Bermuda Triangle

1.

2.

3.

Leonard Nimoy’s “In Search Of…”
Featured Triangle in Season 1 1976

4.

Supernatural Explanations
—Leftover technology from the lost continent of
Atlantis; Bimini Road near Bimini in Bahamas.
—UFOs & Aliens (Steven Spielberg) ends Close
Encounters with the revelation that Flight 19 was
abducted by the mothership.

5.

6.

7.

8.

9.

Story begins in 1952 Fate Magazine
“Sea Mystery at Our Back Door”

10.

Charles Berlitz & Richard Winer
1974 Books Fueled the Flames

11.

12.

Flight 19 U.S. Navy TBM Avengers
December 5, 1945, 5
planes, 14 men
Leader said: “We
are entering white
water, nothing
seems right. We
don’t know where
we are, the water is
green, no white.”

13.

The Unexplained ≠ Inexplicable
Mysterious ≠ Supernatural

14.

1. Depart Ft. Laud.
2. Drop bombs at Hen
and Chickens shoals.
3. Proceed on new
heading 346° for
73 nautical miles.
4. Fly on third heading
241° for 120 naut
miles 5. Return to Ft.
Laud. 6. Exact pos.
unknown 7. Radio
triangulation
establishes flight's
approx. position.
8. PBM-5 takes off.
9. PBM-5 explodes
10. The Florida Keys,
where Taylor thought

15.

500-page Navy board of investigation report:
—Taylor had mistakenly believed that the small
islands he passed over were the Florida Keys, so
his flight was over the Gulf of Mexico and
heading northeast would take them to Florida.
—It was determined that Taylor had passed
over the Bahamas as scheduled, and he did in
fact lead his flight to the northeast over the
Atlantic.
—Some subordinate officers did likely know
their approximate position as indicated by radio
transmissions stating that flying west would
result in reaching the mainland.

16.

500-page Navy board of investigation report:
—Taylor, although an excellent combat pilot and
officer with the Navy, had a tendency to "fly by the
seat of his pants", getting lost several times in the
process. Twice during such times he had to ditch
his plane in the Pacific and be rescued.
—It wasn't Taylor's fault because the compasses
stopped working.
—This report was subsequently amended "cause
unknown" by the Navy after Taylor's mother
contended that the Navy was unfairly blaming her
son for the loss of five aircraft and 14 men when the
Navy had neither the bodies nor the airplanes as.

17.

Natural Explanations
—Compass Variations
—Hurricanes
—Gulf Stream anomalies
—Methane Eruptions
—Rogue Waves
—Deliberate Acts of Destruction
—Human Error

18.

Larry Kusche’s 1976
Bermuda Triangle Mystery: Solved
Revealed inaccuracies and
inconsistencies between
Berlitz's accounts and
statements from
eyewitnesses, participants,
and others involved in the
initial incidents. Noted
cases where pertinent
information unreported

19.

Kusche’s Explanation
—The number of ships and aircraft reported
missing in the area was not significantly
greater, proportionally speaking, than in any
other part of the ocean.
—In an area frequented by tropical storms,
the number of disappearances that did occur
were neither disproportionate, unlikely, nor
mysterious; furthermore, Berlitz and other
writers would often fail to mention such
storms.

20.

Kusche’s Explanation
—The numbers themselves were exaggerated
by sloppy research. A boat's disappearance,
for example, would be reported, but its
eventual (if belated) return to port may not
have been.
—Some disappearances had, in fact, never
happened. One plane crash was said to have
taken place in 1937 off Daytona Beach FL, in
front of hundreds of witnesses; a check of the
local papers revealed nothing.

21.

Kusche & the Burden of Proof
"Say I claim that a parrot has been
kidnapped to teach aliens human language
and I challenge you to prove that is not true.
You can even use Einstein's Theory of
Relativity if you like. There is simply no way
to prove such a claim untrue. The burden of
proof should be on the people who make these
statements, to show where they got their
information from, to see if their conclusions
and interpretations are valid, and if they have
left anything out."

22.

Baseline Rate Explanation
The Bermuda Triangle is one of the most
heavily traveled shipping lanes in the world:
—Ships cross it daily for ports in the
Americas, Europe, and the Caribbean Islands
—Cruise ships, pleasure craft regularly go
back and forth between Florida and the
islands.
—Also a heavily flown route for commercial
and private aircraft heading towards Florida,
the Caribbean, and South America from
points north.

