough to do that,
(07:36):
then you know, probably he doesn't deserve to win. But
I'm skeptical that this is anything other than like tactical negotiation.
Speaker 1 (07:44):
That makes sense. I'll be very, very curious to see
how this plays out. And if I could bet on polymarket,
I would, but but I can't.
Speaker 2 (07:51):
You're going to Barcelona, right.
Speaker 1 (07:53):
I mean I am in Barcelona, Barcelona. Yes, this is
this is my Barcelona hotel room, nice with my very
own mini bar.
Speaker 2 (07:59):
I was gonna say it's a lot of booze for yes, yes,
it is for in the afternoon for me. All right,
we're we're gonna bring Tim Harford on. Then maybe you
can have a drink Maria, four pm, Barcelona.
Speaker 1 (08:13):
That sounds great. It is just about cocktail hour here
in Barcelona. But first, yes, let's welcome Tim onto the show. Tim,
welcome to the show.
Speaker 3 (08:22):
To be on the show, thank you so for.
Speaker 1 (08:26):
The 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
(08:49):
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 you know the lines
(09:12):
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.
Speaker 2 (09:24):
Do you mean to say that campling doesn't always work out, Maria?
Speaker 1 (09:26):
It's weird. It's so weird.
Speaker 3 (09:27):
The chance of loss is in fact one hundred percent,
which I guess we'll get we'll get to that. But yes, that.
Speaker 1 (09:33):
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 let's have
(09:55):
you lay him out. Let us meet Sam Israel, the
first kind of our first subject for today.
Speaker 3 (10:02):
Sam Israel, the third I think is his full name. Third,
absolutely remarkable gentlemen if gentlemen 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
white people fall for them, but also white people set
(10:24):
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 by
You Capital, which was set up by Sam Israel. I
saw one writer described Sam Israel and by You Capital.
(10:46):
It's like somebody took the Bernie made Off story but
was told to write a Hollywood script and to punch
it up a bit, you know, make it sing a
bit more. And everything that made made Off's Ponzi scheme
notorious applies to Sam Israel. But it just all gets crazier.
So Sam came from a wealthy family I think of
(11:09):
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, you know,
all that kind of broish culture of Wall Street in
the nineteen eighties. And so he takes all this in,
(11:31):
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 insider trading, for example, and then he sets up
his own firm, by You Capital, which is a hedge fund,
and very quickly By You Capital turns from being a
(11:54):
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 made even more massive profit, and then
more investors give you money, and you keep saying you've
made massive profits. And if anybody ever says, that's great,
(12:15):
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, 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 twenty percent this year,
(12:35):
they made another twenty five percent 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 So, and you met Sam
in prison. So a spoiler. So tell us what did
you make for as a person? How did he get
into this? Why did he get into this?
Speaker 1 (12:56):
Well, it's funny because my interview with him was from
a while back, you know, twenty seventeen something like that.
I honestly don't remember.
Speaker 3 (13:07):
We should say he was arrested, I think in about
two thousand and seven, two thousand and eight something like that.
Speaker 1 (13:12):
Wasn't yeah, exactly exactly, but so I was trying to
refresh my memory, and you know, 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
(13:33):
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.
Speaker 3 (13:49):
So I should say there's one amazing scene. Gee Lawson
wrote this book The Octopus, which is like the quintessential
account of Sammue's wail. But there's a scene in that
book where his wife walks in and catches him bent
over his desk snorting cocaine through a fifty dollar bill
and says, why are you taking cocaine? And he goes,
(14:09):
how dare you accuse me of taking drugs? So yeah, sorry,
I interrupted.
Speaker 1 (14:15):
He 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
(14:36):
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 you know, millions for people and for himself in
his prior Wall Street days. So let's just we'll take
(14:57):
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 three hundred million to
begin with of outside money, which back then, this was
nineteen ninety six, I want to say something around somewhere
(15:18):
around there in ninety 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, you know, that he was a
good guy and that this would work. So the way
Sam told it to me was that when they started
(15:39):
by you in nineteen ninety six, he kind of relied
on this guy, you know, to be an equal partner,
and that this guy was 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,
(16:01):
you know, shit, we've lost twelve percent in our first year.
You know, 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.
Speaker 3 (16:16):
And his his his accountant, who was a guy called
Dan Marino. He there is footnote foroobody. Well, if anybody
so think about it, this is nineteen ninety six. If
anybody googles as pre google, right, if anybody who tries
to search on the internet for Dan Marino, they get
the football player. So he's working with this accountant who
(16:37):
is completely invisible to internet searches. And the accountants are smart.
