March 4, 2009

UPDATED: Bubbles and Sex

Michael Lewis visits Iceland for ten days for Vanity Fair to develop A General Theory of the Icelandic Financial Crash.

The subtext of his article is that Lewis, who wrote a bestselling memoir in 1989 about his few years on Wall Street, is suddenly so much in demand again as a financial journalist that he's getting rapid-fire assignments on topics about which he knows nothing.

The resulting article is a wonderful example of how reporters parachute into some place unknown and create general theories based on trivial travel incidents. When his plane lands, an Icelandic man bumps him while getting his bag out of the overhead bin (ICELANDIC MEN ARE MACHO). The airport passport control has one line for both foreigners and natives (ICELANDERS ARE EGALITARIAN), etc. At times it sounds like something that one of the foreign correspondents in Waugh's Scoop would write after two days in Abyssinia.

After visiting a museum devoted to Iceland's bloody medieval sagas, Lewis eventually arrives at the theory that Iceland went hog wild financially out of excessive machismo. Because everybody knows that Icelandic men are just as bloodthirsty today as in Viking times.

Well, actually Lewis's theory blames excessive machismo and excessive cultivation, since Icelandic men were also too genteel to be fishermen or aluminum smelters, the main jobs Iceland is suited for, so they became investment bankers.

From there, Lewis develops a general theory of bubbles:
Back in 2001, as the Internet boom turned into a bust, M.I.T.’s Quarterly Journal of Economics published an intriguing paper called “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” The authors, Brad Barber and Terrance Odean, gained access to the trading activity in over 35,000 households, and used it to compare the habits of men and women. What they found, in a nutshell, is that men not only trade more often than women but do so from a false faith in their own financial judgment. Single men traded less sensibly than married men, and married men traded less sensibly than single women: the less the female presence, the less rational the approach to trading in the markets. One of the distinctive traits about Iceland’s disaster, and Wall Street’s, is how little women had to do with it. Women worked in the banks, but not in the risktaking jobs. As far as I can tell, during Iceland’s boom, there was just one woman in a senior position inside an Icelandic bank.

Of course, this theory also completely explains the much more important American Housing Bubble, since women play virtually no role in buying or selling homes in the United States. Just think of how many poor American wives were badgered by their husbands until they reluctantly agreed to spring for those granite countertops and extra-large walk-in master bedroom suite closets that their menfolk had always had their hearts set on.

In Lewis's defense, he's admitted elsewhere that he's trying to cash in quick on the fact that he's one of the few brand name journalists who can write readable prose about finance. I certainly don't blame him, and he's been on a hot streak lately (with me linking to several of his articles over the last few months), but diminishing marginal returns appear to be setting in.

UPDATE: A reader writes:
The paper by Barber and Odean is really concerned with trading behavior (specifically, they push the notion that overconfidence drives such counterproductive behavior). Barber and Odean (in my view to their credit) have made a virtual career out of that data set and also show that it is trading in general that seems to drive the poor returns. That is, the more you trade the more your losses (male or female, married or not), and men tend to trade more than women.

In other words, as a lot of guys found out in the spring of 2000, day-trading is an exciting but expensive hobby unless you have inside information or an elaborate arbitrage system. In the long run, transaction costs get you.
The Icelandic blowup was largely the result of holding paper assets that sank in value vs. liabilities that increased in value, not trading per se.

Also, based on the Icelanders I have known, they would hardly compare to say the blustering macho men of Mexican or South American variety. In fact, I would find the macho angle to be completely counterproductive.

Banking is a particularly dumb specialty if you live out in the middle of the ocean, and thus can't conveniently check out borrowers. At least Swiss bankers can take the train to visit the companies they are lending to. Hawaii would be a nice place to live if you were rich, but rich bankers rarely live in Hawaii. Heck, Wall Street turned out to be too far from Southern California to notice what was happening in the mortgage market.

The Icelandic banking follies sound like a higher-brow version of how newly capitalist Albania succumbed to pervasive pyramid scams in 1997.
4) The real story should be that Iceland is the proverbial canary in the coalmine (largely because they are small). They are essentially the first country in the current catastrophe to see its economy undone by excessive debt (and poor risk taking generally). That is, the reason it essentially went bankrupt is fundamentally similar to many Eastern European countries about to go belly up, and eventually the U.S., Japan, etc. In short, they are holding or have issued too much debt that cannot be paid back at the original terms. Essentially, the Austrians are correct.

