Best-Selling Author Michael Lewis on Stock Market Overconfidence and Revisiting “Moneyball”

Best-selling author Michael Lewis wrote classics like The Big Short, Liar’s Poker, and Moneyball. He also hosts the podcast Against the Rules. Motley Fool host Chris Hill talked with Lewis last year for an episode we published on May 20, 2022. Due to time constraints, we had to leave some parts of the conversation out of that episode, so we’re bringing them to you now!

Hill and Lewis discuss:

• Unintended consequences of Moneyball.
• Why single men fare worse in the stock market.
• How Iceland responded to the Great Recession.
• How to spot true experts.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 12, 2023.

Michael Lewis: I think you’re right. I think it’s like if I were running a big organization — thank God I’m not — I would be really alive to this problem, that a lot of what I need to know doesn’t find its way to meet naturally. There are all these barriers coming up the chain before it gets to me, and I need to find ways to open up those barriers. Call it flattening the organization or whatever. But the truth is, especially in corporate America, the way we behave does not encourage that.

Chris Hill: I’m Chris Hill, and that’s best-selling author Michael Lewis. I caught up with him for an episode in May of 2022, talking about his excellent podcast, Against the Rules. But there was stuff from that conversation we had to leave out last time that we wanted to share today, including a closer look at his book, Moneyball, and the takeaways that were lost. It’s Michael Lewis telling stories. There’s no one better.

I think the first episode of Season 3, you play an audio clip of a radio interview from when you’re on a book tour for Liar’s Poker 30-plus years ago, and you are getting these questions demonstrating… It reminded me of a friend of mine who’s a financial analyst, and he had done a television live hit of some sort. I asked him how it went, and he just smiled and said, “It was great. Do you know why?” I said, “No, why?” He said, “Because they called me an expert. It’s the only place in my life anyone ever calls me an expert.” He’s like, “My wife doesn’t think I’m an expert. My kids don’t think I’m an expert. But if I go on television, they call me an expert.”

Michael Lewis: You’re on TV because you’re an expert. You’re on TV for two actually contradictory reasons: the ability for the television people to hold you out as an expert and your willingness to sound completely certain about something you don’t know anything about or to be completely certain about something that maybe you know something about but not everything about.

Every time I go on book tour, this happens. People want me to come on like cable news and talk about stuff that I don’t know anything about. I happen to have a book out about X, but they want me to talk about Y, Z, and A and B. And I’ll say, look, I don’t really know anything about that, and that’s not the answer they want to hear. What they want to hear is, “I’m going to answer that question, me, me.”

I was kicking around with the producers after we just finished the last episode of this season, which will air in a couple of weeks, two or three weeks, they’re dropping one a week. But we were sitting there just shooting the shit about what this was all about, and one of the producers says, “If we had to summarize this whole season, in a sense, it would be, you can recognize the expert because he or she is the one who is not totally certain and is really quick to say, ‘I don’t know.’ If you want to find the person who actually doesn’t really know what they’re talking about, look for total certainty, and look for people who don’t admit they don’t know things.”

TV isn’t friendly to that. TV doesn’t want you on TV saying, “I don’t know the answer.” Why are you on TV, then? We opened with those clips from Liar’s Poker because as we were starting the thing, I said, it could not be a more clear-cut example of the problems we have in our media environment with presenting expertise to the public.

The whole of Liar’s Poker was a dramatization of my ignorance. A dramatization of, if you’re going to listen to anybody about money, don’t make it be me. I clearly don’t know what I’m talking about. These interviewers over and over are saying like, which way is the stock market going or which should I invest in now? It was a madness.

Anyway, so we opened with that, but we quickly get to the subject at hand in that one.

Chris Hill: But you just touched on another theme that runs through some of your books, and it’s the role that confidence plays, for better or for worse, and it shows up in this season. The intersection of confidence and expertise. And as you said, throughout the season of this podcasts, we meet people who have great expertise, and they are almost shy about it. Then there are people who have great confidence despite their complete lack of expertise.

Michael Lewis: Two examples, one specific, one general. Episode 3, I think, goes back to Bill James, who is the reason for Moneyball. He’s the first person who, in a big way, to a largest audience, is rethinking the game of baseball in the ’70s and ’80s. He’s showing really clearly that professional baseball people aren’t making any sense in the way they are valuing players, in the way they’re thinking about strategies, that there’s a fresh take on all of this. He says then that he looks at a baseball field, and what he sees is a field of ignorance.