Speaker 2 (16:41):
Yeah, it's really smart.
Speaker 1 (16:42):
It's very smart.
Speaker 3 (16:43):
The accountant's completely crooked and basically sets up his own
fake Uh.
Speaker 2 (16:49):
Sounds like a cricket I had a stereotype based on
last but sounds like a cricket account accountant or a quarterback.
Speaker 3 (16:56):
So 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 orditor called Dan Marino, and they're the same guy.
So that was kind of an important part of this fraud.
But yeah, Dan Marinos told the author Gee Lawson that
(17:20):
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. You know, we'll have
you know, 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,
(17:43):
and whenever they had a bad year, they would never
admit that they had a bad year. So there was
a you know, 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.
Speaker 1 (17:57):
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 I'm Israel is that
once the scheme kind of comes undone, right, which happens
at some point, just like with SBF night. Right, at
(18:18):
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
(18:40):
the judge gave him two hundred and forty months, so
twenty years right instead, And he was like, oh shit,
you know I can't do twenty years. I'm going to
be an old man. This is this is not cool.
I was ready for seven I can't do twenty. And
so instead of you know, figuring out how do I
(19:02):
deal with this, he decides to fake his own death.
Speaker 3 (19:04):
Yeah, which he's obviously going to work out really well.
Speaker 1 (19:07):
Oh it's going to work out great, we'll be back
in a minute. 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.
(19:28):
Because a lot of CONN 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 I'm going to fake my own death.
I've watched this really cool movie it's called r V,
and I'm going to buy an RV and I'm going to,
you know, 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 as after his sentencing,
(19:52):
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 has.
Speaker 2 (20:04):
Yes out Mano Dan Marino. Would you Costa Rica? I
don't know what.
Speaker 1 (20:14):
I think You've got a career.
Speaker 3 (20:15):
This so but I'm curious. So, Maria, you said that
this is very this is short term thinking.
Speaker 2 (20:21):
He didn't.
Speaker 3 (20:21):
He wasn't really think to the consequences of his actions,
and that 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.
Speaker 1 (20:41):
So he decided he was going to jump off a bridge.
Speaker 3 (20:44):
Well, not just he was decided he was going to
pretend that he had jumped off a bridge, right, he
actually jumped off a bridge because he because he then
he did actually actually claimed.
Speaker 1 (20:55):
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 going to be
off the grid right these days? Like how am I
going to survive? How am I going to get out
of the country, and you know where, where's my cash
(21:18):
going to 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.
So he finds a bridge that's under construction, so there
are nets underneath, and he's like, oh, perfect, Like I'm
gonna jump and I'm going to land in the net
(21:41):
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 you know, the risk reward equation there is not great.
Speaker 3 (22:04):
So the net deigning to catch people or just like
a spat of that somebody drops, I mean that's the.
Speaker 1 (22:10):
Right, No, it's I think it was. I think it
was designed to catch bricks and you know, falling debris
from construction. So when a person goes into it, it
just like you know, it 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 gonna have
spent my last minutes trying to scramble up this net.
(22:30):
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
(22:51):
the driver that you're going to be faking your own death.
Don't worry, momb I'm not actually dead, calling uber.
Speaker 2 (23:01):
Do it in style.
Speaker 1 (23:03):
But that's this is what happened. So you know, he
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 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
(23:25):
RV parks, you know, 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,
(23:45):
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,
(24:06):
you know, hey, I'm here to turn myself in, and
the police officer 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
(24:28):
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.
Speaker 3 (24:35):
It's astonishing. I'm not 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 you know, 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,
(24:58):
these people you call Riverians. Is short termism part of
the or kind of a side effect or a glitch
in the Riveria and 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 Samme's meel
(25:19):
just seems to have never been able to see past
the It had no problem taking risks, but just couldn't
see past the end of his nose.
Speaker 2 (25:27):
Yeah. No, look, I think the better investors in 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 ten years ahead. But yeah,
some of this sounds very familiar, Marie, I know if
I'm talking to you, the notion of like a good
business gone bad. I mean, even FTX was a pretty
(25:48):
good business, right, it was like the leading brand for
crypto trading. They made legitimate profits, et cetera. But like
you know, it turns sour or I think you know,
Sam bacon Free couldn't resist the temptation to take all
this money sitting 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 kind of miscalculating
(26:10):
consequences you know, if you're very charming, which I think
Sam Israel is more so than SBF, it's a different story.
You can kind of easle 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, no,
it's not going to work. But I don't know. I mean,
(26:31):
at some point there's a point of no return, right, there.
