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Episode: Cautionary Tales Presents: Death Fraud and Other Risky Business
Author: Pushkin Industries
Duration: 00:48:19
Episode Shownotes
Tim Harford joined Nate Silver and Maria Konnikova on their podcast Risky Business to discuss two of history’s most compelling swindlers: Sam Israel III and John Law. We hope you enjoy this episode of Risky Business. It's available wherever you listen to podcasts.See omnystudio.com/listener for privacy information.
Summary
In this episode of 'Cautionary Tales', Tim Harford, accompanied by Nate Silver and Maria Konnikova, explores the cautionary stories of historical con artists Sam Israel III and John Law. Sam Israel III's transformation of his hedge fund, Bayou Capital, into a Ponzi scheme illustrates the pitfalls of deception and the consequences of short-term thinking, culminating in his attempt to fake his own death as he faced prison time. The episode also examines John Law's impact on the financial system in 18th-century France, revealing the blurred lines between innovation and fraud. Through these tales, the discussion emphasizes themes of risk, human error, and the necessity of foresight in decision-making.
Go to PodExtra AI's episode page (Cautionary Tales Presents: Death Fraud and Other Risky Business) to play and view complete AI-processed content: summary, mindmap, topics, takeaways, transcript, keywords and highlights.
Full Transcript
00:00:06 Speaker_14
Pushkin.
00:00:17 Speaker_13
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00:01:47 Speaker_14
Over the years, Cautionary Tales has warned you about ponzi schemes, dodgy Christmas savings clubs, and promotions that are too good to be true. So it may come as a surprise when I urge you to get into risky business.
00:02:02 Speaker_14
Don't worry, I'm not trying to pull a fast one. I just want you to try out a podcast I think you'll enjoy. Risky Business is a weekly show about making better decisions.
00:02:11 Speaker_14
The hosts, Maria Konnikova and Nate Silver, are both writers and high-stakes poker players. Maria and Nate cover everything from politics to poker to personal decisions. So when they asked me to join them for an episode, I was eager to try.
00:02:26 Speaker_14
I even got the chance to talk to Maria about one of the fraudsters featured in Cautionary Tales. She has met him and he assured her, yes, he was a liar.
00:02:37 Speaker_14
You can listen to Risky Business wherever you get your podcasts, but for now, here's the episode featuring me. I hope you like it. There are duels, prison breaks, banking bubbles, poetry, and Nate reveals he has a relative who faked his own death.
00:02:56 Speaker_10
Hey everyone, welcome back to Risky Business, our show about making better decisions. I'm Maria Konnikova.
00:03:05 Speaker_06
And I'm Nate Silver.
00:03:06 Speaker_10
So today we have a slightly different and fun show for you.
00:03:11 Speaker_10
We're going to be bringing on a very special guest, Tim Harford, who hosts another Pushkin podcast, Cautionary Tales, and we'll be talking about the intersection of risk and cautionary tales from history. Tim, welcome to the show.
00:03:30 Speaker_14
I'm thrilled to be on the show. Thank you.
00:03:34 Speaker_10
So for listeners of Pushkin, you're probably familiar with Tim as the host of Cautionary Tales. I've been lucky enough to be on the show and to have been a listener of the show. I think it's wonderful.
00:03:45 Speaker_10
My episodes are obviously the best, but it's all pretty good. Tim is an economist, a journalist. He has a column in the Financial Times. He's written multiple amazing books. You know, longtime friend of the two of us.
00:04:00 Speaker_10
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
00:04:12 Speaker_10
risky business that are about risk, about taking risks, about how risk-taking can go wrong, and how sometimes, you know, the lines between legitimate risks and cons and deceptions might get blurred a little bit and cross over into territory that goes from legitimate to illegitimate very quickly.
00:04:32 Speaker_14
Do you mean to say that gambling doesn't always work out, Maria?
00:04:35 Speaker_10
It's weird. It's so weird.
00:04:36 Speaker_14
The chance of loss is in fact 100%, which I guess we'll get to that. But yes.
00:04:41 Speaker_10
That is absolutely true. So when we were kind of thinking about ways to make this episode work, Tim, you thought about one particular story where you and I have actually intersected on this because we've both thought about this person.
00:04:56 Speaker_10
And he's someone who I actually had on my previous podcast, The Grift. And he is a Well, let's have you lay him out. Let us meet Sam Israel, our first subject for today.
00:05:10 Speaker_14
Sam Israel III, I think is his full name. Absolutely remarkable gentleman, if gentleman is the right word. term, and it probably isn't.
00:05:23 Speaker_14
We did a cautionary tales episode live on stage about pyramid schemes and Ponzi schemes and why people fall for them, but also why people set them up.
00:05:34 Speaker_14
And this kind of strange snowball of disaster where the Ponzi scheme becomes increasingly difficult to cover. And the most amazing example I've ever come across is Bayou Capital, which was set up by Sam Israel.
00:05:51 Speaker_14
I saw one writer described Sam Israel and Bayou Capital, it's like somebody took the Bernie Madoff story but was told to write a Hollywood script and to punch it up a bit, you know, make it sing a bit more.