23.

Lloyd’s of London, who keeps
detailed records of all disasters,
noted in a UK Channel 4 TV special
that there was nothing unusual
about the “triangular” area beyond
chance expectation based on the
baseline rate for amount of traffic in
a given area.

24.

U.S. Coast Guard Investigation
Concluded that the number of supposed
disappearances is relatively insignificant
considering the number of ships and aircraft
that pass through the “triangle.” Noted the
1972 explosion and sinking of the tanker SS
V.A. Fogg in the Gulf of Mexico, Coast Guard
photographed the wreck and recovered
several bodies, in contrast with claim that all
the bodies had vanished, with the exception of
the captain, who was found sitting in his
cabin at his desk, clutching a coffee cup.

25.

The Devil’s Triangle varies by author
No “operational definition” of area

26.

Illusion of Small Numbers
A small number of data points ≠ a trend

27.

28.

Illusion of Large Numbers
Black Swan effects in complex systems
Million to one odds happen 300 x/day

29. Humans trying to emulate random sequences will almost never place more than four heads (or tails) in a row.

30. In a true random generation, the probability of at least one string of 5 or more identical outcomes is 0.999 and for a sequence

of 6 it is 0.96!

31. It is easy to spot which is human generated: it is the one that looks least random!

32. The Birthday Probability Game

The odds of
getting 2
people with
the same
birthday is
better than
50% with
only 23
people.

33.

“Regression to the Mean”
1. Height (2 tall parents: for every 4 children, 3
will be shorter for every one taller)
2. I.Q. (2 smart parents: for every 4 children, 3
will be dumber for every one smarter)
3. Hollywood films (producers and directors get
fired after one bad film, even though their
films under production go on to success)
4. Sports Illustrated Cover Curse (to get on the
cover an athlete has to have a statistically
extraordinary game or season, which is
unlikely to happen again)

34.

The Monty Hall Problem
Let’s Make a Deal!
3 Doors: 1 car, 2 goats
Monty knows what’s behind all 3 doors
Monty will not reveal what’s behind your door
Monty can only show you a goat
You choose Door #1
Monty shows you what’s behind door #2: Goat
Door #1: ?
Door #2: Goat
Door #3: ?
Do you want to keep your choice or switch?

35.

The Monty Hall Problem
At the start: 1/3rd chance of picking the car
and a 2/3rds chance of picking a goat.
Switching doors is bad only if you 1st
chose the car, which happens only 1/3rd
of the time.
Switching doors is good if you 1st chose a
goat, which happens 2/3rds of the time.
Thus, the probability of winning by
switching is 2/3rds, or double the odds of
not switching.

36.

10 Doors: 1 car, 9 goats
Monty knows what’s behind all 10 doors
You choose Door #1
Monty reveals door #s 2-9: Goats
Door #1: ?
Door #2: Goat Door #3: Goat
Door #5: Goat Door #6: Goat
Door #8: Goat Door #9: Goat
Door #10: ?
Door #4: Goat
Door #7: Goat
Do you want to keep your choice or switch?

37.

Folk Innumeracy & Death Dreams
5 dreams/day = 1,825 dreams/year
1/10 remembered dreams = 182.5/year
295 million Americans = 53.8 billion remembered
dreams/year
Each of us knows about 150 people fairly well
Network grid of 44.3 billion personal relationships
Annual U.S. death rate = .008 = 2.6 million/year
Inevitable that some of those 53.8 billion
remembered dreams will be about some of
these 2.6 million deaths among the 295 million
Americans and their 44.3 billion relationships.
It would be a miracle, in fact, if some death

38.

The “hot hand”
Illusion

39.

