Cautionary Tales with Tim Harford - Buried by the Wall Street Crash (Classic)

Episode Date: April 25, 2025

Cautionary Tales returns with a new episode on May 2nd. Both of the world’s greatest economists, Irving Fisher and John Maynard Keynes, thought they could see into the future and make a killing on the stock market - and then both were wiped out by the Wall Street Crash. One died a pauper, the other millionaire. What does it take to bounce back from ruin? Oh... and UFOs.See omnystudio.com/listener for privacy information.

Pushkin Cautionary Tales is teaming up with the Risky Business podcast for a special Q&A collaboration. Hosts Maria Konikova and Nate Silva, both journalists who moonlight as high stakes poker players, are joining me to answer your questions. Economics, scammers, robots, board games, poker, human instinct – something that sparked your interest from either podcast, we are up for any question. Just send your ideas to tails at pushkin.fm MUSIC Late one evening, on the 20th of December 1954,

a small group of people sat together in a living room in Oak Park, a suburb of Chicago, waiting for the end of the world. They were led by a woman named Dorothy Martin, who was a conduit for messages from aliens, or God, or both. The messages were alarming. At midnight, the aliens would land a flying saucer in the backyard and convey the true believers to the safety of a planet named Clarion. Then, at dawn, a cataclysmic flood would destroy much of the world. Now, at five minutes to midnight, the believers were waiting. Some were dishevelled, since the aliens had demanded they remove all metal from their clothing. Bra clips, buttons, even trouser zips had been hastily

slashed away by fumbling hands wielding scissors or razors. Some of the group were there out of mere curiosity. Others had sacrificed almost everything for this moment. They'd quit their jobs, given away their possessions and said farewell to their families. But what distinguishes this particular apocalyptic cult from all the others is that a small team of social scientists, led by the world-renowned psychologist Leon Festinger, had managed to infiltrate it. They were there to witness what happened at midnight, and in particular how the group

reacted to the appearance, or possibly the non-appearance, of the aliens. Gather round and I'll tell you all about what happened with Leon Festinger, Dorothy Martin and the aliens in due course, but for a moment let's leave them there in Chicago, anxiously waiting for the end of days. Because I have another story to tell you. And it's not a story about crazy cult members, but about two economists. Indeed, two of the most celebrated economists who ever lived. And what do these economists have to do with a UFO cult in 1950s Chicago? It's very simple. These economists have to do with a UFO cult in 1950s Chicago.

It's very simple. Just like Dorothy Martin, they tried to see into the future. And trying to see into the future? It's a dangerous business. One of the economists I want to tell you about is the great British polymath, John Maynard Keynes. You may have heard of him. He's a colossal figure in economics, overturning

the ideas that had gone before him and then reshaping the post-war economic system. Many economists still call themselves Keynesians. Like him or hate him, in economics you can't get much bigger than John Maynard Keynes. Except that, in his day, you could. When Keynes first strode the world stage, he did so in the shadow of another man. In 1924, the Wall Street Journal tried to describe John Maynard Keynes, this up-and-coming economist. They reached for a comparison that everyone in America would have known. Keynes, said the journal, was England's Irving Fisher. And Irving Fisher was the most famous economist on the planet. But Irving Fisher wasn't just more famous than Keynes.

He was brilliant. As one Nobel Prize winner put it, Fischer was anywhere from a decade to two generations ahead of his time. Some would say he was the greatest economist who ever lived. But if you're thinking, I don't hear much about Irving Fischer these days, you're right. He's not the household name he was a hundred years ago. If you're wondering why his reputation faded while Keynes's lived on, that is what our cautionary tale is all about.

Irving Fisher and John Maynard Keynes were very different men in some important ways. But they also had a great deal in common. Both were stars at their universities, Keynes at Cambridge in England, Fisher at Yale. They were both physically impressive. Keynes was thin and very tall with piercing eyes. Fisher had the broad chest of a competitive rower. They were both skilled writers, charismatic speakers too. After witnessing Keynes giving a speech, the Canadian diplomat Douglas Lepan was moved to write, I am spellbound. This is the most beautiful creature I have ever listened to. Does he belong to our species or is he from some other order?

