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Late one evening on the twentieth of December nineteen fifty four, a small group of people sat together in a living room in Oak Park, a suburb of Chicago, waiting for the end of the world. They were led by a woman named Dorothy Martin, who was a conduit for messages from aliens or God, or both. The messages were alarming. At midnight, the aliens would land a flying saucer in the backyard and convey the true believers to the safety of a planet named Clarion. Then at dawn, a cataclysmic
flood would destroy much of the world. Now, at five minutes to midnight, the believers were waiting. Some were disheveled since the aliens had demanded they remove all metal from their clothing. Bra clips, buttons, even trousers. Zips had been hastily slashed away by fumbling hands wielding scissors or razors. Some of the group were there out of mere curiosity. Others had sacrificed almost everything for this moment. They'd quit their jobs, given away their possessions, and said farewell to
their families. But what distinguishes this particular apocalyptic cult from all the others is that a small team of social scientists, led by the world renowned psychologist Leon Festinger, had managed to infiltrate it. They were there to witness what happened at midnight, and in particular, how the group reacted to the appearance or possibly the non appearance, of the aliens.
Gather round, and I'll tell you another cautionary tale. I'll tell you all about what happened with Leon Festinger, Dorothy Martin and the aliens in due course, but for a moment, let's leave them there in Chicago, anxiously waiting for the end of days, because I have another story to tell you. And it's not a story about crazy cult members, but about two economists, Indeed, two of the most celebrated economists who ever lived? And what do these economists have to
do with a UFO cult in nineteen fifties Chicago. It's very simple. Just like Dorothy Martin, they tried to see into the future, and trying to see into the future it's a dangerous business. One of the economists I want to tell you about is the great British polymath John Maynard Keynes. You may have heard of him. He's a colossal figure in economics, overturning the ideas that had gone before him and then reshaping the post war economic system.
Many economists still call themselves Knesians, like him or hate him. In economics, you can't get much bigger than John Maynard Keynes, except that in his day you could. When Caines first strode the world stage, he did so in the shadow of another man. In nineteen twenty four, The Wall Street Journal tried to describe John Maynard Keynes, this up and coming economist. They reached for a comparison that everyone in America would have known, Caines said the Journal was England's
Irving Fisher. And Irving Fisher was the most famous economist on the planet. But Irving Fisher wasn't just more famous than Kiness. He was brilliant. There's one Nobel Prize winner put it.
Fisia was anywhere from a decade to two generations ahead of his time.
Some would say he was the greatest economist who ever lived. But if you're thinking I don't hear much about Irving Fisher these days, you're right. He's not the household name he was one hundred years ago. If you're wondering why his reputation faded while Canes is lived on, that is what our cautionary tale is all about. Irving Fisher and John Maynard Keynes were very different men in some important ways,
but they also had a great deal in common. Both were stars at their universities, Canes at Cambridge and England, Fisher at Yale. They were both physically impressive. Canes was thin and very tall, with piercing eyes. Fisher had the broad chest of a competitive rower. They were both skilled writers charismatic speakers too. After witnessing Canes giving a speech, the Canadian diplomat Douglas Lapan was moved to write.
I am spellbound. This is the most beautiful creature I have ever listened to. Does he belong to our species or is he from some other order?
And Fisher and Kanes were also both active investors. They weren't just Ivory tower economists, but men who believe that their mastery of economics would enable them to make profitable investments. That is where their interest in forecasting came in. An academic economist might be content to describe and explain the economist's past, but to make money, Fisher and Canes would have to catch a glimpse of the economy's future. Let's meet the young Irving Fisher.
How much there is I want to do? I always feel that I haven't time to accomplish what I wish. I want to read much, I want to write a great deal. I want to make money.
He's writing from Yale to an old school friend. Money was important to Fisher. His father had died of tuberculosis the very week that Irving had arrived at Yale. The young man needed to scramble for funds throughout his studies. He understood what it was to struggle financially while surrounded by wealth. At the age of twenty six, however, Fisher found himself with a small fortune at his disposal. He'd married a childhood playmate Margaret Hazard, who was the daughter
of a wealthy industrialist. Irving and Margaret's wedding was sumptuous enough to be covered by the New York Times. With two thousand invited guests, three ministers, an extravagant lunch, and a wedding cake weighing sixty pounds, They commenced a fourteen month European honeymoon and returned to a brand new mansion in New Haven. It had been built in their absence as a wedding present from Margaret's father, and was furnished
with a library, a music room, and spacious offices. If marrying your childhood sweetheart sounds a little too wholesome, I'm just getting started. There are three things you need to know about Irving Fisher. The first is that he was a health fanatic. He abstained from alcohol, tobacco, meat, tea, coffee, and chocolate. One dinner guest enjoyed his hospitality while noting his quirkiness.