The greatest money manager of our time
What do ant colonies, novels and river systems have to do
with making money? Ask Bill Miller, the man who's topped
the market 15 years running.
Fortune managing editor Andy Serwer reports.
November 15 2006: 4:07 PM EST
(Fortune Magazine) -- Have you heard the story about the money
managers and the three bears? It was a gorgeous afternoon last June on a
ranch outside Cody, Wyo. Legendary investor Bill Miller was riding
horseback with Chris Davis of Davis Funds and Michael Larson, who runs
Cascade, Bill Gates' investment company.
The three had been out about an hour when dead ahead of them, no more
than 100 yards off, appeared three grizzly bears. Larson gently pulled up
on his reins and quietly began to back his horse away. But Miller had other
ideas. "Let's see how close we can get," he said, and edged ahead. Larson
stayed back. "I don't know what Bill was thinking," Larson said later. "I
guess he figures he's on a horse and can ride faster than Chris Davis."

40.

“Odds of beating S&P for 13 years
straight are 1 in 149,012”
“Odds of beating S&P the 14th year
are 1 in 372,529”
“Greatest fund feat in past 40 years”

41.

The Scientific View:
Probability of
Assume random 1 in
2 chance
of beating S&P per
fund manager,
each year…
Bill Miller
beating the S&P 15 years in a row
starting in 1991 = 1 in 32,768…

42.

Thousands of Managers:
…
…
…
…
…
.
.
.

43.

Assume random 1 in
2 chance
of beating S&P per
fund manager,
each year…
Probability of Someone among all
the managers beating the S&P 15 or
more years in a row starting any year
in the last 40 years = ???... 3/4 or .75

44.

Headline should NOT be:
The greatest money manager of our time
But rather…
Expected 15-year run finally occurs
Bill Miller lucky beneficiary!!

45.

Hindsight Bias
Monday Morning
Quarterbacking
—9/11 conspiracy
theories
—Stock market
causal explanations
—Authorized
autobiography

46.

Confirmation Bias
The tendency to seek & find
confirming evidence for
one’s beliefs, and to ignore
disconfirming evidence

47.

48.

49.

Reading Michael Drosnin’s
response to Michael
Shermer’s column on the
Bible “code” and its ability to
accurately predict the future,
I could not help but laugh. I
have been a writer and
illustrator of comic books for
the past 30 years, and in that
time I have “predicted” the
future so many times in my
work my colleagues have
actually taken to referring to
it as “the Byrne Curse”.

50.

It began in the late 1970s. While working on a
Spider-Man series titled “Marvel Team-Up” I
did a story about a blackout in New York. There
was a blackout the month the issue went on sale
(six months after I drew it.) While working on
“Uncanny X-Men” I hit Japan with a major
earthquake, and again the real thing happened
the month the issue hit the stands.

51.

Now, those things are fairly easy
to “predict,” but consider
these: When working on the
relaunch of Superman, for DC
Comics, I had the Man of
Steel fly to the rescue when
disaster beset the NASA space
shuttle. The Challenger
tragedy happened almost
immediately thereafter, with
time, fortunately, for the issue
in question to be redrawn,
substituting a “space plane”
for the shuttle.

52.

Most recent, and
chilling, came
when I was writing
and drawing
“Wonder Woman”,
and did a story in
which the title
character was
killed, as a prelude
to her becoming a
goddess.

53.

The cover for that issue was
done as a newspaper
front page, with the
headline “Princess Diana
Dies”. (Diana is Wonder
Woman’s real name).
That issue went on sale on
a Thursday. The
following Saturday. . . I
don't have to tell you, do
I?

54.

My ability as a
prognisticator, like
Drosnin's, would seem
assured—provided, of
course, we reference
only the above, and skip
over the hundreds of
other comic books I
have produced which
featured all manner of
catastrophes, large and
small, which did not
come to pass.
—John Byrne

55.

The Wisdom of the Crowd
Averaging Errors Over Large Numbers

56.

Change Blindness
We look for meaning and miss details

57.

Change Blindness
We look for meaning and miss details

58.

Cognitive
Dissonance
“What we obtain
too cheap we
esteem too lightly”
—Thomas Paine
Discovered by Leon
Festinger in 1954 in
his investigation of
a UFO cult.

59.

PROPHESY FROM PLANET CLARION
CALL TO CITY: FLEE THAT FLOOD.
IT'LL SWAMP US ON DEC 21 [1954]
OUTER SPACE TELLS SUBURBANITE

60.

