art prices. If someone outbids someone else and proudly and triumphantly pays a world-record price, that's a sign of hubris and overconfidence. I also look at architecture markets. I've paid attention to the world's tallest skyscrapers under construction. We can go back in time, and this is another confirmation of overconfidence. In 1929, three buildings competed for the world's tallest tower status in New York City. You had 40 Wall Street and the Chrysler Building, then the Empire State Building; then you got the Great Depression. In 1973 and ‘74, we had the Sears Tower and the World Trade Center, and then a decade of stagflation. In 1997, the world's tallest tower moved to Malaysia in Kuala Lumpur, and we had the Asian financial crisis shortly thereafter. In 1999, we started construction of Tai Pei 101, which was effectively ground zero of the boom in hardware for technology. In 2007, the Burj Dubai took the title, even before completion, within weeks of global equity markets peaking.
My fourth lens is politics. When there are signs of government interference, whether it's taxes, subsidies, incentives, or moral hazard of any sort, you usually see disproportionate risk taking. When people have political motivations for economic decisions, unexpected, possibly even irrational, outcomes are likely.
Lens five is a herd-behavior lens. It comes out of an inspiration I found in the epidemiology literature. If you were to analogize that a speculative mania was not dissimilar to a flu or fever spreading through a population, you could take the toolbox of that epidemiologist and apply the logic of what was happening in terms of the speculative mania. You would care about the infection rate, how quickly is the idea spreading; you would care about the removal rate, how quickly are people dying off and losing their money; and, most importantly, you would care about how much of the population is still vulnerable, because that would be the rate at which the fuel could be poured on the fire. In the case of financial bubbles, it’ s my belief that amateur investor participation in areas that have historically been characterized by professional participation is a telltale sign that the bubble is long in the tooth and maybe ripe for bursting.
Those are the five lenses. And whereas I think any of them is interesting by itself, in aggregate they become powerful.
What is your hope that people would do with that information?
If you're a regulator, I would say it would be really interesting if you applied this framework and decided that there were bubbly conditions under way and take whatever regulatory action could be possible to remove that adverse incentive that comes out of my political lens. If you're a simple investor in the world, I would like you to remove your capital from areas that are higher-risk. If you're a corporate executive about to build a factory in a booming city, state, or country, evaluate how sustainable that boom is before you make unrecoverable commitments.
You talked about specialist thinking being something that can blind you to the existence of a financial bubble, but in your writings you also identify specialization as a greater problem throughout the business world. Can you talk a little bit about the importance of generalism?
It’ s my belief that we've created a society where we've motivated people to become increasingly specialized, specialized, specialized; narrower, narrower, narrower; more focused, more focused, more focused. And the result is very few people are seeing the big picture. The other result of increasing specialization is those who eventually deem themselves experts, either by self-label or being labeled by others, believe they know more than they actually know. In the language of psychology, you might deem them to be overconfident or poorly calibrated.
There's a wonderful academic who's done work on this, Philip Tetlock, and his findings from large studies are that experts tend to be less accurate predictors in areas of their expertise than non-experts. Why is that? It's my belief that specialists maybe overconfident. Generalists are less likely to be overconfident, I believe, because the mere fact that they don't know everything in great depth gives them a natural appreciation for what they do not know;... a generalist's value is in breadth, not depth. If you have a better appreciation for what you do know, for what you do not know, and for what you do not know you do not know, you're more likely to successfully navigate uncertain situations. Given the inherent uncertainty that characterizes business generally, I think many managers would benefit from adopting a more generalist approach.
Is that generalist mindset something that meeting planners can apply to the content they offer at their own live events, even if they're for a specialist society?
Sure. I've been increasingly invited to speak at events that are outside of the financial-services domain. I think there's enormous value in getting seemingly irrelevant perspectives into a meeting. In the course of a typical talk, I often find myself discussing art history, and I may get into specific pieces of art that sold at world-record prices. Let me share one specific example: At the absolute peak of the Japanese bubble in 1990, a paper executive named Ryoei Saito paid $82.5 million for a Van Gogh painting called Portrait of Dr. Gachet and $78 million for a Renoir painting called Le Moulin de la Galette. He then went on to shock the art world by announcing he would cremate the paintings with his body when he passed away. Seems to me there's a lot of insight in that story, particularly about hubris.
Let's say you were a finance firm and you had an art historian come and talk to you about stuff like world-record art prices. There might be value in that. But who would think of talking to an art historian at an investment conference?
I guess the point I'm getting at is there is insight and value in connecting dots across seemingly disparate domains. It seems to me — and I realize I'm heavily biased — that someone who can present information from various domains and weave them together to create relevance would be great for almost any meeting. For instance, I've spoken at events in the fertilizer sector. I'm a finance guy — what do I have to say about fertilizer? Frankly, not that much. But I was able to discuss different dynamics relating to my bubble-spotting framework to understand how they might affect the fertilizer supply chain, its customer base, or the geopolitical regulations they face. What might be happening in their demand areas of ultimate demand, their customers’ customers’ customer, etc., and their suppliers’ suppliers’ supplier. In many ways, not being an industry insider allowed me to take a unique and unadulterated perspective.
When you have the chance to participate in a conference as an attendee, what do you look to get out of the experience?
I may be anomalous on this point, but it's first and foremost about meeting people. So it’ s all about who's coming to the event, who will I get to mingle with, what is the opportunity to actually get to know other attendees. Secondly, I do like getting content that forces me to think, or interesting ideas, thought-provoking in any way. And then, lastly, one of the things I've really enjoyed is, occasionally there will be some of these probabilistic questions posed to the audience where there isn't a right or wrong answer, and they poll the audience with electronic devices to give us a sense as to what the audience thinks. If it’ s an audience of attendees that I care about and I like and I want to meet, the responses to interesting and probabilistic topics is sometimes the most valuable takeaway of an event. It tells me a great deal about my views relative to my peers and the direction of the herd, if there is one.