Well, I ate right through my succession of delicious courses. He dined on a vegetable and a raw egg.
He founded the Life Extension Institute and persuaded William Taft, who had just stepped down as president to be its chairman. In nineteen fifteen, when he was nearly fifty years old, he published a book titled How to Live. How to Live Now, that's some real ambition. It was a huge bestseller, the freeconomics of its day, and from a modern perspective, it's hilarious.
I advocate a sunbath, common sense must dictate its intensity and duration. It is important to practice thorough mastication, chewing to the point of natural involuntary swallowing.
He even adds a discussion of the correct angle between the feet while walking.
About seven or eight degrees of outtying in each foot.
And there's a short section on eugenics, which really hasn't aged well. But while it's easy to laugh, How to Live is in many ways as far ahead of its time as Fisher's economic analysis, describing exercises preaching mindfulness, and at a time when the majority of doctors were smokers, correctly warning that tobacco causes cancer. The second thing you need to know about Irving was that he believed in the power of rational quantified analysis.
In the modern study of scientific clothing, there is a new unit, the cloe. This is a technical unit for measuring the warming power of clothing.
There's also the money. That's the third thing you need to know. Irving Fisher was rich, and not just because of his wife's inheritance. Making money was a matter of pride for Fisher. There were the book royalties from How to Live. There were his inventions, most notably a forerunner of the rolodex, a way of organizing business cards. He sold that invention to a stationary company for six hundred and sixty thousand dollars in cash, many millions of dollars
in today's terms. Fisher turned his academic research into a major business operation called the Index Number Institute. It sold data, forecasts and analysis as a syndicated package to newspapers across the United States. He called it Irving Fisher's business Page. With such a platform, Fisher was able to evangelize about his approach to investment, which broadly speaking, was ti bet on American growth by buying shares in the new industrial
corporations using borrowed money. Such borrowing is called leverage since it magnifies both profits and losses, but during the nineteen twenties, stock market investors had few losses to worry about. Share prices were soaring, Fisher wrote to his old childhood friend to inform him that his ambition had been fulfilled.
We are all making a lot of money.
In the summer of nineteen twenty nine. Irving Fisher was a best selling author, inventor, data pioneer, friend of presidents, entrepreneur, health campaigner, syndicated columnist, and the greatest academic economist of his generation, and in that summer of nineteen twenty nine, a millionaire many times over. Irving Fisher was able to boast to his son that a renovation of the family mansion had been paid for not by the hazard family money,
but by Irving Fisher himself. That achievement mattered to him. Fisher's own father hadn't lived to see his seventeen year old boy grow into one of the most respected figures of the age. As Irving and his son watched a mansion reshaped before them, he could perhaps be forgiven his pride. John Maynard Keynes was the ultimate insider. As a schoolboy, he was educated at Eton College, just like Britain's first
prime minister and nineteen others. Since like his father, he became a senior academic, a fellow of King's College, the most spectacular of all the Cambridge colleges. His job during the First World War was managing both debt and currency on behalf of the British Empire. He had barely turned thirty. He knew everyone. He whispered in the ear of prime ministers. He had the inside track on whatever was going on in the British economy.
Maynard, Bank of England.
Here, I just wanted to let you know that interest rates will be rising tomorrow.
There's a good chap.
But this child of the British establishment was a very different person to his American rival, Irving Fisher. He loved fine wines and rich food. He gambled at Monte Carlo. His sex life was more like a nineteen seventies pop star than a nineteen hundred's economist, bisexual, polyamorous, eventually settling down not with his childhood sweetheart but with a Russian ballerina. One of Kynes's ex boyfriends was the best man at their wedding, and Caines was adventurous in other ways too.
In nineteen eighteen, for example, as the First World War was raging and the German army was camped outside Paris, Caines caught wind of the fact that in Paris, the great French Impressionist artist Edgar de Gart was about to auction his vast collection of pieces by France's greatest nineteenth century painters, and so Caines embarked on an insane adventure. First, he spoke to the Chancellor of the Exchequer, the UK's senior treasury minister, asking for a fund for purchasing art
twenty thousand pounds. That's millions in today's money.
Maynard, It's the first occasion that I've ever known you in favor of any expenditure whatsoever.