Festinger and had infiltrated the Seekers, a small
Chicago-area cult whose members thought they were
communicating with aliens—including "Sananda,"
who they believed was the astral incarnation of Jesus
Christ. The group was led by a Dianetics devotee who
transcribed the interstellar messages through
automatic writing. Through her, the aliens had given
the precise date of an Earth-rending cataclysm:
December 21, 1954. Some of her followers quit their
jobs and sold their property, expecting to be rescued
by a flying saucer when the continent split asunder and
a new sea swallowed much of the United States. The
disciples even went so far as to remove brassieres and
rip zippers out of their trousers—the metal, they
believed, would pose a danger on the spacecraft.

61.

December 21, 1954
Marion Keech’s
prediction for the
world to end when
aliens arrive
Cognitive dissonance,
or the uncomfortable
tension that comes
from holding two
conflicting thoughts
at the same time.

62.

Leon Festinger: “Suppose an individual
believes something with his whole heart;
suppose further that he has a commitment to
this belief, that he has taken irrevocable actions
because of it; finally, suppose that he is
presented with evidence, unequivocal and
undeniable evidence, that his belief is wrong:
what will happen? The individual will
frequently emerge, not only unshaken, but even
more convinced of the truth of his beliefs than
ever before. Indeed, he may even show a new
fervor about convincing and converting other
people to his view.”

63.

What to do when Prophecy Fails:
1.The date was miscalculated
2.The date was a loose prediction, not a
specific prophecy
3.The date was a warning, not a
prophecy
4.God changed his mind
5.The prediction was just a test of the
members’ faith
6.The prophecy was fulfilled physically,
but not as expected
7.The prophecy was fulfilled…spiritually

64.

Self Justification Bias
The self-justification bias is the tendency to
rationalize decisions after the fact to convince
ourselves that what we did was the best thing
we could have done.
Or as I like to say, smart people believe weird
things because they are better at rationalizing
their beliefs that they hold for non-smart
reasons.

65.

“I acknowledge that mistakes
were made here. I accept that
responsibility.”
—U.S. Attorney General
Alberto R. Gonzales
“Mistakes were quite
possibly made by the
administrations in which I
served.” —Kissinger on
Vietnam, Cambodia, and S.A.
“If, in hindsight, we also
discover that mistakes may
have been made…I am deeply
sorry.” —NY Catholic Cardinal
Edward Egan

66.

Confirmation Bias
The tendency to seek & find
confirming evidence for
one’s beliefs, and to ignore
disconfirming evidence

67.

Social psychologist Geoffrey Cohen
quantified this effect in a study in which he
discovered that Democrats are more
accepting of a welfare program if they believe
it was proposed by a fellow Democrat, even
when, in fact, the proposal comes from a
Republican and is quite restrictive.
Predictably, Cohen found the same effect for
Republicans, who were far more likely to
approve of a generous welfare program if
they thought it was proposed by a fellow
Republican.

68.

“You get in the system and you become very
cynical. People are lying to you all over the
place. Then you develop a theory of the
crime, and it leads to what we call tunnel
vision. Years later overwhelming evidence
comes out that the guy was innocent. And
you’re sitting there thinking, ‘Wait a minute.
Either this overwhelming evidence is wrong
or I was wrong—and I couldn’t have been
wrong because I’m a good guy.’ That’s a
psychological phenomenon I have seen over
and over.” —NW U. Law Prof Rob Warden

69.

Self-Serving Bias
In one College Entrance Examination Board
survey of 829,000 high school seniors, 60 percent
put themselves in the top 10 percent in “ability to
get along with others,” while 0 percent (not one!)
rated themselves below average.
1997 U.S. News and World Report study on who
Americans believe are most likely to go to heaven:
52 percent said Bill Clinton, 60 percent thought
Princess Diana, 65 percent chose Michael Jordan,
79 percent selected Mother Teresa, and, at 87
percent, the person most likely to go to heaven was
the survey taker!

70.

Attribution Bias
The tendency to attribute different causes for our
own beliefs and actions than that of others.

71.

Situational attribution bias: We identify the
cause of someone’s belief or behavior in the
environment
“Her success is a result of luck, circumstance,
and having connections”.
Dispositional attribution bias: We identify the
cause of our own belief or behavior in our
disposition
“I am successful because I’m hard working,
intelligent, and creative” .

72.