00:06:04 Speaker_14
And everything that made Madoff's Ponzi scheme notorious applies to Sam Israel, but it just all gets crazier. So Sam came from a wealthy family. I think of commodity traders in Louisiana.
00:06:22 Speaker_14
Um, 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, the, you know, all that kind of bro-ish culture of Wall Street in the 1980s.
00:06:37 Speaker_14
And so he, he, he takes all this in, he keeps his mouth shut. He watches various, um, dubious activities and not just the kind of the sex work and
00:06:47 Speaker_14
the excess, but also illegality, financial illegality, observes people kind of insider trading, for example. And then he sets up his own firm, Bayou Capital, which is a hedge fund.
00:06:58 Speaker_14
And very quickly, Bayou Capital turns from being a hedge fund into being a Ponzi scheme. And just to remind people what a Ponzi scheme is, it's very simple.
00:07:10 Speaker_14
Investors give you money, and then you announce you've made massive profits, and then more investors give you money, and you announce you've made even more massive profits, and then more investors give you money, and you keep saying you've made massive profits.
00:07:21 Speaker_14
And if anybody ever says, that's great, I'd like my money back, well, that's easy. You can give them the money back with the profits, because more people keep giving you their money.
00:07:32 Speaker_14
And the insight that Sam Israel had was with a hedge fund, it's kind of open ended. The money keeps growing.
00:07:38 Speaker_14
And why would anybody ever want their money back if you keep telling them they made another 20% this year, they made another 25% this year, like no one ever asks for their money back. They just leave the money with you.
00:07:49 Speaker_14
And so the fraud went on for a very long time, and then things started to unravel. But Maria, you met Sam, and you met Sam in prison, so spoiler. So tell us, what did you make of him as a person? How did he get into this? Why did he get into this?
00:08:04 Speaker_10
Well, it's funny because my interview with him was from a while back, you know, 2017, something like that. I honestly don't remember.
00:08:15 Speaker_14
We should say that he was arrested, I think, in about 2007, 2008, something like that, wasn't it?
00:08:21 Speaker_10
Yeah, exactly, exactly. 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.
00:08:35 Speaker_10
And he told us the exact same thing at the beginning, which is like, don't believe me, I'm a liar. And it's so funny because I think that he thinks that that absolves him, right? If he puts that disclaimer up top, then he can sort of
00:08:51 Speaker_10
charm his way out and say, but actually I'm a good guy, right? I'm not like that bad guy Madoff.
00:08:57 Speaker_14
So I should say there's one amazing scene. Guy Lawson wrote this book, The Octopus, which is like the quintessential account of Sam Israel.
00:09:04 Speaker_14
But there's a scene in that book where his wife walks in and catches him bent over his desk, snorting cocaine through a $50 bill and says, why are you taking cocaine? And he goes, how dare you accuse me of taking drugs?
00:09:20 Speaker_14
So, yeah, sorry, I interrupted, but that's the kind of guy he is.
00:09:25 Speaker_10
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.
00:09:39 Speaker_10
So he didn't want to go into the family business. Instead, he had this opportunity to go into Wall Street. worked at a very successful hedge fund and was actually making money. By the way, this is all according to Sam Israel, right?
00:09:51 Speaker_10
I haven't actually looked at his returns. I did not look at his balance sheets. I don't know how he did as a trader. He assures me that he was making millions for people and for himself. in his prior Wall Street days.
00:10:04 Speaker_10
So let's just, we'll take that on faith, but what I've learned working with con artists is you can't take anything on faith. So asterisk, but he was very successful on Wall Street.
00:10:13 Speaker_10
And I assume he must have been to a certain degree because he started his own hedge fund, right?
00:10:18 Speaker_10
And he was able to raise, I think, about $300 million to begin with of outside money, which back then, this was 1996, I want to say, somewhere around there, so that was a lot of money.
00:10:29 Speaker_10
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.
00:10:43 Speaker_10
So the way Sam told it to me was that when they started Bayou in 1996, he kind of relied on this guy to be an equal partner, and that this guy started losing a lot of money. And Sam said, well, I'm a good trader. I'm good at this.
00:11:01 Speaker_10
I'll be able to kind of work my way out of the hole. But he couldn't, and the hole kept getting bigger. And so at some point, he realized, shit, we've lost 12% in our first year. It's even worse in our second year. This is looking bad.
00:11:16 Speaker_10
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.
00:11:32 Speaker_14
Well, if anybody, so think about it. This is 1996. If anybody Googles, it's pre-Google, right? If anybody tries to search on the internet for Dan Marino, they get the football player.
00:11:43 Speaker_14
So he's working with this accountant who is completely invisible to internet searches and the accountant- Oh, that's smart. Yeah, it's really smart.
00:11:50 Speaker_05
That's very smart.
00:11:51 Speaker_06
The accountant's completely crooked and basically sets up his own fake... Dan Marino sounds like a crooked... I don't mean to stereotype based on last... But Dan Marino sounds like a crooked accountant or a NFL quarterback, one of the two.
00:12:05 Speaker_14
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... The guy who says that Dan Marino's accounts are genuine is an auditor called Dan Marino.
