Cautionary Tales with Tim Harford – Episode: "Buried by the Wall Street Crash (Classic)"

Release Date: April 25, 2025

Introduction

In this compelling episode of Cautionary Tales, host Tim Harford delves into the intertwined lives of two towering economists of the early 20th century—John Maynard Keynes and Irving Fisher—and explores their downfall amid the Wall Street Crash of 1929. Through engaging storytelling, Harford draws parallels between economic forecasting and human psychology, illustrating how even the greatest minds can falter when overconfident in their predictions.

The UFO Cult and Cognitive Dissonance

Setting the Stage: The Oak Park UFO Cult

The episode begins with an intriguing account from December 20, 1954, where a group in Oak Park, Chicago, led by Dorothy Martin, awaits an impending apocalypse. They believe that aliens will rescue true believers, only to face the non-appearance of the aliens at midnight. This scenario serves as a metaphor for the cognitive challenges faced by economists like Keynes and Fisher.

Leon Festinger's Infiltration

Psychologist Leon Festinger infiltrates the cult to study their response to the failed prophecy. As midnight passes without the alien intervention, Festinger observes the group's intense cognitive dissonance—where members double down on their beliefs despite clear evidence to the contrary. Festinger explains:

Leon Festinger (27:08): "I anticipate very substantial profits with very good probability, if you are prepared to stand the racket for a couple of months."

This theory of cognitive dissonance becomes pivotal in understanding how Keynes and Fisher reacted to their investment failures.

Irving Fisher: The Titan Who Fell

Early Success and Ambition

Irving Fisher, introduced as a pioneering American economist, is portrayed as a health fanatic and a successful investor. By 1929, Fisher is a best-selling author, inventor, and a wealthy man, boasting:

Irving Fisher (07:25): "How much there is I want to do, I always feel that I haven't time to accomplish what I wish."

Fisher's investment strategy heavily relied on leverage—using borrowed money to amplify his investments in the booming stock market.

The 1929 Crash and Downfall

As the stock market peaks in summer 1929, Fisher confidently declares:

Irving Fisher (34:30): "Like a permanently high plateau."

However, the crash devastates his portfolio. Leveraged investments, which once magnified his profits, now exacerbate his losses. Despite initial resilience, Fisher fails to adapt his strategy post-crash, leading to financial ruin. His inability to change his mindset contrasts sharply with Keynes' approach.

John Maynard Keynes: Adaptation and Resilience

A Contrasting Character

In contrast to Fisher, John Maynard Keynes is depicted as a charismatic and adventurous figure. Educated at Eton and a venerable academic at Cambridge, Keynes combines his economic expertise with a zest for life, engaging in high-stakes gambling and eclectic personal relationships.

Early Investment Ventures

Keynes ventures into investment by setting up what is considered the first hedge fund, speculating on currency movements. Although his fund initially thrived, a sudden downturn in 1920 wipes out his gains. Unlike Fisher, Keynes reassesses and seeks to innovate his investment strategies.

Adaptation Post-Crash

After the Wall Street Crash, Keynes learns from his mistakes. By abandoning business cycle forecasting, he adopts a long-term investment philosophy focused on great companies, echoing strategies later popularized by Warren Buffett. His ability to change his mind and adapt his methods ensures his continued success:

Leon Festinger (26:54): "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."

Keynes' resilience not only preserved his wealth but also cemented his legacy as one of the most influential economists.

Philip Tetlock and the Art of Forecasting

Challenging Expert Predictions

Harford introduces Philip Tetlock's groundbreaking research on expert forecasting. Tetlock's study reveals that most experts, including economists like Keynes and Fisher, are no better at predicting future events than random chance:

Tim Harford (22:03): "According to Tetlock's work, the forecasting task was impossible."

Superforecasters: The Exception

However, Tetlock identifies a subset of individuals, dubbed "superforecasters," who consistently outperform their peers. These individuals share traits such as being actively open-minded, adaptable, and willing to change their opinions based on new evidence.

Tim Harford (24:03): "The superforecasters are what psychologists call actively open-minded thinkers."

This concept underscores the importance of flexibility and continuous learning in effective decision-making, a lesson Keynes embraced but Fisher did not.

The Downfall of Irving Fisher vs. the Rise of John Maynard Keynes

Fisher’s Inflexibility

Irving Fisher's refusal to alter his investment strategies in the face of mounting losses exemplifies the dangers of cognitive dissonance. Despite overwhelming evidence from the 1929 crash, Fisher doubled down on his leveraged investments, ultimately leading to bankruptcy and the loss of his reputation.

Keynes' Strategic Pivot

Conversely, Keynes' willingness to evolve his approach allowed him to recover and thrive post-crash. By shifting focus from speculative forecasting to long-term investments, Keynes not only salvaged his finances but also influenced global financial systems through institutions like the World Bank and the IMF.

Conclusion: Lessons from History

Tim Harford wraps up the episode by highlighting the crucial takeaway: the ability to change one's mind is paramount to overcoming failure and achieving long-term success. The contrasting fates of Keynes and Fisher serve as a cautionary tale about the perils of overconfidence and the importance of adaptability.

Reflecting on Keynes' legacy, Harford notes:

John Maynard Keynes (35:12): "The Monte Carlo gambler knew all along that while investing was a fascinating game, it was a game nonetheless."

Keynes' pragmatic approach and readiness to learn from mistakes ensured his enduring influence, while Fisher's rigidity led to his downfall.

Key Quotes

• Leon Festinger (05:36): "Fisher was anywhere from a decade to two generations ahead of his time."
• Leon Festinger (27:08): "I anticipate very substantial profits with very good probability, if you are prepared to stand the racket for a couple of months."
• Irving Fisher (07:25): "How much there is I want to do, I always feel that I haven't time to accomplish what I wish."
• Irving Fisher (34:30): "Like a permanently high plateau."
• Leon Festinger (26:54): "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."
• Tim Harford (24:03): "The superforecasters are what psychologists call actively open-minded thinkers."

Final Thoughts

This episode of Cautionary Tales masterfully intertwines economics, psychology, and history to deliver a profound lesson on the importance of adaptability and humility in the face of uncertainty. Through the lives of Irving Fisher and John Maynard Keynes, Harford illustrates how even the most brilliant minds must remain open to change to navigate the unpredictable tides of the financial world.

For more insights and detailed discussions from the episode, visit TimHarford.com.