Speaker 1 (26:35):
Is a point of no return. Yeah, I think I
think that's absolutely right, Nate. I think one of the
this is a characteristic that you have both uh, both
with raverians and non reveriance and Tim. I'm sure you've
come across this in other cautionary tales, but I think
a lot of it is this over confidence in hubris, right,
that comes with a certain level of success and people.
(26:58):
And I think to be an entrepreneur and to be
a risk taker, you need to be over confident to
a certain extent. You know, as as we all know,
if you actually know your odds of access, you're not
gonna you're not gonna start the damn company. You're not
gonna you're not gonna try it, because it's the risk
of failure, and the chances of failure are so high,
(27:18):
so it's a it's this fine balance and I think
overconfidence so turns into delusion and turns into this thinking
that actually, you know, 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,
(27:40):
I've gotten you know, okay, you know one year, two years,
three years, four years, everything's good. This is this is
all going good.
Speaker 2 (27:47):
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 loser tilt we all have experienced.
Uh maybe not a Maria, uh, but winter'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
(28:07):
well or something is also a big deal.
Speaker 1 (28:12):
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, It's chance
something like that. Yeah, And she had people be not
bet but guess the results of a coin toss and
(28:33):
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
(28:53):
clustered near the beginning, right, So basically you would say,
you know, heads, you'd guess, and then they'd make sure
it landed on heads. It was a rigged toss, so
that you were right it was yeah, 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
(29:15):
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
(29:36):
was just complete randomness when they had those 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 Madeoff, right,
He was successful for far longer than Sam Israel, and
Sam Israel, by the way, was the single biggest Ponzi
scheme before Bernie made Off.
Speaker 3 (29:54):
Now I'm curious, we've been talking about people who were
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.
Speaker 1 (30:13):
Yeah, John Law. He was. He was someone who I
wrote about for The Confidence Game and I've come back
to so my my next book is about cheating, So
I've 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's game. When you're talking
(30:36):
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 literal gambling or like literal gambling.
(31:01):
So yeah, so he was someone who came from money.
Who's you know who whose parents had a financial business.
Speaker 3 (31:08):
We should say this is it was seventeen hundreds, just
to situate, right, Yes, for those small number of listeners
who don't know who John Lauri is or that everybody should.
Speaker 1 (31:17):
We're in the seventeen hundreds and he's going to be
making friends with the Duke of Orleans or 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,
(31:37):
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, you know,
(31:59):
did he know what he was doing and get unlucky
or did he like basically, did he do this as
a kind of Ponzi scheme, as a kind of con
or not.
Speaker 3 (32:07):
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 Scott, a Scott. He killed a guy
and 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
(32:29):
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
(32:52):
in the history of the world, it's not even the
first paper money in the history of France, but it is.
It's pretty new and people are still trying to figure
out kind of how it works. And of course this
is revolutionary. He's ahead of his time, like 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
(33:13):
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 Misissippi 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.
Speaker 2 (33:32):
Yeah, it's very intoxicating when the number goes up. Right.
I did wonder too, there is some survivorship bias in
which kind of scams and schemes we discover. You know,
the best frauds in history, probably nobody knows about it.
Speaker 3 (33:47):
Yeah, a good point.
Speaker 2 (33:48):
SPF was convinced that he could somehow navigate his way
through bankruptcy, or not through bankruptcy, now his way through
this downfall and bitcoin and come out on either side
of it. And maybe people wouldn't really notice, right, Maybe
it's like a page a sixteen story and not inn
a one story. If he like, if there's a spontaneous
rise in bitcoin prices and they recover these losses that
(34:08):
they have, they were ten million and ten billion in
a hole, which is pretty hard to overcome.
Speaker 1 (34:13):
It's funny, Nate. I think that's a really important point
that the best con artists are never caught. When people
when we talk about conn artists and people ask me,
you know, 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
(34:34):
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 Is reels of
the world.
Speaker 2 (34:45):
Or like cheating in poker, a lot of these famous
cheating scandals, like online cheating scandals, people are are very
greedy where they win at like, you know, thirteen centered
deviations above some random rate, whereas if you won at
two center deviations above random, it would be almost possible
to detect and you'd have a great life. Although we
don't find those people though, right, we don't find the
(35:05):
people that are that are actually good at cheating a
lot of time.
Speaker 1 (35:09):
Yeah, but so as we you know, wrap up the
story of John law I do think that it's interesting that,
I mean, economists don't agree, historians don't agree whether whether
or not he was you know, 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
(35:29):
rhyme that I would love to share if you guys
are in poetry mode, that come 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.