00:12:18 Speaker_14
and they're the same guy. So that was kind of an important part of this fraud. But yeah, Dan Marino told the author Guy Lawson that one of the problems was, there's this idea, oh, we're going to have a really good year.
00:12:33 Speaker_14
We're going to make a lot of money for real. And when we make a lot of money for real, then it will no longer be a Ponzi scheme. It's all genuine. It'll all come out good in the end. Dan Marino said the problem is,
00:12:46 Speaker_14
sometimes they did have good years, but whenever they had a good year, they would claim it was an even better year. And whenever they had a bad year, they would never admit that they had a bad year.
00:12:55 Speaker_14
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.
00:13:06 Speaker_10
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.
00:13:14 Speaker_10
But the most incredible thing about Sam Israel is that once the scheme kind of comes undone, right, which happens at some point, Just like with SBF night, right?
00:13:26 Speaker_10
At some point people are going to ask for their money and people are going to get spooked. And when they get spooked, like there's going to be a day of reckoning. And he had a moment where he said, oh shit, you know, I'm going to jail.
00:13:39 Speaker_10
And he thought he would get seven or eight years. which was pretty typical for white-collar criminals. And then they switched judges and the judge gave him 240 months. So 20 years, right, instead. And he was like, oh shit. you know, I can't do 20 years.
00:14:01 Speaker_10
I'm going to be an old man. This is not cool. I was ready for seven. I can't do 20. And so instead of, you know, figuring out how do I deal with this, he decides to fake his own death.
00:14:13 Speaker_14
Which is obviously going to work out really well.
00:14:15 Speaker_10
Oh, it's going to work out great. We'll be back in a minute.
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00:18:11 Speaker_10
He only has a few months to plan, right? It's not like he has been thinking, oh, I'm gonna fake my own death, this is my exit strategy. Because a lot of con artists, they don't think that far ahead, right?
00:18:21 Speaker_10
They don't think of the exit strategy, they think it's always gonna work out. So he says, I'm gonna fake my own death.
00:18:28 Speaker_10
I've watched this really cool movie, it's called RV, and I'm gonna buy an RV, and I'm gonna just go around the country and maybe make my way to, oh, by the way, one of the things he told me
00:18:39 Speaker_10
was that after his sentencing, as he was walking out, an FBI agent, one of the ones he'd gotten friendly with, looked at him and said, I have two words for you, Costa Rica. I find it very difficult to believe that that actually happened.
00:18:55 Speaker_14
Yes, I also doubt.
00:18:57 Speaker_06
Hey, San Marino, San Marino, two words for you, Costa Rica.
00:19:02 Speaker_10
Nate, I think you've got a career in this.
00:19:06 Speaker_14
But I'm curious. So Maria, you said that this is short term thinking. He wasn't really thinking through the consequences of his actions. And that's true. Any Ponzi scheme inevitably becomes completely unsustainable. You cannot possibly keep it going.
00:19:24 Speaker_14
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.
00:19:32 Speaker_10
Yeah, he decided he was going to jump off a bridge.
00:19:34 Speaker_14
Well, not jump off. He decided he was going to pretend that he had jumped off a bridge, right?
00:19:38 Speaker_10
He actually jumped off a bridge. Oh, yeah, because then he did actually claim he committed. No, no, no. He actually jumped off a bridge. So this is the research he was doing.
00:19:50 Speaker_10
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. How am I going to be off the grid these days?
00:20:03 Speaker_10
How am I going to survive? How am I going to get out of the country? Where's my cash going to come from? All of these things.
00:20:10 Speaker_10
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.
00:20:26 Speaker_10
And he's like, oh, perfect. I'm going to jump, and I'm going to land in the net, and then I'll use the net to scramble up and get out.
00:20:35 Speaker_10
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.
00:20:54 Speaker_14
So is the net designed to catch people or just like a spanner that somebody drops? I mean, that's the right.
00:21:00 Speaker_10
No, it's I think it was going to find out. 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, whoo. You know, it goes all the way down. So then he's stuck in it.
00:21:13 Speaker_10
And at this point, he's like, I think I'm going to die anyway, except it's going to be much worse because I'm going to have spent my last minutes trying to scramble up this net.
00:21:21 Speaker_10
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 gonna drive off into the sunset. Oh, by the way, another really, really important thing.
00:21:36 Speaker_10
If you're trying to fake your own death, do not tell your mother, your girlfriend, your son, and the driver that you're going to be faking your own death. Don't worry, Mom, I'm not actually dead.
00:21:46 Speaker_06
Don't worry. Just call an Uber. Just call an Uber these days.
00:21:49 Speaker_12
Call an Uber, yeah.
00:21:50 Speaker_06
Call an Uber.
00:21:51 Speaker_10
Uber Black. Do it in style. 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.
00:22:05 Speaker_10
You know, he's met by a driver, makes it to his RV. And for the first few weeks, it actually seems like everything is kind of okay because even though he's living in an RV, living in RV parks, you know, he's kind of getting away with it. And then he,
00:22:20 Speaker_10
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.
00:22:33 Speaker_10
to start Googling yourself, but he does that, and he sees that his girlfriend has been arrested as an accomplice and that they're looking to arrest his mother.