Remember, the British Treasury was four years into fighting the most devastating war the planet had yet seen, but Caines knew to get his way.
My picture coup was a whirlwind affair, carried out in a day and a half before anyone had time to reflect on what they were doing. I think the Chancellor was very much amused at my wanting to buy pictures, and eventually let me have my way as a sort.
Of a joke, some joke.
Escorted by destroyers and a silver airship watching overhead.
Canes crossed the Channel to France with the director of London's National Gallery, who had shaved off his mustache so that nobody recognized him. And just as Dagar's auction begins, the German artillery starts up. Some people panic and hurry out. Canes pounces, buying twenty seven pieces at rock bottom prices for the National Gallery, and he buys a few for himself, including a Sizan, which these days would be regarded as a better buy than anything the National Gallery director chose.
It costs Canes just three hundred and seventy. They then flee back to the English Channel and cross home with a convoy of hospital ships. Exhausted after his non stop adventure, Camees calls in on some friends.
I've got a Sazan in my suitcase. It was too heavy for me to carry, so I've left it in the ditch behind the gate.
What Irving Fisher would have made of it all, I do not know yet. Like Fisher, Caines was also pursuing an investment career. It wasn't just in art. He set up what some historians describe as the first hedge fund to speculate on currency movements. He raised money from rich friends and from his own father, to whom he made the not entirely reassuring comment.
Win or lose. This high stakes gambling amuses me.
Initiallykines made money fast, but then a brief spasm in the currency markets wiped out his fund in nineteen twenty awkward. But he went back to his investors, including his own father, and asked them to trust him with more of their money.
I am not in a position to risk any capital myself, having quite exhausted my resources.
Remember this is John Maynard Kaynes, the man who persuaded a wartime government to speculate in a Parisian art auction. The man, a Canadian diplomat, mistook for an angel.
I anticipate very substantial profits with very good probability if you are prepared to stand the racket for a couple of months.
Of course, they gave him the money he wanted. Caines was back in profit by nineteen twenty two. So, having made a small fortune, lost it and made it again. Caines turned to the vast investments of his own college, King's Cambridge. Caines persuaded his fellow academics to let him adopt a radical money making strategy. He would forecast booms and recessions and move in and out of different economic sectors. A call such an approach makes sense only if you
actually can forecast recessions. But Kines was the leading economist in the country and a man who remember would get friendly phone calls from the Bank of England. If anyone could see into the future of the British economy, it was John Maynard Keynes. By late nineteen twenty nine, both Irving Fisher and John Maynard Keynes were rich, famous, respected,
and standing on the brink of a financial precipice. The cataclysmic Wall Street Crash followed by the Great Depression, the worst peacetime economic calamity to befall the Western world, and the two greatest economists of the age, Fisher and Canes, both of them failed to see it coming. Experts don't have a stellar reputation for forecasting. In nineteen eighty seven, a young Canadian born psychologist named Philip Tetlock became curious
about the entire prognostication racket. Tetlock had been interviewing Cold War experts, and he soon found himself frustrated by their wildly different predictions, their refusal to change their minds when they were wrong and the endless excuses for their forecasting failures. Tetlock's response was patient, painstaking, and quietly brilliant. He began to collect forecasts from almost three hundred experts, eventually accumulating
twenty seven thousand, five hundred predictions. He focused on politics and geopolitics, throwing in a few questions from areas such as economics. Tetlock sought clearly defined questions, enabling him, with the benefit of hindsight, to pronounce each forecast right or wrong. Then Tetlock simply waited while the results rolled in for eighteen years. Tetlock published his conclusions in two thousand and five in a subtle and scholarly book, Expert Political Judgment.
He found that his experts were terrible forecasters, both in the simple sense that what they predicted often didn't happen, and in the deeper sense that the experts had little idea of when they should be confident and when they should admit that they didn't have a clue. Expert forecasts were barely more accurate than chimpanzees throwing darts. Most people hearing about Tetlock's research simply conclude that either the world is too complex to forecast, or that experts are too
stupid to forecast it, or both. On April Fool's Day in twenty thirteen, of all days, I received an email from Philip Tetlock inviting me to join what he described as.
A major new research program.
It was funded by the US Intelligence Services. This program continued and expanded Tetlock's long running study in the form of a forecasting tournament.
You would simply log onto a website, give your best judgment about matter as you may be following anyway, and update that judgment if and when you feel it should be. When time passes and forecasts are judged, you could compare your results with those of others.