Intellectual attribution bias: We consider our
own beliefs as being rationally motivated.
Emotional attribution bias: We see the beliefs
of others as being emotionally driven.
“I am for gun control because statistics
show that crime decreases when gun
ownership decreases”
“He is for gun control because he is a
bleeding-heart liberal who needs to identify
with the victim” or “he is against gun control
because he’s a heartless conservative who
needs to feel emboldened by a weapon”

73.

Lisa Farwell and Bernard Weiner discovered
in their study on the attribution bias in
political attitudes, with conservatives
justifying their beliefs with rational
arguments but accusing political liberals of
being “bleeding hearts”; liberals, in turn,
offered intellectual justifications for their
positions, while accusing conservatives of
being “heartless.”
Farwell, Lisa and Bernard Weiner. 2000. “Bleeding Hearts and the
Heartless: Popular Perceptions of Liberal and Conservative
Ideologies.” Personality and Social Psychology Bulletin, 26, 845-52.

74.

Why People Believe in God
Parental Beliefs
10
6
5
BELIEF IN GOD
RELIGIOSITY
8
6
2
4
3
2
1
4
0
0
0
2
4
6
8
RAISED RELIGIOUS
FIGURE 4-6 B
BEING RAISED RELIGIOUS AND RELIGIOSITY
10
-1
0
2
4
6
8
RAISED RELIGIOUS
FIGURE 4-6 A
BEING RAISED RELIGIOUS AND BELIEF IN GOD
10

75.

Why People Believe in God
Education
10
RELIGIOSITY
8
6
4
2
0
0
1
2
3
4
EDUCATION
FIGURE 4-6 C
EDUCATION AND RELIGIOSITY
5
6

76.

Why People Believe in God
Age
6
10
5
8
RELIGIOSITY
BELIEF IN GOD
4
3
2
6
4
1
2
0
0
-1
0
20
40
60
AGE
80
100
0
20
40
60
AGE
FIGURE 4-6 D
AGE AND BELIEF IN GOD
FIGURE 4-6 E
AGE AND RELIGIOSITY
80
100

77.

Why People Believe in God
Conflict/Harmony with Parents
10
Belief in God
RELIGIOSITY
6
8
6
Raised religiously
4
2
Not raised religiously
0
10
5
4
3
2
1
-8
Low conflict
Raised religiously
-6
-4
-2
PARENTAL CONFLICT
FIGURE 4-6 G
PARENTAL CONFLICT AND RELIGIOSITY
0
Not raised religiously
High
Low
High conflict
Parental Conflict

78.

Attribution of Belief for Self and Others
0
Fear
of death
Reward good
punish evil
0
God has a
plan for us
God needed
for morality
Prayers
answered
Raised
to believe
Faith,
need to
believe
Bible
says so
Comfort,
purpose
to life
Experience
of God
Good design
of universe
Percentage
Why People Believe in God
Why People Think Others Believe in God
30
Why People Say They Believe in God
Why People Say Others Believe in God
25
20
15
10
5
0

79.

Availability Fallacy
The tendency to assign probabilities of
potential outcomes based on examples
that are immediately available to us,
especially those which are vivid, unusual,
or emotionally charged, which are then
generalized into conclusions upon which
choices are based

80.

Availability Fallacy
In the run up to the 1976 United States
Presidential election an experiment was
conducted in which one group of subjects
were asked to “imagine Gerald Ford
winning the upcoming election,” while
another group of subjects were asked to
“imagine Jimmy Carter winning the
upcoming election.”

81.

When subsequently asked to estimate the
probably of each of the candidates winning,
those who were asked to imagine Ford
winning estimated his chances as much
higher than those who were asked to imagine
Carter winning, who, in turn, gave their guy
a much higher probability of victory. This
availability heuristic shows how we assign
probabilities of potential outcomes based on
examples that are immediately available,
which are generalized into conclusions upon
which choices are based.

82.

Conjunction Fallacy
Imagine that you are looking to hire someone for
your company and you are considering for
employment the following candidate:
Linda is 31 years old, single, outspoken, and very
bright. She majored in philosophy. As a student, she
was deeply concerned with issues of discrimination
and social justice, and also participated in antinuclear demonstrations.
Which is more likely? 1. Linda is a bank teller.
2. Linda is a bank teller and is active in the feminist
movement.

83.