00:22:41 Speaker_10
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.
00:22:55 Speaker_10
walks in, he says, you know, hey, I'm here to turn myself in, and the police officer is like, what, you know, in for what? You need to use the bathroom? Like, it's over there. Anyway, there's all of this miscommunication. He says, no, you know, I,
00:23:07 Speaker_10
Turning myself in, I'm wanted, and I just don't want any press here.
00:23:13 Speaker_10
And at this point, the police officer actually looks at him, realizes who he is, and that is when he gets caught and gets an additional two years added onto his sentence for faking his own death and running away.
00:23:26 Speaker_14
It's astonishing.
00:23:28 Speaker_14
One thing you said, Maria, you said that the craziest thing about him or the most amazing thing about him, I'm not even sure that is the craziest thing about him, but we haven't got all day, so there are other stories you could tell about Sam.
00:23:40 Speaker_14
But I wanted to ask Nate, given that, Nate, you've been thinking about the habits of risk-taking individuals, these people you call riverians, is short-termism part of the, or a kind of a side effect or a glitch in the Rivarian thinking system.
00:24:01 Speaker_14
So on the one hand, you need that ability to think probabilistically. You need that ability to take calculated risks.
00:24:08 Speaker_14
But I mean, Sam Israel just seems to have never been able to see past the, had no problem taking risks, but just couldn't see past the end of his nose.
00:24:17 Speaker_06
Yeah, no, look, I think the better investors and gamblers have a longer time horizon. That's kind of one of one of Silicon Valley's secrets, despite their many flaws, that they do kind of think 10 years ahead.
00:24:28 Speaker_06
But yeah, some of this sounds very familiar. Maria, I know from talking to you, the notion of like a a good business gone bad. I mean, even FTX was a pretty good business, right? It was like the leading brand for crypto trading.
00:24:41 Speaker_06
They made legitimate profits, et cetera. But like, you know, it turned sour. Or I think, you know, Sam Bacon Freed couldn't resist the temptation to take all this money, stay on the sideline. He couldn't resist the temptation to go and gamble with it.
00:24:57 Speaker_06
But yeah, the lack of advanced planning, coupled with the kind of miscalculating consequences. You know, if you're very charming, which I think Sam Israel is more so than SBF, it's a different story.
00:25:09 Speaker_06
You can kind of weasel your way out of things, right? You can think you can like dance your way out of anything and you can up the con a level or two or three, and then you may on some level know it's not going to work, but I don't know.
00:25:21 Speaker_06
I mean, at some point there's a point of no return, right?
00:25:25 Speaker_10
There 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 in
00:25:35 Speaker_10
both with reverence and non-reverence, and Tim, I'm sure you've come across this in other cautionary tales, but I think a lot of it is this overconfidence and hubris that comes with a certain level of success.
00:25:47 Speaker_10
And I think to be an entrepreneur and to be a risk taker, you need to be overconfident to a certain extent. As we all know, if you actually know your odds of success, you're not going to start the damn company.
00:26:03 Speaker_10
You're not going to try it because it's the risk of failure and the chances of failure are so high. So it's a fine balance. And I think overconfidence turns into delusion and turns into this thinking that
00:26:18 Speaker_10
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.
00:26:30 Speaker_10
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. Yeah.
00:26:38 Speaker_06
If the coin comes up heads, five times in a row, I mean, you see it in poker all the time, right? You know, winner's tilt is something which is maybe under-discussed. Loser's tilt, we all have experienced. Maybe not you, Maria.
00:26:53 Speaker_06
But winner's tilt, where you're on a hot streak and you're like, ah, maybe I have some gift from God to play poker really well or something, is also a big deal.
00:27:02 Speaker_10
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. And she had people not bet, but guess the results of a coin toss.
00:27:23 Speaker_10
And it was actually not a fair coin, it was rigged.
00:27:26 Speaker_10
And there were different, basically it came up heads and tails the exact same number of times in all of the different conditions, but in some of them it was pretty random, in others it was clustered near the end, and in the most important condition, the correct guesses were clustered near the beginning.
00:27:45 Speaker_10
So basically you would say, heads you'd guess and then they'd make sure it landed on heads. It was a rigged toss so that you were right.
00:27:53 Speaker_10
And the people who were correct clustered at the beginning would then, and these were Harvard students by the way, then they got all sorts of questions like I'm good at predicting the outcomes of coin tosses and they would rate themselves as actually quite good at it.
00:28:11 Speaker_10
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.
00:28:21 Speaker_10
And it was so easy to get people to believe that they were skilled at something where It was just complete randomness when they had those things happen at the beginning. So Tim, I think this goes back to the beginning of your question.
00:28:34 Speaker_10
This is how you get into Ponzi schemes. Think about Bernie Madoff, right? He was successful for far longer than Sam Israel. And Sam Israel, by the way, was the single biggest Ponzi scheme before Bernie Madoff.
00:28:44 Speaker_14
Now, I'm curious, we've been talking about people who have an appetite for risk and who it all came apart for. Maria, I know you've been doing a little bit of research into what are the most important gamblers in economic history?