More than twenty thousand people signed up, some professionals and some amateurs. Tetlock and his colleagues ran experiments on this army of volunteers, giving them different kinds of training or assembling them into teams to see if that helped. I didn't join in. I told myself I was too busy. I suppose I was chickening out too. But the fundamental reason that I didn't participate was because Tetlock's work had already persuaded me that the forecasting task was impossible, but
it wasn't. This vast new tournament identified a select group of people whose forecasts, while by no means perfect, were vastly better than the dark throwing chimp standard. Tetlock, with an uncharacteristic touch of hyperbole, called them super forecasters. So what makes a super forecaster? It was more a matter
of personality. The super forecasters are what psychologists call actively open minded thinkers, people who didn't cling too tightly to a single approach, who were comfortable abandoning an old view in the light of fresh evidence or new arguments, and who embraced disagreements with others as an opportunity to learn the secret of super forecasting. It's a willingness to change
your mind. Philip Tetlock's work on super forecasting has rightly attracted a huge amount of attention, But I think there's a message in that work that's often overlooked. A willingness to change your mind doesn't just help you make better forecasts, it helps you cope with failed predictions too. Let's return to John Maynard Keynes and Irving Fisher. Both of them, remember, had persuaded themselves that their expertise in economics should lead
to investment success. Both of them were wrong. The stock market crash of nineteen twenty nine caught each of them by surprise. Both lost a lot of money. Yet here's a curious fact. Despite his failure, Canes dyed a millionaire and perhaps the most celebrated economist in the world. Fisher made basically the same mistake, yet it ruined both his finances and his reputation. Why the difference in their fortunes. In a way, the answer is ridiculously simple. Caines changed
his mind and changed his investment strategy. Fisher changed neither, But that only raises a deeper question. Why did Caines change while Fisher didn't. Caines had lost one fortune in nineteen twenty and survived the experience by nineteen twenty nine. Before the crash, he was again pondering his shortcomings. His investment strategy, based on the assumption that he could predict the ups and downs of the business cycle, wasn't working out.
He started thinking about how to change his approach. Caines lost more than eighty percent of his net worth in nineteen twenty nine, but even afterwards he was still rich. In short, he had plenty of evidence that had made a mistake. He had experience of making mistakes in the past and bouncing back, and he was still comfortably off. Why not change. By the early nineteen thirties, Caines had
abandoned business cycle forecasting entirely. The greatest economist in the world had decided he just couldn't do it well enough to make money.
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.
Forget what the economy is doing. Just find great companies and invest for the long term. And if that approach sounds familiar, it's most famously associated with Warren Buffett, the world's richest investor, that a man who loves to quote John Maynard Kynes. Kaines is rightly viewed today as a successful investor at King's College. He recovered from the poor performance of the early years. He secured high returns with modest risks, outperforming the stock market as a whole many
times over. It's an impressive reward for being able to change your mind. Irving Fisher was in a very different situation. Irving Fisher's business page had graced newspapers across the country. When things turned sour, Fisher was a scapegoat in front of the entire United States. The New York Times reported that the bubble had been blamed on.
US Treasury Secretary Mellon, former President Coolidge, and Professor Irving Fisher of Yale.
And Professor Irving Fisher of Yale was in deep financial trouble. The fact that his investments were made using leverage meant that both gains and losses were magnified. What had seemed like brilliance before the crash was catastrophic afterwards. Fisher was staring in the face of bankrupt see the loss of his house, his businesses, everything. For example, one of Fisher's
major investments was in the stationery company Remington Rand. It was fifty eight dollars a share before the crash, dropping to twenty eight dollars within a few months. At that point, Fisher borrowed more money to invest, but the share price kept falling all the way to one dollar. You could imagine his desperation, But surely, being in such a tight spot would have made Fisher more likely to adapt his strategy. Not necessarily.
I've received another message. Everyone get your overcoats and stand by. Okay, okay, guys, okay, everyone sit quietly in the living room. We shall act as if this were just an ordinary gathering of friends.
Remember Dorothy Martin and her Ua Foe cult. They've persuaded themselves that the world is about to be flooded and that they will be saved at midnight by aliens delivering them safely to planet Clarion. And remember too, that the psychologist Leon Festinger has infiltrated the cult. His researchers were there that night to observe what happened. Festinger had a striking prediction that when the aliens didn't appear, many cultists wouldn't be discouraged by the clear failure of missus Martin's
prophecy or feel angry and betrayed. Instead, they would redouble their efforts to believe.
Another reporter, no doubt. Just hang up. Our preparations cannot be interrupted. We'll call them later if we have anything for them.
