From a retired federal employee

In the letters to the editor in my local newspaper was the following letter. It speaks for itself, but I will make one comment following the letter.

“As a retired federal employee with over 34 years of service during the administrations of eight presidents of both political parties, I want to offer my heartfelt thanks to the millions of current federal employees across the country and around the world for your work on behalf of all of us.

Never in my experience have I seen such disdain from a president and his administration for federal employees, calling them “idiots,” “a disaster,” and otherwise demeaning service.

Federal employees deserve better than that, and I am here to just say thanks for your service.

Any boss who treats federal employees the way the current president does should not be the boss.”

This is well said. In Michael Lewis’ well researched book “The Fifth Risk” which looks at what these federal employees actually do and how the current administration did not take much time at all to learn what they do and the heightened risks as a result, he noted the following theme. The deep state (as these folks are often called) are the people who actually know what they are talking about.

Undoing how we make decisions

Best-selling author Michael Lewis’ latest book is called “The Undoing Project – A Friendship that Changed our Minds” which focuses on how we make decisions. Two transplanted Israeli psychologists named Daniel Kahneman and Amos Tversky partnered together for years and were acclaimed for their work in showing we are less rational decision-makers than we think we are, especially where risk is involved.

In short, we include our biases in how we interpret data and probabilities, so we do not all see the issue the same way. But, even more telling is we can be influenced by how the question is posed to us. Their analysis eventually led to a Nobel Prize in Economics, which was awarded to Kahneman after Tversky had passed away. The reason is their work created a new breed of economics called “Behavioral Economics.” But, their work had converts using it in the practice of medicine, setting public policy and even in making NBA draft picks. They ask that people step back and question things. Your bias may lead you to pick the most improbable cause or choice, so if you question yourself and others you may find the best probable path forward.

The other key takeaway is the tremendous partnership these two had over the years. They were very different personalities, yet it was difficult for them to know who had more input into their work. They often flipped a coin to decide whose name should go first in a paper. Their partnership was so constructive, it was difficult on people in the US who tend to believe one of the partners was a greater contributor. Tversky, being more outgoing and confident, was more easily and incorrectly thought of as the lead. Kahneman questioned everything even when he was far more right than wrong, so he came across as less confident. Ironically, it was his questioning things that challenged Tversky to reconsider strong positions. They yin and yanged like an old married couple.

It would be difficult for me to define their work in such a short piece, so let me share some of their examples which may be illustrative. Their most famous piece is called “Prospect Theory: An Analysis of Decision under Risk.” If you were given two options where (1) gave you a 50% chance to win $1,000 and (2) provided a gift of $500, most people would pick (2) as a sure thing. Yet, if the question is reframed and the two options were (3) which gave you 50% chance to lose $1,000 and (4) which provided a sure loss of $500, most everyone would pick (3) the gamble.

As they dived further into questions like this, they discovered that people would regret losing the sure thing as they did not have the money, yet were more risky with money they did not have. When they altered the probability of winning or losing, the same result would occur, even when the odds were much more in your favor to win (or not lose). But, they also learned how the questions were framed made a huge difference.

If an Asian disease was expected to kill 600 people and you could take one of the following actions, which one would you choose where Option (1) would save 200 people and (2) had a 1/3 chance of saving all 600 and a 2/3 chance of saving none? Most people chose Option (1) to save 200 people. Yet, if the question is framed as Option (3) where 400 people would die and (4) where there is a 1/3 chance none would die and 2/3 chance all would die, most people chose Option (4). Yet, it is the same question.

Another key concept they introduced through study is “representativeness.” If you added information to a question, people would believe the greater accuracy meant they should choose that option. This would even be true if the information added was irrelevant or unimportant. In other words, if something is described in more detail than other options, it creates an information bias. They illustrated this to be true with experts in a field, as well as with laypersons.

Lewis uses the example of medical doctor who embraced Kahneman and Tversky’s work named Don Redelmeier. Redelmeier would question quick conclusions by doctors made under stress, where they would use information bias. A good example came when a car accident left a woman with an irregular heartbeat after they treated her. The doctors hung their hat on the fact she had a medical history of excess thyroid hormones and just assumed that was causing the irregularity.

Yet, this was a remote probability. They were led down this path because of the extra piece of information. Redelmeier had them question this remote idea and look further. It turned out the more likely cause was indeed the reason for the irregular heartbeat – a collapsed lung from the accident. Because they had more information on a condition, they stopped looking for other causes that did not obviously surface.

I encourage you to read the book for the two reasons Lewis wrote it. It is more than just the work of Kahneman and Tversky on making decisions. It is also about how two different people can collaborate so successfully and be far more together than they were separately. They valued this partnership and made it work well for them and us.

Note: Lewis also wrote “The Blind Side,” “Moneyball,” “Liar’s Poker” and “The Big Short,” to name a few.


A big culprit in the housing crisis is punished

After living through the housing crisis and reading and watching news, books and movies, I read with interest that one of the biggest culprits has been punished – the rating agency Moody’s. In my view and the view of others, Moody’s failed in its job to forewarn investors of the true risks of packaged together mortgage loans. They fell into a “pay to play” modus operandi.

What is pay to play? Per an article in Reuters, “Moody’s ratings were ‘directly influenced by the demands of the powerful investment banking clients who issued the securities and paid Moody’s to rate them,’ Connecticut Attorney General George Jepsen said in a statement on Friday.” This would be akin to you paying off the inspector of the house you just built and want to sell. The buyer would not know the inspector was gaming the system against him or her.

So, individual investors, pension funds, 401(k) funds, states, and countries all fell prey to this pay to play ratings approach. Iceland had to declare bankruptcy, e.g. As a result of their actions, Moody’s was fined $864 million which will be distributed to twenty-one states and the federal government, who were part of the lawsuit.

We should not lose sight of an industry who became enamored with riskier investments and did not ask enough questions. Executives did not fully understand the risk they were taking on and it brought them down, along with the housing market, stock market and economy. An excellent movie to watch is called “The Big Short,” based on Michael Lewis’ book, which takes a complex topic and explains it with the dialogue, but also with clever sidebars which use laymen’s terms to define what things mean.

In essence, mortgage loans were given out to anyone who could fog a mirror, then these lesser risks were packaged together to spread risk and sold to investors. The problem is packaging bad risks does not make the risk less, it makes it concentrated bad risk. The law of large numbers to mitigate risk is only effective if good risks are mixed with some bad risks. Moody’s stamped these packaged loan investments with much higher ratings than they deserved. And, investors who trusted Moody’s and the seller bought them in good faith.

We rely on Moody’s and other rating agencies to take their job with seriousness of purpose and ethics. If they cannot shoot straight with us, they will let us down. And, that is precisely what they did. In my view, that fine may not be enough for the damage they helped perpetuate.