00:29:03 Speaker_10
Yeah, John Law. He was someone who I wrote about for The Confidence Game, and I've come back to so my next book is about cheating. So I've kind of been thinking about him.
00:29:16 Speaker_10
But one of the reasons I am interested in John Law, so when we're talking about someone like Sam Israel, right, it's pretty clear, con artist, right, Ponzi scheme.
00:29:25 Speaker_10
When you're talking about someone like John Law, it becomes much less clear, because he's someone who was a huge gambler, and we know that sometimes he was successful, but he also ran his father's business into the ground, if I remember correctly, through gambling.
00:29:43 Speaker_10
But I guess he got better with time. And killed a man. And killed a man.
00:29:48 Speaker_06
Wait, literal gambling? Or like... Literal gambling.
00:29:51 Speaker_10
So yeah, so he was someone who came from money, whose parents had a financial business.
00:29:59 Speaker_14
And we should say this is the 1700s, just to situate people. For those small number of listeners who don't know who John Law is, or that everybody should.
00:30:07 Speaker_10
We're in the 1700s, and he's going to be making friends with the Duke of Orleans, who was then Regent of France. and he's going to be basically setting up France's banking system.
00:30:19 Speaker_10
So the reason why I was fascinated by him is that it's actually unclear if he was a con artist or not.
00:30:28 Speaker_10
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.
00:30:46 Speaker_10
And the question is, you know, 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?
00:30:57 Speaker_14
And the fact that we still don't really agree on that, I think is fascinating. I mean, we should say, so he was originally a Scot.
00:31:08 Speaker_14
He killed a guy in a duel, was sentenced to death for murder, escaped from prison, traveled Europe, wound up in Paris, made a few friends with some influential nobles, made a huge amount of money gambling because he would set himself up as the house and he understood the probability enough
00:31:26 Speaker_14
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.
00:31:41 Speaker_14
Now this is not the first paper money in the history of the world, it's not even the first paper money in the history of France, but it's pretty new and people are still trying to figure out kind of how it works. And of course, this is revolutionary.
00:31:55 Speaker_14
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 bubble.
00:32:05 Speaker_14
And the Mississippi bubble was, it was a stock market bubble. One stock was involved, the stock of the Mississippi company, and John Law controlled the Mississippi company.
00:32:14 Speaker_14
But it was clear that nobody really understood what was going on, except that number go up. And if number go up, everyone gets very excited.
00:32:23 Speaker_06
It's very intoxicating when the number goes up, right? I do 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.
00:32:37 Speaker_14
Good point.
00:32:39 Speaker_06
SPF was convinced that he could somehow navigate his way through bankruptcy, or not through bankruptcy, navigate his way through this downfall in Bitcoin and come out the other side of it. And maybe people wouldn't really notice, right?
00:32:50 Speaker_06
Maybe it's like a page A16 story, not an A1 story. If he like, if there's a spontaneous rise in Bitcoin prices and they recover these losses that they have, although they were 10 billion in a hole, which is pretty hard to overcome.
00:33:04 Speaker_10
It's funny, Nate. I think that's a really important point that the best con artists are never caught. When we talk about con artists and people ask me, you know, why aren't there as many female con artists?
00:33:16 Speaker_10
I say a few things, but one of them is kind of a joke, but kind of not, which is that they're just better at it. So we don't know them because they haven't been caught.
00:33:26 Speaker_10
They don't have as much ego, and they know when to disappear and how to disappear much better than the Sam Israels of the world.
00:33:35 Speaker_06
Or like cheating in poker. A lot of these famous cheating scandals, like online cheating scandals, people are
00:33:41 Speaker_06
are very greedy, where they win at like, you know, 13 standard deviations above some random rate, whereas if you won at two standard deviations above random, it would be almost impossible to detect and you'd have a great life.
00:33:53 Speaker_06
Although we don't find those people though, right? We don't find the people that are actually good at cheating a lot of the time.
00:33:59 Speaker_10
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 or not he was, you know, greedy. He was obviously greedy.
00:34:14 Speaker_10
I think everyone agrees on that. But whether he thought that this could actually all worked out, I found a rhyme that I would love to share if you guys are in poetry mode from the time about what happened with the Mississippi bubble.
00:34:29 Speaker_10
And it goes like this. My shares, which on Monday I bought, were worth millions on Tuesday, I thought. So on Wednesday I chose my abode, in my carriage on Thursday I rode, to the ballroom on Friday I went, to the workhouse next day I was sent.
00:34:46 Speaker_06
First poetry reading on the Risky Business podcast, I believe.
00:34:50 Speaker_10
It is, it is.
00:34:50 Speaker_06
I think that should start a tradition. That's very good.
00:34:55 Speaker_10
And one nobleman of the time said, thus ends the system of paper money, which has enriched a thousand beggars and impoverished a hundred thousand men.
00:35:04 Speaker_10
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.
00:35:13 Speaker_10
He had to escape France, by the way, because he was convicted and was going to be sent to prison there. So he dressed up as a beggar, ran away to Italy and died in Venice, totally impoverished.
