The Big Short by Michael Lewis is a very good book, thoroughly entertaining. The language is simple, but all the concepts are sufficiently explained to make sense to non-financial readers, without leaving out too much. It also cleared up some issues I have been unable to get a grip on despite reading sporadically about the crisis for years. I do recommend that you read this book. But if you do, beware of a couple of things.
It’s a story
The books reads like a story, which is what makes it so entertaining. But it is also exactly there that its danger lies. It is centred on a handful of individuals that made money from the subprime crisis, who, in essence, predicted it and took investment positions to profit from it. It contains many personal elements of the lives of these people, explaining how they moved through life and how they decided to place their bets against the system. Their lives are very interesting, at least Lewis manages to make them appear so.
Don’t trust a story
Storytelling, though useful, is dangerous. It makes you forget how messy life really is. Everything is put into plots and subplots, everything heads toward the ending, in this case, a financial collapse. It has the illusion of inevitability. Never believe that. As smart as these people were, as thorough as their research was, nothing about their success was inevitable. They were lucky. I do not mean to say the odds were not in their favour – they looked at information most others ignored, they saw things others did not see. But they could (or rather, should not) have been certain. A difference in timing, a slight change in the economy, stimulus here or not there, and we could have seen a different set of winners or losers.
There is a survivorship bias in the book. (This is also a problem with stories – usually they focus on the people who succeed, sometimes on the ones who fail horribly, never the ones in-between). We hear only from the people who made it. How they happened to make their fortune. We don’t hear about the people in similar situations with similar intellects who did not. We are to presume they did not exist.
As I read and I felt the suspense of the coming crash (and voyeuristic exhilaration at the heaps and heaps of money the protagonists would make) I too felt, perhaps I can make money too, perhaps I could also be a great investor. Of course these people were not really investors, they were speculators betting on the crash of a system (albeit, probably with the odds in their favour). They were right, at least partly because they were lucky enough to stumble on the right information at the right time.
Perhaps, if there is anything to learn from the crisis and from the book, it is that you are far more likely to be the sucker who misunderstands everything (in this case almost all of Wall Street) than anything else. Humility is your ally.