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Lessons from The Big Short

Dmitriy Ioselevich

Not too long ago, 20 of Prosek’s finest gathered to watch The Big Short, the big-screen adaptation of Michael Lewis’ book about the Great Recession and the select few who generated huge profits while the global economy collapsed around them.

So what did we learn and, perhaps more importantly, has anything really changed?

The how’s and what’s of the collapse of the credit and housing markets have already been covered ad nauseam by journalists, economists and other pundits from all over the world. But what about the why’s?

Why did so many investors continue blindly betting on the housing market when, if they took the time to analyze some of the mortgage-backed securities, it would have been obvious that there was something fishy going on? Why did mortgage companies lower their lending standards, knowing full well that it would lead to increased defaults and foreclosures? Why did research analysts give these same mortgage companies glowing recommendations when their business models depended on housing prices going up forever? And why did the ratings agencies give their stamp of approval on securities that were far from risk-free?

The answer to these questions, I believe, is “irrational exuberance” – a phrase popularized by former Fed chairman Alan Greenspan during a speech given at the height of the Dot-com bubble in the 1990’s. (Nobel Prize-winner and Yale University professor Robert Shiller also published a book titled Irrational Exuberance in 2000, the exact month of the stock market collapse.)

Irrational exuberance is defined by Investopedia as “unsustainable investor enthusiasm that drives asset prices up to levels that aren’t supported by fundamentals.” Evidence of investor enthusiasm, often referred to as groupthink, is available in spades in The Big Short –  bankers gleefully creating increasingly complex derivatives, investors celebrating high returns, mortgage companies entering the public markets at sky-high valuations and, all around, people enjoying the world’s greatest party. That is, until the music finally stopped.

One of the film’s most memorable quotes comes from Jared Vennett, a character played by Ryan Gosling and based on Greg Lippmann, a former trader for Deutsche Bank, who said: “People hate to think about bad things happening so they always underestimate their likelihood.”

Yes, it’d be great if the market just went up for perpetuity. However, it’s a law of the financial markets that what goes up must come down. And with so many people wearing rose-colored glasses, the downslide can sometimes be catastrophic, as it was in 2008. 

The groupthink phenomenon isn’t unique to finance. It happens in every sector—healthcare, energy, technology, government. How else do we explain Donald Trump? 

So if there’s a lesson to The Big Short it’s this—don’t follow the crowd. Just because a plurality of people believe something—or in someone—that doesn’t mean you should follow their lead.

As communications professionals this is an issue we too have to deal with. We constantly have to push boundaries and think creatively on behalf of our clients. What might’ve worked for P.T. Barnum in the 1870’s or Ivy Lee in the early 1900’s almost certainly won’t work now. And as The Big Short showed, it’s those who go against the grain that often earn the biggest reward.

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