00:35:24 Speaker_14
I guess the cautionary tale is that 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,
00:35:41 Speaker_14
You've got to make sure you have the right controls over that person or over that institution. It can't just be some guy who killed a guy in a duel and came over, won a lot of money in gambling, and then he's the guy who can do it.
00:35:53 Speaker_14
You need this institutional scaffolding which, you know, when we have it, it seems to work just fine. We'll be back right after this.
00:36:15 Speaker_13
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00:39:15 Speaker_06
I mean, are there like two or three or one big takeaways, like common patterns and when you know something is becoming a cautionary tale or a con?
00:39:27 Speaker_14
At the risk of quoting that classic opening line of Anna Karenina, that all happy families are alike and every unhappy family is unhappy in its own way.
00:39:40 Speaker_14
I think one of the striking things about cautionary tales is that there are a lot of different ways for things to go wrong.
00:39:48 Speaker_14
Uh, there's, there were organizational problems, informational problems, engineering problems, uh, hubris and arrogance, uh, short sightedness, uh, lots and lots of self delusion, lots of wishful thinking.
00:40:03 Speaker_14
Um, I mean, it's a miracle that, that human civilization survives actually given how many different ways there are to go wrong. I mean, that is. That is part of the slightly perverse joy of researching and writing these cautionary tales.
00:40:18 Speaker_14
There is always a new disaster and always a new way for disaster to happen.
00:40:25 Speaker_10
You make that sound almost gleeful.
00:40:27 Speaker_14
Yeah. I mean, sometimes I have to remind myself that 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.
00:40:42 Speaker_06
Yeah, Maria, I remember you telling me that like cons are most likely to occur when you're in an up cycle or a down cycle, right? Not in the steady state, but when there's something new and novel and people are panicking.
00:40:53 Speaker_10
Yeah, moments of transition. So whether those are societal transitions or whether they're personal transitions is when you're most vulnerable to get conned. So it's not a personality trait, it's not intelligence, it's not anything like that.
00:41:09 Speaker_10
It is this kind of moment of either up or down, euphoria or despondency, but when things are uncertain and your worldview gets challenged, gets shattered, gets displaced, you look for certainty.
00:41:26 Speaker_10
And that's when con artists swoop in and give that certainty to you.
00:41:31 Speaker_14
So as long as nothing ever changes, we're all safe from cons.
00:41:34 Speaker_10
We're good.
00:41:37 Speaker_06
My great-grandfather faked his death and got away with it.
00:41:41 Speaker_10
Okay, Nate, we need this story. I'm sorry, we're pausing everything. Nate, please.
00:41:47 Speaker_06
I mean, his name was Ferdinand Thrun, which is a great name. It's an amazing name. He was written up in the Chicago Tribune and the New York Times and places like that. insurance fraudster. We should do this as a separate segment sometime. Yeah.
00:42:01 Speaker_06
But basically his technique was to commit crimes so devious that there was no law to charge them with because they hadn't figured out like this particular type of fraud. But we should do proper research and do an episode on this, Maria.
00:42:12 Speaker_14
Yeah, absolutely. So Maria, Nate, now we've discussed Sam Israel, we've discussed John Law. I actually had a couple of questions, given that you guys are absolutely experts on this sort of thing.
00:42:25 Speaker_14
I had a couple of questions for you that I hope you won't mind me asking. The first one is, I have your two most recent books in front of me. I have Nate's On the Edge, I have Maria's The Biggest Bluff, Stone Cold Classic. Amazing.
00:42:43 Speaker_14
I looked in the index. The word experiments does not appear in the index of either of your books. Expected value, of course, does appear, but experiments does not. And I just wondered whether you two are brilliant risk takers, analysts, poker players.
00:43:03 Speaker_14
But I thought, a poker player can't really experiment. If you want to find out, you need to make the bet. You need to put down the money. There's no cheap way to find out what the other person's cards are.
00:43:19 Speaker_14
And maybe that is a blind spot in poker playing relative to decision-making advice in everyday life.
00:43:25 Speaker_14
Because what I've always been saying to people is, OK, if you're facing an uncertain situation, you don't know what the right thing to do is, maybe there's an experiment. Maybe you can run a little pilot. Maybe you can run a little A-B test.
00:43:38 Speaker_14
Maybe there's a cheap way to find out without betting all your chips, metaphorically speaking. So I just wanted to ask, why did neither of you talk about experiments? And is this, in fact, a blind spot in the poker player's view of the world?
00:43:54 Speaker_06
It's a great point, Tim. I I have a home game I play maybe every third week. That's a one dollar, two dollar 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.
00:44:09 Speaker_06
You know, last night I made I had a nut flush draw, which some of our audience will know what that means. I have the ace high flush draw on a board that was king queen X X. I made like a three X. overbet shove on the turn. I'm just going to experiment.
00:44:23 Speaker_06
I bet probably there's some frequency at which you're supposed to do this in game theory. But like, but if I lose this pot, then, you know, I'll win. Sometimes I'll catch my flush and like it'll be a fun hand to show down and whatever.
00:44:33 Speaker_06
But I do feel I think we do probably. Experiment a little bit and that kind of like naughty feeling you have of like having an experiment and getting away with it Like you're kind of taking the piss to use a is that the British term?