51 comments:

AC said...

One thing we can all agree on is that skilled immigration policy in the US is a travesty. While we grant de facto amnesty to illegals, productive doctoral students have trouble getting visas. (http://ssmag.wordpress.com/2009/03/04/visa-trouble-keeps-foreign-scientists-out/)

"We should all be worried about this. Science and engineering students and postdocs from abroad are finding it more difficult to get visas, and experiencing longer delays. This is making researchers increasingly unwilling to study or schedule conferences in the US — we can no longer assume we’re the rest of the world’s first choice. As Danielle Guichard-Ashbrook of the Massachusetts Institute of Technology put it: “There are other countries that want these folks. They are the best of the best. They have other options.”"

RKU said...

What's even funnier is that I think Michael Lewis actually played a pretty huge role in *starting* the gigantic Internet Bubble, with his ridiculous book gullibly singing the business praises of Netscape and also that health software company that eventually lost 99.999% of its market value.

At least you can say he knew something about Wall Street, since he worked there for a year or two, but he clearly knew ZERO about software or technology...

Robert said...

Yes, men like Warren Buffet and Peter Lynch have been trading so recklessly that they are practically in the poorhouse! And of course, there aren't any women over their heads in debt just men!

Anonymous said...

Ahh, yes, if only we had been less sexist and involved women, peace and prosperity would reign everywhere and everyone would have an above-average IQ.

On a related topic, I am more than happy for the US to reserve high paying jobs for my daughters.

About USD1M per year would be a good starting salary for them. Let's have more women related to me making high salaries!

Anonymous said...

Did he mention the Israeli and international banker connection??

James said...

Does he mention that there are only 300,000 people in Iceland? Smaller than Bakersfield.

Pete said...

"One of the distinctive traits about Iceland’s disaster,"

You do know what "distinctive" means, right Steve? Criticize the guy, sure, but at least criticize what he actually wrote.

Anonymous said...

Off-Topic I know, but I read once that Icelandic women were incredibly easy. Sex on the first date, sex before a formal date occurred etc.

They better hope HIV stays out of their volcanic paradise.

I thought Lewis's article was fluff, but there were some comic observations (why does a nation of 300,000 need 4 major political parties?)

Anonymous said...

Yet again, the elite get the commentary they have bought-and-paid for. Lets blame men for the bubble, and not the principles and policies that really caused the mess.

Anonymous said...

I thought this article was kind of fun and funny, intentionally so.

Sailer is being envious of Lewis for being a better and more in-demand writer.

Pete said...

That's a damn good article actually, your envy is showing Steve, don't wear it so plainly. And this was a very good point:

"the people have cultivated themselves to the point where they are unsuited for the work available to them. All these exquisitely schooled, sophisticated people, each and every one of whom feels special, are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting."

You could say the same about the US. We live in a society where people refuse to accept their limitations. Everyone is a genius, everyone deserves a good life, just because.

Anonymous said...

I discounted Michael Lewis when he discounted racial differences in intelligence.

William said...

Time for a homemade tax cut/ rebate.

Since few of us will be reporting income from investments anytime over the next few years and others may be about to be laid off...
A bit off topic - maybe not:
We need to start a national campaign to get folks to preemptively adjust their income tax withholding (using form W4) and have Uncle Sam take less out. Getting that money into the economy ASAP will help shorten the recession - folks could use the cash to pay down the Visa Card, pay the light bill etc.

Lloyd G. said...

Now that Iceland has a lesbian prime minister things will turn around.
I like Lewis' rigorous fact-checking "As far as I can tell..."

The Vuster said...

This is a funny, insightful piece, certainly more interesting than anything Steve's written since he became obsessed with Obama.

Anonymous said...

michael lewis has become a shameless entertainer, malcolm gladwell with wall-street cred. this is also the same guy who wrote that the mortgage bubble blew to its greatest excesses with some female executives in the highest echelons of wall street. Zoe cruz, sallie krawchek, etc.

none of the above said...

So, is there a good (well-researched, accurate) account of the Icelandic crisis in English anywhere? I've found nothing, but maybe I'm not looking all that hard.

I have this ugly feeling we should really care a lot about the Iceland story, because it's a demonstration of what might happen to us at some point.

The article you're describing is full of flaws, but there aren't many good alternatives I've been able to find....

silver said...

Michael Lewis is an entertaining writer but his work suffers from his being afflicted with pee-cee makes you stupid syndrome. (And let's pile on: I never really got the point of "Liar's Poker" either. These people make megabucks. Okay...and?)