Now, we go back to him, because it’s so interesting to see this man who spawned a revolution, who has every reason, though he called himself out as the world’s greatest expert on baseball, the greatest thinker who ever thought about the game.

We go back to him, and one, he’s really uneasy with the idea that he is the expert because he’s much more comfortable with the idea that we actually still don’t know a lot. It really bothers him the way that Moneyball has created this illusion of certainty about the knowledge around the game. That there’s this illusion of precision that has all become very quantitative, very analytical. It has gotten smarter, they have learned things, but his point is that the people who are now the experts, it’s a different kind of person who than it used to be. It used to be the old baseball scout who played, the person who had experience in the game. It’s now the person who has analytical abilities.

The person’s changed, he says. The attitude hasn’t changed as much as he would’ve hoped, in that back in the day, when Bill James was first saying things about baseball that were just shockingly true and revolutionary, you could see it. He says, “Why was I able to do this? Why was a total outsider able to make his contribution to the understanding of the game?”

Because the insiders thought they knew, they had stopped thinking altogether. Why did they stop thinking? Because they thought they knew. He said, that’s the thing that bothered him the most, the “I think I know. I’m totally sure.” He sees the same streak in people who now occupy — not all of them — but front offices where they’re very clever, they’re highly educated, they do have answers to some things, but they are excessively sure about what they know. It bothers him a lot.

He’s maintained everything through whatever it is, 45 years, 50 years. Even as he was integrated into the game and his thinking was integrated into the game, he’s preserved this distance and this humility, it’s a really deep humility. Like he points to the field, he says, “that’s still a field of ignorance, and we need to respect what we don’t know and don’t pretend we know things we don’t know.” That’s one example. If anybody has got to be an expert, Bill James would be an expert.

The second is, like the episode that we released today is about the role of male overconfidence in this great problem of, why doesn’t knowledge and knowledgeable people actually reach the audience it needs to reach? It starts with the phenomenon of mansplaining, and it’s great.

It starts with the story of the writer Rebecca Solnit. This is where the term “mansplaining” gets coined back in the early 2000s. She’s at a dinner party in Snowmass, Colorado. She’s been invited, but she doesn’t actually know the host. It’s a lot of old, rich, important people. She’s a young-ish writer. She’s written seven books.

The host ignores her the whole party. At the end, he comes over and he says, “Oh, so I understand you’ve written a couple of books?” She’d written seven books, but she said, “Yes, I wrote a couple books.” He says, “What are your books about?” She said, “Well, the most recent is about the photographer Eadweard Muybridge.” He says, “There is a very important new Eadweard Muybridge book out that you need to know all about.” He starts to talk at great length about this book that he clearly hasn’t read. He’s just read some review of. And she knows he hasn’t read it because she wrote it.

It’s her book. He’s explaining her book to her.

She sits and listens. She realizes this has happened to her over and over her life. This man is talking to her, presenting as someone who is the expert on the subject of Eadweard Muybridge, and everything he knows is a review of her book.

So anyway, she sits on this for a couple of years, I think, before she writes this essay, which she calls “Men Explain Things to Me.” Someone reads her essay and coins that the word “mansplaining.”

It’s like what’s at the bottom of this? We go from there to like where you find male overconfidence and what are its consequences. One place where it’s been pretty fantastically dramatized is in the stock market. Do you know Terry Odean and Brad Barber’s paper “Boys Will Be Boys”? Has the Fool run across this?

Chris Hill: I’m sure my company has. I’m familiar with the references. But haven’t read it.

Michael Lewis: This audience should know about this paper. Around the time Rebecca Solnit is being mansplained to in Snowmass, Colorado, these two guys, economists, are working on this subject, and they’ve gotten access to data from one of the big online brokerage firms. They never say which one. So they can see how the accounts performed. They carve all the accounts at this online brokerage firm into three buckets. Accounts run in households with just a single man, accounts with the household just a single woman, accounts with a household that have a man and a woman in it. They say, well, so how did the various households perform?

The house with a single guy in it is the worst. He underperforms the house with a single woman in it by 1.4% a year, which sounds like not much, but you compound that over a lifetime of trading, and it’s forever. It’s a huge sum of money.

They get it why this is happening, and why it’s happening is, the single guy is trading way too much. He’s just like he is churning. He’s churning because he thinks he knows something. He says like, oh, there’s a smart move to buy IBM today, whatever it is. And he’s paying, he’s bleeding commissions. His judgments are no better than the market. But he doesn’t know it. It’s like a distillation of the problem of the male overconfidence in the marketplace.