00:44:45 Speaker_06
Yeah, yeah You kind of get away with it. Like it's a very satisfying feeling and I think encourages current artistry sometimes. Yeah
00:44:52 Speaker_10
Yeah, I think that there are 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, when the money is not as meaningful and you get to test certain theories out.
00:45:08 Speaker_10
So if I'm studying and I'm kind of figuring out different possibilities for playing similar spots, I might test those out and feel comfortable testing them out when I don't care as much about the stakes, when it's not kind of as important.
00:45:22 Speaker_10
Now that said, we can't experiment as in the traditional. So I'm a trained psychologist, right?
00:45:29 Speaker_10
So when I was doing studies for my PhD, you have to have a very strict experimental design where you have your control group and you have your test groups and you have all of these things where you're trying to
00:45:42 Speaker_10
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 experiment.
00:45:55 Speaker_10
And I saw poker as kind of a psychology laboratory of testing out a lot of the psychological theories that I had kind of known in theory and putting them into practice at the table and being able to see, oh, you know, this is how this plays out.
00:46:08 Speaker_10
This is how that plays out.
00:46:11 Speaker_10
And I do think that poker is great for that, but of course, you can't, when you're playing in a tournament, when you're playing in a game, you can't have the exact same conditions where you say, okay, on this exact same board, I'm gonna do this, let's see what happens.
00:46:28 Speaker_10
All right, pretend I didn't do that, let's go back. And now I'm going to do something else, and we'll see what happens there.
00:46:33 Speaker_10
Because even if Nate and I were thinking, oh, OK, let's see what it feels like to overbet three times the pot in this particular spot. And Nate says, OK, I'm going to do this. And then, Maria, you do Y.
00:46:47 Speaker_10
In poker that experiment is actually not a valid control group because Nate and I are so different.
00:46:54 Speaker_10
People respond to us differently and all of a sudden you can't control the environment because it's a different environment the moment you switch out the players.
00:47:01 Speaker_10
All of a sudden the experimental conditions change even if you've changed literally nothing except who's sitting in that chair. I think that's actually fascinating and that's how life works.
00:47:13 Speaker_10
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 all of your variables.
00:47:26 Speaker_06
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. You know, people really are afraid to call you on your bullshit.
00:47:41 Speaker_14
Yeah. Okay. Second quick question. Second quick question, because I have to take advantage of the opportunity to tap into your wisdom. Okay. So, I think it's fair to say that both of you would advocate putting a probability on something.
00:47:59 Speaker_14
If you're going to make a risky decision, you have to have an idea. Is this like a five to one? Is it a three to one? Is there a 20% chance this is going to happen? Is there a 70% chance this is going to happen?
00:48:09 Speaker_14
And there's a difference between, say, a 53% chance and a 48% chance, even though they're both close to 50-50. So it's important to quantify as much as you can, even though you don't always have the data.
00:48:23 Speaker_14
Okay, so 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 30%.
00:48:43 Speaker_14
And a report was prepared for President Kennedy And Kennedy, and 30% was, presumably they thought, oh, the president won't understand percentages. So he was told there is a fair chance of success. And by fair chance of success, they meant, well, 30%.
00:48:58 Speaker_14
And we don't, we don't know what Kennedy understood by a fair chance of success, but he seems to have thought it was a good chance of success. And so, and he approved this total fiasco.
00:49:09 Speaker_14
So, it might seem more user-friendly to express things as, well, this is common or uncommon or likely or unlikely, but actually none of those words really mean the same thing to the person who's uttering the word as to the person who's receiving it.
00:49:26 Speaker_14
So, you should always put probabilities on things. Here's the counter example. Counter example, think back to the financial crisis, 2007-2008. You had quants putting probabilities on things.
00:49:40 Speaker_14
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.
00:49:54 Speaker_14
People had too much confidence in the probabilities. And it's fine to say, oh, we think there's like a 0.5% chance that this will default. That's fine.
00:50:01 Speaker_14
But then the problem is you feed the 0.5% into a model, which gets fed into another model, which gets fed into another model. And in the end, you'd be like, oh, well, we've repackaged this thing.
00:50:10 Speaker_14
And now there's like only a one in a trillion chance that this will default. And it turns out that that's all dependent on the quality of your original assumption.
00:50:19 Speaker_14
And you shouldn't be betting the existence of Western civilization on that calculation and people got it wrong.
00:50:25 Speaker_14
So the case against quantification is once you have a number, then you are tempted to rely on that number too much and to analyze or to manipulate or to remodel or to reanalyze that number too much and to forget that actually the number was always basically just an educated guess.
00:50:46 Speaker_10
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.
00:51:01 Speaker_10
which is garbage in, garbage out, right? If your assumptions are garbage, then your probabilistic assessment is going to be garbage. So I actually think that both of these things, they're not counterexamples.
00:51:15 Speaker_10
The 30% chance of the Bay of Pigs, I just think that these were people who had A lot of qualifications had done the research, had done rigorous analysis, and that was not garbage. They had assumptions that were there for a good reason.