Comments here appear to be divided between those who can handle the truth (good one Steve!) and those who can't (jealous prick!).

silver said...

This is a funny, insightful piece, certainly more interesting than anything Steve's written since he became obsessed with Obama.

Yeah you're right, he's only the president of the USA, and then only the most radically different president in US history, so not much to see there.

No one else is obsessed with Obama, either, no way. I mean, women are saying things like they want to have his kids and some men think he could well be the most perfect human that ever existed, but nah, that's not obsession.

Anonymous said...

...the less the female presence, the less rational the approach to trading in the markets.

This is why historically all the best stock pickers have been women - Warrena Buffett, Petra Lynch, etc.

By the way, this is PC at its worst - he's putting reality on its head just to rub our noses in our powerlessness to say anything back. When we hear stuff like that we're supposed to say that yes, the Earth IS flat, up is down, down is up, etc.

I love women as much as the next guy, but rational thinking is not their stereotypical strength. Everyone knows this on some level, including most women. They excel at intuitive thinking about people, their emotions and motivations. Rational thinking about numbers on computer screens is a man's job - not because I or anybody else wanted it to be, but because evolution has worked out that way.

dc watcher said...

So he's saying women are not likely to involve themselves in risky undertakings. Isn't that what you think too? Why ridicule him. The housing bubble is different. Houses SEEM non-risk. They are material, property, and traditionally appreciate in value. They were not usually considered a high risk, though foreclosure was always a possibility.

Anonymous said...

"We should all be worried about this. Science and engineering students and postdocs from abroad are finding it more difficult to get visas, and experiencing longer delays."

Boo hoo. Why am I supposed to be worried by this again?

Anonymous said...

why does a nation of 300,000 need 4 major political parties?

It occurs to me that the smaller the country, the more numerous the parties. Why does a country as large as the US have only two real parties?

Anonymous said...

"I have this ugly feeling we should really care a lot about the Iceland story, because it's a demonstration of what might happen to us at some point."

It would be great if we end up more like Iceland, if you get my meaning...

Truth said...

"I discounted Michael Lewis when he discounted racial differences in intelligence."

Oh come on buddy, just because they elected a sham government that caused their economy to collapse through sheer incompetence, doesn't mean the Icelanders are THAT dumb.

Anonymous said...

Women should pee standing up since men have done such a lousy job at it.

BGC said...

none of the above said... So, is there a good (well-researched, accurate) account of the Icelandic crisis in English anywhere? I've found nothing, but maybe I'm not looking all that hard.

I'd like to know this too.

Since I have spent 8 days in Iceland, travelled all round the island, and have read at least 50 books on the topic - I am a major expert on the Icelandic nation (compared with Michael Lewis, anyway).

And from what little I know I would have thought Iceland was the last place on earth to suffer such a suicidal financial bubble; yet it happened.

I'd be really interested to know why, I mean _really_ why.

Anonymous said...

I must say, this comment stream really sucks. Don't you people have anything better to do than criticize a blog author in HIS comment section. I applaud Steve's efforts to highlight PC blindspots in economic thinking.

Thanks for the analysis, Steve. I for one, appreciate it. Keep up on the increasing amount of economic posts. Just about nothing else matters at this point. It is all being swallowed up by the economic collapse.

John of London said...

28 Comments and no-one's brought it down to race. What's happened, guys? So allow me to ask: What do you make of the fact that, of the 4 large islands in the North Atlantic (Great Britain, Ireland, Iceland and Greenland), the only one that hasn't covered itself in execrement through really, really stupid policies wrt banking is the one that's mostly inhabited by Inuits?

Anonymous said...

Didn’t Icelandic banks offer internet accounts to UK residents at high interest rates and then invest the deposits back into UK real estate, both residential and commercial at the same time the Blair/Brown Labour governments created a real estate bubble? Once that bubble burst, the UK account holders sought to take money out of Icelandic banks, causing a run at the same time that the assests backing up those deposits fell. Thus there was a currency crunch in Iceland following the banking crisis, which resulted in the inability of Iceland to purchase the imports it needs, not being a self-sufficient island economy.

Anonymous said...

Michael Lewis may simply be repackaging the debate that was already going on amongst women/feminists in post-crash Iceland, as described in a recent article:

http://www.guardian.co.uk/world/2009/feb/22/iceland-women

As Lloyd G. said, they now have an openly gay female prime minister.