Bias Blind Spot
The tendency to recognize the power of cognitive
biases in other people but to be blind to their
influence upon our own beliefs.
Princeton University psychologist Emily
Pronin and her colleagues, subjects were randomly
assigned high or low scores on a “social
intelligence” test. Those given the high marks rated
the test fairer and more useful than those receiving
low marks. When asked if it was possible that they
had been influenced by the score on the test,
subjects responded that other participants had
been far more biased than they were.

84.

Bias Blind Spot
Even when subjects admit to having such a bias as
being a member of a partisan group, says Pronin,
this “is apt to be accompanied by the insistence
that, in their own case, this status…has been
uniquely enlightening—indeed, that it is the lack of
such enlightenment that is making those on the
other side of the issue take their misguided
position.”

85.

Sunk Cost Fallacy
—The tendency to believe in
something because of the cost sunk
into that belief.
—Vietnam, Iraq war, Stocks, Business
—Failing businesses & relationships

86.

Sunk Cost Fallacy
Leo Tolstoy: “I know that most men,
including those at ease with problems of the
greatest complexity, can seldom accept even
the simplest and most obvious truth if it be
such as would oblige them to admit the falsity
of conclusions which they have delighted in
explaining to colleagues, which they have
proudly taught to others, and which they
have woven, thread by thread, into the fabric
of their lives.”

87.

Endowment Effect
Owners of an item value it roughly
twice as much as potential buyers of the
same item.

88.

Endowment Effect Experiment
Subjects given a coffee mug worth $6
Asked the lowest price they would
take: $5.25.
Other subjects asked how much they
would pay for the same mug: $2.75

89.

Loss Aversion
Losses hurt twice as much as gains feel
good

90.

Imagine that I gave you $100 and a choice
between (A) a guaranteed gain of $50 and (B) a
coin flip in which heads gets you another $100
and tails gets you nothing. Do you want A or B?
Now imagine that I gave you $200 and a
choice between (A) a guaranteed loss of $50 and
(B) a coin flip in which heads guarantees you
lose $100 and tails you lose nothing. Do you
want A or B?
The final outcome for both options A and B
in both scenarios is the same so rationally it does
not matter which option you choose, so people
should choose both equally.

91.

Most people choose A in the first scenario (a
sure gain of $50) and B in the second scenario
(avoiding the sure loss of $50).
Even though there is no difference between
having $100 and a sure or potential gain of $50,
and having $200 and a sure or potential loss of
$50, emotionally there is a difference. That
emotion is called loss aversion, or risk aversion.
On average most people will reject the
prospect of a 50/50 probability of gaining or
losing money unless the amount to be gained is
at least double the amount to be lost, because
losses hurt twice as much as gains feel good.

92.

Loss Aversion in the Brain
Neuroeconomists using fMRI brain scans found
areas in the brain that light up (or down) during
profits and losses that are rich in dopamine
receptors, a neurotransmitter associated with
motivation and reward. As the potential for losses
increased they found decreasing activity in these
reward-sensitive areas.

93.

Loss Aversion in Monkeys
Capuchin monkeys were given 12 tokens that they
were allowed to trade with the experimenters for
either apple slices or grapes.
In one trial, the monkeys were given the
opportunity to trade tokens with one experimenter
for grapes and with another experimenter for apple
slices. One monkey, for example, traded 7 tokens
for grapes and 5 tokens for apple slices. A baseline
like this was established for each monkey so that
the scientists knew each monkey’s preferences.

94.

Trial #2: monkeys were given additional tokens
to trade for food, only to discover that the price
of one of the food items had doubled.
According to the law of supply and
demand, the monkeys should now purchase
more of the relatively cheap food and less of the
relatively expensive food, and that is precisely
what they did.
In another trial in which the experimental
conditions were manipulated in such a way that
the monkeys had a choice of a 50% chance of a
gain or a 50% chance of a loss, the monkeys
were twice as averse to the loss as they were
motivated by the gain.

95.

Question: Why Didn’t Risk
Aversion Prevent the Financial
Meltdown?
Answer: Risk Signals were
removed in both the public &
private spheres.

96.