00:51:31 Speaker_10
They had good historical data. I have no idea how they came upon the 30%. This is me making assumptions. Yeah, hindsight bias, exactly. And so you get 30%. And by the way, you should absolutely have told Kennedy 30% and not fair chance.
00:51:50 Speaker_10
There are so many psych studies about this that trying to put words with percentages backfires because people do not understand. It's like if you have a weatherman and says a fair chance of rain, right?
00:52:03 Speaker_10
Let's talk about not a fair chance that the Bay of Pigs is a success. Fair chance of rain. Do you bring an umbrella? You want to know what the percentage chance is.
00:52:12 Speaker_10
You want to know that actual number because otherwise the quantification gets all out of whack. Financial crisis, when you have those numbers in the models, those were people whose incentives were not aligned.
00:52:25 Speaker_10
with giving you a correct probabilistic assessment. Their incentives were to make money. That's also a question that you have to make, you always have to ask, and this is something that Nate and I talk about as well.
00:52:39 Speaker_10
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?
00:52:49 Speaker_10
And in this particular case, their incentive was to make money for them today and to make their company think that this was going to be a great bet and okay, that it was going to work out.
00:53:00 Speaker_10
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.
00:53:14 Speaker_10
Then all of a sudden, I come up with different percentages. I use different inputs. My model looks very, very different. But Wall Street didn't work that way, still doesn't work that way. That's not how you're incentivized.
00:53:27 Speaker_06
Yeah, look, I think there's a risk of laundering subjective opinions through probabilities and forgetting they're subjective, right? If I'm running late to the airport, there's traffic on the Van Wick or whatever, right?
00:53:38 Speaker_06
I might say to myself, oh, it's a 5% chance I'm going to miss my flight, right? That's not coming out of any regression. analysis or anything.
00:53:45 Speaker_06
You know, I've probably used the phrase on this show, like quoting Vice President Harris, a model does not fall out of a coconut tree. It exists in the context of that which became before it or whatever else.
00:53:56 Speaker_06
You're trying to get at the truth with a model. And I think mediocre modelers in particular will publish a number, and then forget how many assumptions are driven into that, right? Look, I still think it's worth quantifying things.
00:54:11 Speaker_06
I mean, at the end of the day, probability is defined as a number between 0.0 and 1. And you have to make decisions even in conditions of uncertainty.
00:54:21 Speaker_06
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.
00:54:30 Speaker_10
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?
00:54:44 Speaker_10
That you often do become a little bit overconfident when you're like, well, I have this model and this model. So it must be.
00:54:50 Speaker_10
And there you have the bias that we've talked about a lot, where it goes from being probabilistic to seeming much more certain, like, this will not default. This will not happen because you forget that it ain't zero.
00:55:06 Speaker_14
Thank you so much, guys. Fantastic.
00:55:08 Speaker_10
Tim, thank you so much for coming on the pod today. It's been such a pleasure having you.
00:55:12 Speaker_14
It's been really, really fun. Thank you for sharing your wisdom.
00:55:16 Speaker_14
And if people want to hear more about Sam Israel or any other stories of things going disastrously wrong and me trying to investigate the social science behind why they went wrong, Cautionary Tales with Tim Harford is one of Risky Business' sister podcasts on Pushkin.
00:55:32 Speaker_10
It is, and there are lots of tales of risk-taking assessments that do not turn out quite the way the risk-taker thought they would. Risky Business is hosted by me, Maria Konnikova. And me, Nate Silver.
00:56:01 Speaker_10
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 Goldstein.
00:56:13 Speaker_05
And if you want to listen to an ad-free version, sign up for Pushkin Plus. For $6.99 a month, you get access to ad-free listening. Thanks for tuning in.
00:56:37 Speaker_13
The holiday season is back, which means it's a time for giving. Subaru and its retailers believe in giving back to those who need it most. For the past 17 years, Subaru has made the act of buying a Subaru during the holiday season an act of love.
00:56:52 Speaker_13
When you purchase or lease a new Subaru during the Subaru Share the Love event, Subaru and its retailers donate a minimum of $300 to charity.
00:57:00 Speaker_13
By the end of this year's event, Subaru and its retailers will have donated nearly $320 million to national and hometown charities. To learn more, go to Subaru.com slash share. Subaru, more than a car company.
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Once upon a time, Amazon Music met audiobooks, and listeners everywhere rejoiced. Oh, yeah.
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Because now they could listen to one audiobook title a month from an enormous library of popular audiobook titles, including Romanticy, Autobiographies, True Crime, and more.
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Suddenly, listeners didn't mind sitting in traffic or even missing their flight. Amazon Music Unlimited now includes Audible. No way. Download the Amazon Music app now to start listening. Terms apply.
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Your teen requested a ride, but this time not from you. It's through their Uber Teen account. You drive your teenager around, a lot, to their friend Jacob's house, their other friend Jake's house, to James's, to Jaden's, to Jalen's too.
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Uh, Mom? This is Jake's house, not Jacob's.
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Now with an Uber Teen account, your teen can request a ride under your supervision. They'll ride with a highly rated driver, and with live trip tracking, you'll follow along the whole ride to their friend's houses that all sound the same.
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Add your teen to your Uber account today. See app for details. Bye, Mom.