(35:51):
On Friday I went to the workhouse. Next day I was.
Speaker 2 (35:54):
Sent first poetry reading on the Risky Business podcast.
Speaker 1 (35:59):
I believe it is it is think that should style tradition.
Speaker 3 (36:02):
That's very good.
Speaker 1 (36:05):
And one nobleman of the time said, thus sends the
system of paper money, which which has enriched a thousand
beggars and impoverished one 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
(36:27):
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 talesary.
Speaker 3 (36:37):
It is a cautionary tale. And I guess the lesson,
or maybe the lesson is that 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 what a
(36:59):
lot of money in gambling, and then he's the guy
who can do it. You need this institutional scaffolding, which
you know, when we have it, it seems to work just fine.
Speaker 2 (37:10):
We'll be back right after this. I mean, are there
like two or three or one big takeaways, like common
(37:31):
patterns and when you know something is becoming a cautionary
tale or a can.
Speaker 3 (37:38):
At the risk of quoting that classic opening line of
Ana Karenina that 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 that
there are a lot of different ways for things to
go wrong. There's there are organizational problems, informational problems, engineering problems,
(38:06):
hubrisk and arrogance, as short sightedness, lots and lots of
self delusion, lots of wishful thinking. I mean, it's a
miracle that human civilization survives, actually, given how many different
ways there are to go wrong. I mean that is
part of the slightly perverse joy of researching and writing
(38:27):
these cautionary tales. There is always a new disaster, and
always a new way for disaster to happen.
Speaker 1 (38:35):
You make that sound almost gleeful.
Speaker 3 (38:38):
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.
Speaker 2 (38:53):
Yeah, Maria, I remember you telling me that, like, cons
are most likely to occur when you're in an upcycle
or a down cycle, right, not in the steady state,
but when there's something new and novel and people are panicking.
Speaker 1 (39:04):
Yeah, moments of transition. So whether those are societal transitions
or whether their personal transitions is when you're most vulnerable
to get cons So it's not a personality trade. It's
not intelligence, it's not 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
(39:30):
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.
Speaker 3 (39:41):
As long as nothing ever changes, we will say from
cons we're good.
Speaker 2 (39:46):
You know, my great grandfather faked his death and got a.
Speaker 1 (39:50):
Wait what okay, Nate, can we just can we we
need this story. Sorry, we're pausing everything, Nate, please.
Speaker 2 (39:58):
I mean his name was Ferdinand Thrunn, which is a
great name.
Speaker 1 (40:01):
It's an amazing name.
Speaker 2 (40:02):
He was written up in the Chicago Tribune and the
New York Times and places like that. Yeah, he was
like a insurance fraudster. We should do this as separate
segments sometime, yeah, But basically his technique was to commit
crimes so devious that there is no law to charge
them with because I haven't figured out like this particular
type of fry. But we should do proper research and
do an episode on this. Maria.
Speaker 1 (40:23):
Yeah, absolutely so, Maria, Nate.
Speaker 3 (40:26):
I 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 that The first one is,
I have your two most recent books in front of me.
(40:47):
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
(41:08):
two a brilliant risk takers, analysts poker players. But I
thought a poker player can't really experiment, like if you
want to, if you want to find out, you need
to you need to make the bet. You know, you
need to put down the money. There's no cheap way
to find out what the other person's cards are. And
(41:29):
maybe that is a blind spot in poker playing relative
to decision making advice in everyday life. Because what I've
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, ab test. Maybe there's
a cheap way to find out without betting all your
(41:53):
chips metaphorically speaking. So I just wanted to ask why
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.
Speaker 2 (42:04):
It's a great point, Tim. I have a home game
I play maybe every third week. That's a one dollar
two dollars 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 straw,
which some of our artists will know what that means.
I had the ace I flush straw on a board
(42:26):
that was King Queen x X and we made like
a three x overbet shove on the turn. I'm just
going to experiment, I bet. Probably there's some frequency which
you're supposed to do. This is in game theory, but
like but if I lose this pot, then you know,
I'll win sometimes to 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
(42:48):
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. Is
that the British term. Yeah, you're taking the piss. You
kind of get away with it like It's a very
satisfying feeling, and I think encourages kurrent artistries sometimes.
Speaker 3 (43:02):
Yeah.
Speaker 1 (43:03):
Yeah, I think that there are 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 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
(43:24):
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 kind of as important.