I'm not a feminist, but having just read Rory Stewart's "The Places in Between", an account of his solo walk across Afghanistan in 2002 (taking a route even Alexander the Great shunned, preferring, as Stewart puts it, "the hippy trail"), during which he met only one woman, it makes one see the value of balanced male/female energies in society. The Afghan tribesmen he encounters are distinguished by their love of guns and dangerously erratic behaviour, all bound up with their sense of honour/status.

james said...

They are different in Iceland. Look at that strut. The way they toss their hair about. Now that's confidence.

Anonymous said...

Icelandic women are easy. Ah, every man's dream. Blondes on tap.

I'm a Brit and I thought it was American girls who dropped their drawers two seconds after being introduced.

Sad to say, I was bitterly disappointed when I found out the truth. They only do that if you pay them.

silver said...

So he's saying women are not likely to involve themselves in risky undertakings. Isn't that what you think too? Why ridicule him. The housing bubble is different. Houses SEEM non-risk. They are material, property, and traditionally appreciate in value. They were not usually considered a high risk, though foreclosure was always a possibility.

The point is Lewis ignores the role women did play as home buyers. It doesn't matter that women might think they are engaging in riskless behavior (homes are "safe"), it matters whether they are or are not. And when mortgage brokers lay it on thick and women fall for it, that has an effect.

Chick-lit author and Oxonian (now Hudson) Society co-founder (ie no idiot) Louise Bagshawe once explained in the mid real estate bubble years that her investment strategy preferred residential real estate to the stockmarket because she just couldn't get returns of 25%, 30% per annum in stocks. Investment strategy! Maybe Michael Lewis should interview her.

Peter said...

So suggesting that women are less prone to risk-taking is now "PC" thinking? What? Try telling a feminist that, she'll bite your head off. Steve, aren't people who read your site for the most part people who believe in innate genetic differences between racial groupings AND between genders? I'm frankly very surprised that people find Lewis' suggestion "PC". I completely agree with Lewis that women are less likely to take risks, and less likely on average to speculate. It may also be that their inferior math skills, on average, make finance less attractive to women. I am very surprised Sailer would disagree with Lewis on this, that puts Steve and many commenters here in the same boat as the feminists who attacked Larry Summers, an odd place to be. But the converse of women being more risk averse is that a society dominated by women would be far less innovative, far more hidebound by convention. If women take over Iceland I'm sure there will be fewer speculative bubbles in the future, but there will also be slower average long-term growth.

Finally, the fact that American women went around buying expensive houses and leveraging themselves to the hilt doesn't disprove the Lewis thesis in my mind, simply because most of the women who engaged in this behavior were too uneducated or simply too stupid to realize they were engaging in risky behavior. Everyone on TV and print media was telling them this behavior was fine.

Anonymous said...

The resulting article is a wonderful example of how reporters parachute into some place unknown and create general theories based on trivial travel incidents.

That brings to mind Thomas Friedman.

Anonymous said...

Keep up on the increasing amount of economic posts. Just about nothing else matters at this point. It is all being swallowed up by the economic collapse.

The good news is a lot of cherished Leftist shibboleths that are the indulgence of a prosperous society will get blown away like so many tumbleweeds.

--Senor Doug

Truth said...

"I'd be really interested to know why, I mean _really_ why."

Oh come on BGC, you know the Icelander bankers relaxed lending standards so that the 391 remaining original native islanders could buy homes.

Dutch Boy said...

How do you say "irrational exuberance" in Icelandic?

Danindc said...

most criticism of steve is bs..... as colonel jessup said just say thank you and be on your way

Bill said...

The Icelandic banking follies sound like a higher-brow version of how newly capitalist Albania succumbed to pervasive pyramid scams in 1997.

That's what I was thinking about all this.

Iceland is very small, and the fact that it's a sovereign country has advantages, but obviously makes the place an easy setup.

Here in Seattle there are a couple of Nordic banks that seem to be doing alright, because they've stuck with their traditional standards (e.g. making sure that every new fishing/crabbing business they finance is well-insured and well-planned). Viking Bank, founded by an Irish doctor and a Norwegian fisherman (combine the two genetically and you get an Icelander), appears to be thriving.