As the clock has midnight.
That's wrong with that.
Take a couple of minutes.
That clock is love. Look at the other clock. I said it myself this afternoon, and it's not midnight yet.
One minute to midnight, and not a.
Plan has gonistry.
At midnight, the aliens did not appear. Nobody said a word. One of the more casual cult members, who had expressed skepticism before, picked up his coat and hat and walked out, no comment.
We have nothing to tell you.
People tried to make sense of what was happening, or rather not happening. The theories grew ever wilder. People were confused, exhausted. Leon Festinger's observers tried to ask why the saucer hadn't come. The group didn't want to talk about it, and then at four o'clock in the morning, Dorothy Martin put her face in her hands and began to weep. One of Festinger's researchers stepped outside for some air and discussed the situation with a leading cult member.
I've had a long way to go. I've given up just about everything. I've cut every tie, I burned every bridge. I've turned my back on the world. I can't afford to doubt. I have to believe.
They went back inside. But at four forty five am, Dorothy Martin, with hand shaking, picked up a pencil and began to write. It was, she said, a new message. Because of the faith shown by that small group of people, the earth had been spared destruction. A higher power would save not only the small cult but the entire human race. At this the cultists acquired new fervor, going out to
greet the dawn and tell people the good news. They suddenly became evangelists, issuing stufatements to the press rather than batting them away.
Dorothy, is this the first time you've called the newspaper yourself?
Oh? Yes, this is the first time I've ever called them. I've never had anything to tell them before, but now I feel it's urgent.
We should call the Associated Press and the Oneida Press. This thing is pretty important. It's a very big thing, bigger than just one newspaper.
I don't think the creator would want this to be an exclusive story, you know, definitely not.
Oh no, right, correct, It's got to be for everybody.
It's for everybody who wret.
Yes, Festinger had been right. His view that the cultists would redouble their efforts to believe in the face of failure was based on a theory he called cognitive dissonance. Cognitive dissonance predicts that people will start to squirm when they hold contradictory thoughts, such as it's worth quitting my job in order to be collected by aliens, and the
aliens did not show up. People often deny the obvious in order to reduce the discomfort, and the more suffering people have put themselves through on behalf of a belief, the more likely they are to cling onto it. Otherwise, all that suffering would seem ridiculous, would it not. Festinger's theory applies perfectly to poor Irving Fisher in the nineteen thirties. He believed himself to be a man of logic and reason, and yet he was deeply in debt, the most famous
financial basket case in the country. In fact, if people today know just one thing about Irving Fisher, it's this. Two weeks before the Wall Street crash began, he was quoted by The New York Times.
Starks have reached what looks like a permanently high plateau.
How do you away from that? Fisher went deeper and deeper in debt to the taxman and to his brokers towards the end of his life. He was a marginalized figure, a widower, an easy target for scam artists and their get rich quick schemes because he was always on the lookout for a way to revive his fortune. He never did. Although Caines had much in common with Fisher, he was a different kind of character. Recall Kine's comment to his father, this.
High stakes gambling amuses me.
The Monte Carlo gambler knew all along that while investing was a fascinating game, it was a game, nonetheless, and one shouldn't take an unlucky throw of the dice too much to heart. When his investments flopped, he tried something else. Fisher and Canes died within a few months of each other, not long after the end of the Second World War. Fisher had become irrelevant. Caines was the most influential economist on the planet, fresh from shaping the World Bank, the IMF,
and the entire global financial system. Looking back, Cain's reflected.
My only regret is that I have not drunk more champagne in my life.
But he's remembered far more for words that he probably never said. Nevertheless, he lived by them. When my information changes I alter my conclusions. What do you do, sir? If only he'd taught that lesson to Irving Fisher. You've been listening to Cautionary Tales If you'd like to find out more about the ideas in this episode, including links to our sources, The show notes are on my website, Tim Harford dot com. Cautionary Tales is written and presented
by me Tim Harford. Our producers are Ryan Dilly and Marilyn Rust. The sound designer and mixer was Pascal Wise, who also composed the amazing music. Starring in this season are Alan Cumming, Archie Panjabi, Toby Stephens and Russell Tovey, alongside Enzochilente, Ed Gochen, Melody Gutteridge, Massaamnroe and rufus Wright. And introducing Malcolm Gladwell. Thanks to the team at Pushkin Industries, Julia Barton, Heather Faine, Mea LaBelle, Carl Migliori, Jacob Weisberg
and of course the mighty Malcolm Gladwell. And thanks to my colleagues at the Financial Times