And Fisher and Keynes were also both active investors. They weren't just ivory tower economists but men who believed that their mastery of economics would enable them to make profitable investments. That is where their interest in forecasting came in. An academic economist might be content to describe and explain the economist's past. But to make money, Fisher and Keynes would have to catch a glimpse of the economy's future. Let's meet the young Irving Fisher. How much there is I want to do. I always feel that I haven't time to accomplish what I

wish. I want to read much. I want to write a great deal. I want to make money. He's writing from Yale to an old school friend. Money was important to Fisher. His father had died of tuberculosis the very week that Irving had arrived at Yale. The young man needed to scramble for funds throughout his studies. He understood what it was to struggle financially while surrounded by wealth. At the age of 26, however, Fisher found himself with a small fortune at his disposal. He'd married a childhood playmate, Margaret Hazard, who was the daughter of a wealthy

industrialist. Irving and Margaret's wedding was sumptuous enough to be covered by the New York Times, with 2,000 invited guests, 3 ministers, an extravagant lunch and a wedding cake weighing 60 pounds. They commenced a 14 month European honeymoon and returned to a brand new mansion in New Haven. It had been built in their absence as a wedding present from Margaret's father and was furnished with a library, a music room and spacious offices. If marrying your childhood sweetheart sounds a little too wholesome, I'm just getting started.

There are three things you need to know about Irving Fisher. The first is that he was a health fanatic. He abstained from alcohol, tobacco, meat, tea, coffee and chocolate. One dinner guest enjoyed his hospitality while noting his quirkiness. Well, I ate right through my succession of delicious courses. He dined on a vegetable and a raw egg. He founded the Life Extension Institute

and persuaded William Taft, who'd just stepped down as president, to be its chairman. In 1915, when he was nearly 50 years old, he published a book titled How to Live. How to Live? Now, that's some real ambition. It was a huge bestseller, the Fre freakonomics of its day. And from a modern perspective it's hilarious.

I advocate a sunbath. Common sense must dictate its intensity and duration. It is important to practise thorough mastication, chewing to the point of natural involuntary swallowing. He even adds a discussion of the correct angle between the feet while walking. About seven or eight degrees of out-toeing in each foot. And there's a short section on eugenics, which really hasn't aged well. But while it's easy to laugh, How to Live is in many ways as far ahead of its time as Fisher's economic analysis, describing exercises, preaching mindfulness and at a time when the majority of doctors were smokers, correctly warning that tobacco causes cancer.

The second thing you need to know about Irving was that he believed in the power of rational, quantified analysis. In the modern study of scientific clothing there is a new unit, the cloe. This is a technical unit for measuring the warming power of clothing. There's also the money. That's the third thing you need to know. Irving Fisher was rich, and not just because of his wife's inheritance. Making money was a matter of pride for Fisher. There were the book royalties from How to Live. There were his inventions, most notably a forerunner of the Rolodex, a way of organising

business cards. He sold that invention to a stationary company for $660,000 in cash – many millions of dollars in today's terms. Fisher turned his academic research into a major business operation called the Index Number Institute. It sold data, forecasts and analysis as a syndicated package to newspapers across the United States. He called it Irving Fisher's Business Page. With such a platform, Fisher was able to evangelise about his approach to investment, which, broadly speaking, was to bet on American growth by buying shares in the new industrial corporations using borrowed money. Such borrowing is called leverage, since it magnifies both profits and losses.

But during the 1920s, stock market investors had few losses to worry about. Share prices were soaring. Fisher wrote to his old childhood friend to inform him that his ambition had been fulfilled. We are all making a lot of money. In the summer of 1929 Irving Fisher was a best-selling author, inventor, data pioneer, friend of presidents, entrepreneur, health campaigner, syndicated columnist and the greatest academic economist of his generation. And in that summer of 1929, a millionaire many times over, Irving Fisher was able to

boast to his son that a renovation of the family mansion had been paid for not by the hazard family money but by Irving Fisher himself. That achievement mattered to him. Fisher's own father hadn't lived to see his 17 year old boy grow into one of the most respected figures of the age. As Irving and his son watched a mansion reshaped before them, he could, perhaps, be forgiven his pride. John Maynard Keynes was the ultimate insider. As a schoolboy he was educated at Eton College, just like Britain's first Prime Minister and 19 others since. Like his father, he became a senior academic, a fellow of King's College, the most spectacular

of all the Cambridge colleges. His job during the First World War was managing both debt and currency on behalf of the British Empire. He'd barely turned 30. He knew everyone. He whispered in the ear of Prime Ministers. He had the inside track on whatever was going on in the British economy. Maynard, Bank of England here. Just wanted to let you know that interest rates will be rising tomorrow. There's a good chap. But this child of the British establishment was a very different person to his American rival Irving Fisher. He loved fine wines and rich food. He gambled at Monte Carlo. His sex life

