Writing Worth Reading
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Writing Worth Reading
When the financial markets crash, whether it’s in 1929 or 1973 or 2008, people get angry. But in [your new ebook] How To Be a Rogue Trader, you imply that speculation is baked into the human character. We get the booms and busts that we deserve, and even that we want. So are we fools or hypocrites, or both?
We always say afterwards, “How could it possibly have happened? It’s an outrage! Why weren’t we stopped?” But at the time we all want our houses to rise in price. We all fear losing face to the neighbour we meet at the dinner party who’s done better from real estate speculation than we have. The pattern time and time again is that you have the speculators, who draw in the elite group, and then, as the speculation continues, everybody wants to be part of it, everybody thinks, “Oh I’m just a little bit behind, I need to get in.”
You can find plenty of evidence from psychological and behavioural research that we are to some extent programmed to act in crowds – to follow the crowd towards what we think will be a reward. Like birds and bees. Whether in a coordinated fashion, or individually for the good of the species.
These speculative peaks repeat themselves down history. People say, “It will never happen again.” And then it does – you just have to wait a decade or two for people to forget sufficiently. At some point you have got to conclude that we are programmed to behave in this way. Because we enjoy it. And because some people can make an enormous amount of money in bubbles if they get it right.
And, presumably, because so many people think they have some sort of edge over the others in the market – better information, better instincts, better judgment, better models. Is that always an illusion?
There is some interesting academic work that suggests you could run a hedge fund by flipping a coin, literally flipping a coin, risking your capital on the outcome, and if you model the way that fund would perform, it would perform very well at low volatility for seven years. And then go bang. The nice name for this is “informationless investing”. It can give your hedge fund a long enough life for you to make an enormous amount of money, and for your investors to lose it all.
Which is an opportune moment to introduce your first book, Extraordinary Popular Delusions and the Madness of Crowd by Charles MacKay. It sounds as though we haven’t even digested what Mackay was trying to tell us in 1841.
It’s a very patchy book, but it leads off with three classic financial booms and busts – tulip mania in Holland, the Mississippi scheme in 18th century France, and the South Sea Bubble. MacKay was a journalist with a fine tabloid style, and he writes it all up very entertainingly. He gets the eyewitness quotes and he finds the human foibles. And, because he was the first person to collect these episodes, his book has become the source material for a lot of later works that are more scholarly and more rigorous. And yes, when you read Mackay, you do think, “Oh my goodness, this is what’s happening now.” There are extraordinary parallels.
For example?
In periods of speculation, people start trading derivatives of whatever the primary commodity might be. During the South Sea Bubble they were speculating not only on sailcloth for the expeditions, but on options to buy the sailcloth.
James Surowiecki wrote a recent book called The Wisdom Of Crowds. Are the wisdom and the madness reconcilable?
Surowiecki talks about the way in which crowds of people making independent judgments can come up with good decisions. But if you have a coordinated mass hysteria, that’s something completely different.
And it presumes a coordinator. Your next book, Anthony Trollope’s The Way We Live Now, is also about speculation – but it’s as much about manipulation, isn’t it?
Absolutely. And, slightly atypically for Trollope, it is a book written in a spirit of moral disgust. Trollope generally takes a detached, somewhat comic or ironic view of society. But here we have contempt for the state of Victorian Britain in 1875.
Augustus Melmotte, the tycoon at the centre of the story, is a great character: A mysterious outsider with a bullying, charming, intimidating presence. He promises money and riches to London’s decadent and foppish aristocrats. He is really a speculator in railway bonds, with an American shyster, Hamilton K Fisker, as his partner. Aristocrats crowd on to his boards, as baubles, for the money. You sense an entire class of society wanting to be corrupted, wanting to believe in this man. Melmotte is the precursor of modern figures such as Bob Maxwell and Bernie Madoff, who bully or charm you into believing they have the key to boundless riches.
It's hard to think of another novel about finance that works quite so well.
Other writers have tried to capture the world of high finance, and failed, because finance is abstract and complicated. Trollope succeeded because his real interest was in bringing to life the way that money could change human character. There’s nothing abstract or complicated about greed, vanity and weakness. Tom Wolfe managed something similar a century later with The Bonfire of the Vanities.
John Gapper is chief business commentator of the Financial Times, where he writes a weekly column. He co-authored All That Glitters, an account of the collapse of Barings bank in 1995. His new e-book is How To Be A Rogue Trader, pegged to the story of a young trader who allegedly ran up $2.3bn of losses
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