Here, they make exactly the point of this post:

"When Viking Bank started out, it served the needs of its immediate community: Ballard. That meant an emphasis on the maritime industry. “This was a great opportunity for us," explains Redmond. “While it's true that the industry has faced a lot of challenges over recent years, it's emerged very strong. If you understand the maritime industry the way we do, then you're able to participate in its growth. But can you image a banker headquartered in Charlotte, North Carolina, trying to figure out the Northwest fishing industry? They just missed the whole thing." Over the years, Viking Bank has supported the members of the local fishing industry through business advocacy as well as financial services. Redmond was the only banker to publicly support the Crab Rationalization Plan, which created a quota system promoting fishermen safety, long term fisheries management and economic stability."

Anonymous said...

The interesting thing is not what happened in Iceland, but what they are going to do about it. Obviously Icelanders are not going to buckle down to pay off the enormous amount of personal and public debt incurred during the bubble. The paper wealth has disappeared but much of the real economy remains. There are still buildings, cars and fishing boats--people willing to work and jobs for most of them. Their economy will have to do a complete reset. Wipe out all debt, public and private, issue a new currency (the Pound Haddock?)and somehow convince everyone to continue working and transacting business with one another. How can this be done? I think that German fascism was a complete reset of the German economy after the chaos and hyper-inflation of the Wiemar Republic. It seems to have worked, but we have never thought it necessary to study how it was done.

Now we need to know. We should offer some financial aid to Iceland if they will allow us to send a team of economists--not to advise them but to observe them. I am afraid that we are going to be needing a complete reset of our own economy soon.

Pete said...

I think that German fascism was a complete reset of the German economy after the chaos and hyper-inflation of the Wiemar Republic.

No, it was not. This is the kind of idiocy we have to deal with because no one studies history. Hyperinflation was a problem in Germany in the early 20s. Weimar licked that. What brought the Nazis to power was a severe recession and high unemployment, and a Reichsmark that was overvalued, making German industry uncompetitive. Actually, not all that different from where Germany is today...

Anonymous said...

I thought there was an interesting biodiversity angle to this story which has gone unmentioned as yet. The icelanders have historically made their livings fishing. To succeed as fishing one must be brave almost to the point of recklessness as it is one of the most dangerous jobs in the world. In a country as small and inbred as Iceland this can lead to a population much less risk averse than normal. When these risk lovers move from fishing to banking, it would seem almost inevitable that they would make alot of money very quickly and then lose it even quicker.

Anonymous said...

As far as the last anon's point goes I thought there was an interesting HBD angle here as well (but a slightly different one).

Icelanders are famously inbred / interrelated and the men are spectacularly willing to take risks fishing. In modern times, they are spectacularly willing to take risks in banking / finance. There's an obvious connection there.

Risk your life for strangers on a boat to get more fish? Not worth it. Risk your life for people as genetically close to you as a brother to get more fish for all? Much more high paying strategy for the genes that code for that behavior.

The benefits of free-riding and being the risk averse fisherman on the boat would outweigh the costs unless the free-rider was closely related to the rest of the crew.

-Steve Johnson

I.Q. Fetish said...

"It would be great if we end up more like Iceland, if you get my meaning..."

Shameless white whores and effeminate white men, all unable to see the world as it is economically, politically, racially, due to a lack of desire to go beyond what they're told on television - we're more like Iceland than you might think.

Anonymous said...

Peter sed:
"It may also be that their inferior math skills, on average, make finance less attractive to women."


Ha, I could not detect much Math in Wall Street. More like greed. I doubt many of those traders or strategists were busying themselves solving partial differential equations all day long.

Anonymous said...

"and a Reichsmark that was overvalued, making German industry uncompetitive. Actually, not all that different from where Germany is today..."


Yip, everybody hates those Porches, BMW's, Merc's, Airbuses, Zeiss lenses, Siemens electronics, turbines, U-boats etc. WTF. The only mistake Germany made in the last decade was turning over the Deutsche Mark. Had they hung onto that, this recession would have been a cake walk.

Anonymous said...

The good news is a lot of cherished Leftist shibboleths that are the indulgence of a prosperous society will get blown away like so many tumbleweeds.

Will they? I don't know. It seems to me this could just as easily be where they solidify. We're seeing, for example, a lot of pro-open borders political action at a time when it's least justified because of rising unemployment. And little debate...

If we, and, more importantly, our ideological leaders, aren't willing to challenge them when they're most vulnerable to challenge when will we be willing to do so?

Further, the diversicrat, open borders welfare state and what we appear to be getting is ever more of that.

stari_momak said...

Don't hold back, I.Q.F

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