was more like a 1970s pop star than a 1900s economist. Bisexual, polyamorous, eventually settling down, not with his childhood sweetheart, but with a Russian ballerina. One of Keynes's ex-boyfriends was the best man at their wedding. And Keynes was adventurous in other ways too. In 1918, for example, as the First World War was raging and the German army was camped outside Paris, Keynes caught wind of the fact that in Paris, the great French Impressionist artist Edgar Deg, was about to auction his vast collection of pieces by France's greatest 19th century painters. And so Keynes embarked on an insane adventure. First, he spoke to the Chancellor of the Exchequer, the UK's senior Treasury Minister, asking for a fund for purchasing art. £20,000. That's

millions in today's money. Maynard, it's the first occasion that I've ever known you in favour of any expenditure whatsoever. Remember, the British Treasury was four years into fighting the most devastating war the planet had yet seen. But Keynes knew how to get his way. My picture coup was a whirlwind affair carried out in a day and a half before anyone had time to reflect on what they were doing. I think the Chancellor was very much amused at my wanting to buy pictures and eventually let me have my way as a sort of a joke.

Some joke. Escorted by destroyers and a silver airship watching overhead. Keynes crossed the Channel to France with the director of London's National Gallery who'd shaved off his moustache so that nobody recognised him. And just as Degas' auction begins, the German artillery starts up. Some people panic and hurry out. Keynes pounces, buying 27 pieces at rock-b rock bottom prices for the National Gallery. And he buys a few for himself, including a Cezanne, which these days would be regarded

as a better buy than anything the National Gallery director chose. It costs Keynes just £370. They then flee back to the English Channel and cross home with a convoy of hospital ships. Exhausted after his non-stop adventure, Caines calls in on some friends. I've got a Cezanne in my suitcase. It was too heavy for me to carry, so I've left it in the ditch behind a gate. What Irving Fisher would have made of it all, I do not know.

Yet, like Fisher, Caines was also pursuing an investment career. It wasn't just in art. He set up what some historians describe as the first hedge fund to speculate on currency movements. He raised money from rich friends and from his own father, to whom he made the not entirely reassuring comment, Win or lose, this high stakes gambling amuses me. Initially Keynes made money fast, but then a brief spasm in the currency markets wiped out his fund in 1920. Awkward.

But he went back to his investors, including his own father, and asked them to trust him with more of their money. I am not in a position to risk any capital myself, having quite exhausted my resources. Remember, this is John Maynard Keynes, the man who persuaded a wartime government to speculate in a Parisian art auction, the man a Canadian diplomat mistook for an angel. I anticipate very substantial profits with very good probability if you are prepared

to stand the racket for a couple of months. Of course they gave him the money he wanted. Keynes was back in profit by 1922. So having made a small fortune, lost it and made it again, Keynes turned to the vast investments of his own college – King's Cambridge. Keynes persuaded his fellow academics to let him adopt a radical money-making strategy. He would forecast booms and recessions and move in and out of different economic sectors accordingly.

Such an approach makes sense only if you actually can forecast recessions. But Keynes was the leading economist in the country, and a man who, remember, would get friendly phone calls from the Bank of England. If anyone could see into the future of the British economy, it was John Maynard Keynes were rich, famous, respected and standing on the brink of a financial precipice. The cataclysmic Wall Street crash, followed by the Great Depression, the worst peacetime economic calamity to befall the Western world. And the two greatest economists of the age, Fisher and Keynes? Both of them failed to see it coming. Experts don't have a stellar reputation for forecasting. In 1987, a young Canadian-born psychologist named Philip Tetlock became curious about

the entire prognostication racket. Tetlock had been interviewing Cold War experts and he soon found himself frustrated by their wildly different predictions, their refusal to change their minds when they were wrong and the endless excuses for their forecasting failures. Tetlock's response was patient, painstaking and quietly brilliant. He began to collect forecasts from almost 300 experts, eventually accumulating 27,500 predictions. He focused on politics and geopolitics, throwing in a few questions from areas such as economics. Tetlock sought clearly defined questions, enabling him, with the benefit of hindsight, to pronounce each forecast right or wrong.

Then Tetlock simply waited, while the results rolled in for 18 years. Tetlock published his conclusions in 2005 in a subtle and scholarly book, Expert Political Judgment. He found that his experts were terrible forecasters, both in the simple sense that what they predicted often didn't happen, and in the deeper sense that the experts had little idea of when they should be confident and when they should admit that they didn't happen, and in the deeper sense that the experts had little idea of when they should be confident and when they should admit they didn't have a clue. Expert forecasts were barely more accurate than chimpanzees throwing darts. Most people hearing about Tetlock's research simply conclude that either the world is too complex to forecast, or that experts are too stupid to forecast it, or both.