Now that said, we can't experiment as in the traditional
so I'm you know, 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
(43:45):
your control group, and you have your test groups, and
you know, 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,
you know, my whole book was an experiment. So experiments
not in the index, but the biggest bluff, all of
it was was experiment. And I saw poker as kind
(44:07):
of a psychology laboratory of 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
(44:27):
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 going to do this. Let's see what happens. All right,
Pretend I didn't do that. Let's go back. Now I'm
going to 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 over bet three
(44:49):
times the pot in this particular spot, and Nate says, okay,
I'm going to do this, and then Maria, you do
why people 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 different environment.
(45:10):
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 a Really 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,
(45:33):
I think all of your variables.
Speaker 2 (45:35):
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. Yeah, people really
are afraid to call you on your bullshit.
Speaker 3 (45:52):
Yeah, okay, yes, 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 I think
it's fair to say that both of you would advocate
putting a probability on on something. If you're going to
make a risky decision, you have to have an idea.
(46:12):
Is this like a five to one? Is it a
three to one? Is there twenty percent chances is going
to happen? Is there are seventy percent chances is going
to happen? And you know, and there's a difference between
say a fifty three percent chance and a forty eight
percent chance, even though they're both close to fifty to fifty.
So it's important to quantify as much as you can,
even though you don't always have the data. Okay, So
(46:36):
two very little stories to get you to reflect on
the case in favor 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
thirty percent, and a report was prepared for President Kennedy
(46:56):
and Kennedy and thirty percent was Presumably they thought, oh,
the president wanting to understand percentages, so he was told
there is a fair chance of success, and by fair
chance of success, they meant well, thirty percent. 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 he approved this total fiasco. So
(47:21):
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, counterexample. Think back to
(47:42):
the financial crisis two thousand and seven, two thousand and eight.
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
(48:05):
too much confidence in the probabilities, and it's fine to say, oh,
we think there's like antin five percent chance that this
will default. That's fine. But then the problem is you
feed the zero point five percent 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
(48:25):
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
(48:46):
or to reanalyze that number too much, and to forget
that actually the number was always basically just an educated guess.
Speaker 1 (48:56):
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,
(49:17):
then your probabilistic assessment is going to be garbage. So
I actually think that both of these things, they're not
counter examples. The thirty percent 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 regulous,
rigorous analysis, and that was not garbage in right there.
(49:40):
They had assumptions that were there for a good reason.
They had good historical data. I have no idea how
they came upon the thirty percent. I'm just see making
your SUPs. Yeah, hindsight bias exactly, and so you get
thirty percent. And by the way, you should absolutely have
told Kennedy thirty percent and not fair chance. There are
(50:01):
so many psych studies about this that trying to put
words with percentages backfires because people do not understand. And
it's like if you have a weather man 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?
(50:21):
You want to know what the percentage chances. You want
to know that actual number, because otherwise a 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
(50:43):
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? Right? And in this particular case,
their incentive was to make money for them today and
(51:05):
to make their company think that this was going to
be a great bet 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
(51:29):
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.
Speaker 2 (51:37):
Yeah, look, I think there's a risk of laundering subjective
opinions through probabilities and forgetting their subjective right. If I'm
running nak the airport, there's traffic on the Vanwick or whatever. Right,
I might say myself, Oh, it's a five percent chance
going to miss my flight. Right, It's not coming out
of any regression analysis or anything. You know. I've probably
used the phrase in the show, like quoting Vice President Harris.
(52:01):
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 the model. And I think mediocre modelers in particular
will publish a number and then forget how many assumptions
are driven into that. Right. I still think it's worth
quantifying things. I mean, at the end of the day,
(52:23):
probability is defined as a number between point zero and one,
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.
Speaker 1 (52:40):
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 over confident when
you're like, well, I have this model, in this model,
so this it must be. And there you have the
(53:02):
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.
Speaker 3 (53:16):
Thank you so much, guys, fantastic Tim.
Speaker 1 (53:19):
Thank you so much for coming on the pod today.
It's been such a pleasure, havn't you.
Speaker 3 (53:23):
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. Caution ne Tales with Tim Harford is one
of Risky Business's sister podcasts on Pushkin.
Speaker 1 (53:43):
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
(54:08):
by Me kind of Cova and me Mate Silver. The
show is a co production of Pushkin Industries and iHeartMedia.
This episode was produced by Isabel Carter. Our associate producer
is Gabriel Hunter Chang. Our executive producer is Jacob Eldstein.
Speaker 2 (54:23):
And if you want to listen to an AD free version,
sign up for Pushkin Plus. For six seventy nine a month,
you get access to ad free listening. Thanks for tuning in.
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