Risk Aversion & the Financial Meltdown
Federal Reserve Intervention into the price of $$$
Interest Rate manipulation
Price & Wage Controls
Bailouts (signals that losses will be recovered by
someone else, thereby removing loss aversion)
Moral Hazards (government insulates investors and
corporations from risk, thereby removing risk
aversion): GM, Crystler, AIG
Example: Community Reinvestment Act, 1977, to
prevent “redlining” against minorities, led to
government intervention into the housing market

97.

How Financial Institutions
Lost Risk Aversion
(“Toxic”) Mortgage Backed Securities
Credit Default Swaps
Derivatives & Credit Derivatives
Lending agencies passing paper down the line:
A mortgage is given by a loan officer.
A thousand mortgages are bundled and sold as a
mortgage-backed security.
A thousand mortgage-back securities packaged and
sold as a collateral debt obligation (CDO).
A thousand CDOs packaged, sold, and secured
with credit default swaps.

98.

September 30, 1999 New York Times:
“Fannie Mae Eases Credit To Aid
Mortgage Lending”
Fannie Mae began a program that
spring to encourage banks “to extend
home mortgages to individuals whose
credit is generally not good enough to
qualify for conventional loans.”
Why?

99.

September 30, 1999 New York Times:
“Fannie Mae, the nation’s biggest
underwriter of home mortgages, has been
under increasing pressure from the Clinton
Administration to expand mortgage loans
among low and moderate income people
and felt pressure from stock holders to
maintain its phenomenal growth in profits.”
July, 1999, HUD forced Fannie &
Freddie to increase portfolio of loans to
lower and moderate-income borrowers
from 44% to 50% by 2001.

100.

There’s nothing wrong with taking higher risks,
whether under political or profit pressure, as long
as you adjust for it by charging more. The higher
price acts as a risk signal to keep the market in
balance.
Under the new program, higher-risk people
with lower incomes, negligible savings, and poorer
credit ratings could now qualify for a mortgage that
was only one point above a conventional 30-year
fixed rate mortgage (and that added point was
dropped after 2 years of steady payments).
In other words, the normal risk signal sent to
high risk consumers—you can have the loan but
it’s going to cost you a lot more—was removed.
Lower the risk signal and you lower risk aversion.

101.

Entrepreneurial Error
Investors buy the wrong stock
Businessmen produce the wrong products
Consumers over-spend, especially during
holidays.
Drivers have accidents.
Ships sink.
Builders don’t meet deadlines.
Economists make false predictions.
Entrepreneurs cut corners, deceive
customers, & embezzle funds.
Economic failure, stupidity, &
incompetence are too common.

102.

Entrepreneurial Error
“To make mistakes in pursuing
one’s ends is a widespread human
weakness.” —Ludwig von Mises
“As a rule only some businessmen
suffer losses at any one time; the
bulk either break even or earn
profits.”
—Murray Rothbard

103.

Entrepreneurial Error
Leads to Business Cycles

104.

Entrepreneurial Error: Boom & Bust

105.

Entrepreneurial Errors Level Out

106.

Entrepreneurial Errors Level Out

107.

Bureaucratic Error

108.

Bureaucratic Error

109.

Solutions to the Financial Crisis
1. Allow the market to determine risk signals
2. Markets, not the Fed, must determine price of $$
3. Losses must be linked directly to those who
make financial decisions, from lenders to CEOs
4. No more bailouts! No one is “too big to fail”
5. No more: “In profits we’re capitalists, in losses
we’re socialists”
6. Evolution & Economics: “Extinction is the rule,
survival the exception.”
7. Economies must be allowed to flourish from the
bottom up, & cannot be controlled from top down
8. Free Trade w/well defined & enforced rules

110.

Bureaucratic Commandments

111.

How to See the World Anew
1. Think out of the box, change perspectives,
look for the gorilla
2. Look for new patterns, be playful, relaxed,
and see the bigger picture
3. Be curious, ask why, examine the
unexpected
3. Look for disconfirmatory evidence and
alternative explanations
4. Seek peer review, constructive criticism,
and feedback
5. Be willing to change your mind, to say “I

112.

113.

114.

115.

116.

117.

Law of Small Numbers
Law of Large Numbers
Regression to the Mean
Hindsight Bias
Framing Effects
Anchoring Fallacy
Loss Aversion
Sunk Cost Fallacy
Endowment Effect