On April Fool's Day in 2013, I received an email from Philip Tetlock inviting me to join what he described as a major new research programme. It was funded by the US Intelligence Services. This programme continued an expanded TETLOC's long-running study in the form of a forecasting tournament. You would simply log onto a website, give your best judgement about matters you may be following anyway, and update that judgement if and when you feel it should be. When time passes and forecasts are judged, you could

compare your results with those of others." More than 20,000 people signed up, some professionals and some amateurs. Tetlock and his colleagues ran experiments on this army of volunteers, giving them different kinds of training or assembling them into teams to see if that helped. I didn't join in. I told myself I was too busy. I suppose I was chickening out too. But the fundamental reason that I didn't participate was because Tetlock's work had already persuaded me that the forecasting task was impossible. But it wasn't. This vast new tournament identified a select group of people whose forecasts,

while by no means perfect, were vastly better than the dart-throwing chimp standard. Tetlock, with an uncharacteristic touch of hyperbole, called them superforecasters. So what makes a superforecaster? It was more a matter of personality. a superforecaster. It was more a matter of personality. The superforecasters are what psychologists call actively open-minded thinkers. People who didn't cling too tightly to a single approach, who were comfortable abandoning an old view in the light of fresh evidence or new arguments, and who embraced disagreements with others as an opportunity to learn. The secret of superforecasting? It's a willingness to change your mind. Philip Tetlock's work on superforecasting has rightly attracted a huge amount of attention,

but I think there's a message in that work that's often overlooked. A willingness to change your mind doesn't just help you make better forecasts, it helps you cope with failed predictions too. Let's return to John Maynard Keynes and Irving Fisher. Both of them, remember, had persuaded themselves that their expertise in economics should lead to investment success. Both of them were wrong. The stock market crash of 1929 caught each of them by surprise. Both lost a lot of money. Yet here's a curious fact. Despite his failure, Keynes died a millionaire and perhaps the most celebrated economist in the world.

Fisher made basically the same mistake, yet it ruined both his finances and his reputation. Why the difference in their fortunes? In a way, the answer is ridiculously simple. Keynes changed his mind and changed his investment strategy. Fisher changed neither. But that only raises a deeper question – why did Keynes change whileischer didn't. Keynes had lost one fortune in 1920 and survived the experience. By 1929, before the crash, he was again pondering his shortcomings. His investment strategy, based on the assumption that he could predict the ups and downs of the business cycle, wasn't working out. He started thinking about how

to change his approach. Keynes lost more than 80% of his net worth in 1929, but even afterwards he was still rich. In short, he had plenty of evidence that he'd made a mistake, he had experience of making mistakes in the past and bouncing back, and he was still comfortably off. Why not change? By the early 1930s, Keynes had abandoned business cycle forecasting entirely. The greatest economist in the world had decided

he just couldn't do it well enough to make money. As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about, and in the management of which one thoroughly believes. Forget what the world's richest investor and a man who loves to quote John Maynard Keynes. Keynes is rightly viewed today as a successful investor. At King's College, he recovered from the poor performance of the early years. He secured high returns with modest risks,

outperforming the stock market as a whole many times over. It's an impressive reward for being able to change your mind. Irving Fisher was in a very different situation. Irving Fisher's business page had graced newspapers across the country. When things turned sour, Fisher was a scapegoat in front of the entire United States. The New York Times reported that the bubble had been blamed on… US Treasury Secretary Mellon, former President Coolidge and Professor Irving Fisher of Yale. And Professor Irving Fisher of Yale was in deep financial trouble.

The fact that his investments were made using leverage meant that both gains and losses were magnified. What had seemed like brilliance before the crash was catastrophic afterwards. Fisher was staring in the face of bankruptcy, the loss of his house, his businesses, everything. For example, one of Fisher's major investments was in the stationery company Remington Rand. It was $58 a share before the crash, dropping to $28 within a few months. At that point Fisher borrowed more money to

invest but the share price kept falling, all the way to $1. You can imagine his desperation. But surely being in such a tight spot would have made Fisher more likely to adapt his strategy. Not necessarily. I've received another message. Everyone, get your overcoats and stand by. Okay, okay, okay everyone. Sit quietly in the living room. We shall act as if this were

just an ordinary gathering of friends. Remember Dorothy Martin and her UFO cult? They've persuaded themselves that the world is about to be flooded and that they will be saved at midnight by aliens delivering them safely to planet Clarion. And remember too that the psychologist Leon Festinger has infiltrated the cult. His researchers were there that night to observe what happened. Festinger had a striking prediction. That when the aliens didn't appear, many cultists wouldn't be discouraged by the clear failure of Mrs Martin's prophecy, or feel angry and betrayed.

Instead, they would redouble their efforts to believe. Another reporter, no doubt. Just hang up. Our preparations cannot be interrupted. We'll call them later if we have anything for them. Hasn't the clock passed midnight? What's wrong with that clock? It hasn't moved in a couple of minutes. That clock is slow. Look at the other clock. I set it myself this afternoon and it's not midnight yet.

One minute to midnight and not a plan has gone astray. At midnight the aliens did not appear. Nobody said a word. One of the more casual cult members who'd expressed skepticism before picked up his coat and hat and walked out. People tried to make sense of what was happening, or rather, not happening. The theories grew ever wilder. People were confused, exhausted. Leon Festinger's observers tried to ask why the saucer hadn't come. The group didn't want to talk about it.

And then at four o'clock in the morning, Dorothy Martin put her face in her hands and began to weep. One of Festinger's researchers stepped outside for some air and discussed the situation with a leading cult member. I've had a long way to go. I've given up just about everything. I've cut every tie, there, and discussed the situation with a leading cult member. They went back inside. But at 4.45am Dorothy Martin, with hand shaking, picked up a pencil and began to write. It was, she said, a new message. Because of the faith shown by that small group of people, the earth had been spared destruction. A higher power would save not only the small cult,

but the entire human race. At this, the cultists acquired new fervour, going out to greet the dawn and tell people the good news. They suddenly became evangelists, issuing statements to the press rather than batting them away. Dorothy, is this the first time you've called the newspaper yourself? Oh, yes. This is the first time I've ever called them. I've never had anything to tell them before. But now I feel it's urgent.

We should call the Associated Press and the Unite Press. This thing is pretty important. It's a very big thing. Bigger than just one newspaper. I don't think the creator would want this to be an exclusive story. Definitely not. Definitely not. Oh no. Right, correct. It's got to be for everybody. It's for everybody. Correct. Yes. Festinger had been right. His view that the cultists would redouble their efforts to believe in the

face of failure was based on a theory he called cognitive dissonance. Cognitive dissonance predicts that people will start to squirm when they hold contradictory thoughts, such as, it's worth quitting my job in order to be collected by aliens, and the aliens did not show up. People often deny the obvious in order to reduce the discomfort, and the more suffering people have put themselves through on behalf of a belief, the more likely they are to cling onto it. Otherwise, all that suffering would seem ridiculous, would it not? Festinger's theory applies perfectly to poor Irving Fisher in the 1930s. He believed himself to be a man of logic and reason. And yet, he was deeply in debt, the most famous

financial basket case in the country. In fact, if people today know just one thing about Irving Fisher, it's this. Two weeks before the Wall Street crash began, he was quoted by the New York Times. Stocks have reached what looks like a permanently high plateau. How do you back away from that? Fisher went deeper and deeper in debt to the taxman and to his brokers. Towards the end of his life he was a marginalised figure, a widower, an easy target for scam artists and their get-rich-quick schemes because he was always on the lookout for a way to revive his fortune. He never did.

Although Keynes had much in common with Fisher, he was a different kind of character. Recall Keynes' comment to his father? This high-stakes gambling amuses me. The Monte Carlo gambler knew all along that while investing was a fascinating game, it was a game nonetheless, and one shouldn't take an unlucky throw of the dice too much to heart. When his investments flopped, he tried something else. Fisher and Keynes died within a few months of each other, not long after the end of the

Second World War. Fisher had become irrelevant. Keynes was the most influential economist on the planet, fresh from shaping the World Bank, the IMF and the entire global financial system. Looking back, Keynes reflected, My only regret is that I have not drunk more champagne in my life. But he's remembered far more for words that he probably never said. Nevertheless, he lived by them. When my information changes, I alter my conclusions. What do you do, sir?

If only he'd taught that lesson to Irving Fisher. Tim Harford dot com. Cautionary Tales is written and presented by me, Tim Harford. Our producers are Ryan Dilley and Marilyn Rust. The sound designer and mixer was Pascal Wise, who also composed the amazing music. Starring in this season are Alan Cumming, Archie Panjabi, Toby Stephens, and Russell Tovey, alongside Enzo Chilente, Ed Gochen, Melanie Gutteridge, Maseya Munro and Rufus Wright.

And introducing Malcolm Gladwell. Thanks to the team at Pushkin Industries, Julia Barton, Heather Fain, Mia LeBelle, Carly Migliori, Jacob Weisberg and of course the mighty Malcolm Gladwell. And thanks to my colleagues at The Financial Times.