I don’t know. I’ve seen this over and over in my writing life. One way to describe the financial crisis of 2008 is a byproduct of male overconfidence. In fact, I wrote a piece once to one of my favorite chunks of material I ever got handed about what happened in Iceland during the financial crisis. Because Iceland is this, it’s this really great little laboratory because it’s only 350,000 people. It’s like the size of Peoria, Illinois, and they’re all related to one another, so they’ll know each other. You can’t really fool anybody.

After the financial crisis, the women of Iceland turned to the men, and they said, “Five years ago, you said you were going to stop fishing and become a banker because we Icelandic men are more gifted in financial markets than anybody on there, that our Viking heritage has left us predisposed to being financial wizards. You’ve built the three of the biggest and most risky banks in the world.” Three big banks in Peoria, Illinois, basically. “They’ve all come crashing down and thus ruined our society.”

When I walked into this, the women had figured out this is male overconfidence at work, that they elected a prime minister. They kicked out the prime minister who was a guy. They elected a female prime minister, who said “no more men in the banks.” The only functioning money management firm in Iceland at the time was run by a woman, and her selling point, which her marketing was simply, “if you give me your money to manage, I promise no man will ever touch it.” And it worked. Men were giving her money because they didn’t want men to touch the money.

Anyway, the financial sector provides us with examples of the idiocy of male overconfidence and how it gets in the way of perhaps deep understanding. It’s one example of a larger phenomenon. The phenomenon speaks to our whole season, which is like, why is it so hard for the real expert to be heard? One of the reasons is people who don’t know are shouting very loudly.

Look at this before I finished because when you start poking at this, you can’t believe how deeply it runs.

We interview a woman, female doctor, who is on a plane like some commercial flight. Some dude gets up, collapses in the aisle, heart attack, stroke, no one knowing those what it is. But it’s like he’s out. The flight attendant gets on the horn and says, “Any doctors here?” She raises her hand, the guy is prone next to her really and says, “I’m a doctor.” The flight attendant comes back, looks at her, sees a guy who’s behind her who says, “I have some nursing experience,” [laughs] and picks the guy to come and work. She says, “Wait, I’m a doctor,” and like the flight attendant looked and said, “You’re a doctor? How curious.”

Wait a minute. It gets better. She thinks like, “Well, that was weird. This guy was dying. He could be dying at my feet. I’m a doctor. I was actually trained in ways that were exactly suited to dealing with this particular problem, and nobody ever acknowledged that I might be the one.” Instead, they pick this guy who knew less to come and service this poor man.

But she thinks like that was just a weird thing, a one-off, until she stumbles on Facebook into a group of female doctors, all of whom have had the same experience on airplanes. There are lady doctors who’ve been ignored on airplanes in favor of some guy, and the invisible female doctor on a plane. To me, it’s like a little metaphor for the problem.

Anyway, I’m blathering on, but I could tell you that the podcast generally has been a joy to explore things that I might not otherwise explore in print. It’s just taken us places that I just might not otherwise go, and this was one of them.

Chris Hill: When you think about expertise being hidden, this is something that comes up in the very first episode of the season, an episode called “Six Levels Down.” I have a couple of questions about it.

But before that, for people who have not yet listened to the episode — and I can’t encourage people enough to do so — can you give a summary of what the episode explores? Because “Six Levels Down,” I listened to that episode twice, and the second time through, I thought about it just from the standpoint of investing, and I feel like it is an episode that every CEO of every public company should listen to.

Michael Lewis: It’s the phenomenon… I’ll tell you what the general thing is, I’ll tell you the specific story. The general idea was, is an idea that I stumbled across while I was working on the most recent book, on The Premonition. That in a complicated society, in complicated systems, a big corporation, a federal government agency, a state government, whatever it is, a big system, when there is a crisis or a problem, the person who has the expertise to respond to that, the answer to the question is very seldom the person who’s running the operation. Very seldom the person underneath that person. That often, it’s someone who’s six levels down on the organization chart who has a very specific knowledge.

In some ways, this is revealing something, gives a generally true about expertise. It’s quiet and local. Like people who really know something are spending their time learning about that thing and not advertising their expertise, not being big-picture people. They’re little-picture people. You need to find the right little-picture person six levels down in your organization to answer the question that happens.

And the idea was introduced to me by an entrepreneur, also a public servant, fellow named Todd Park. Extraordinary character. He’s created three different multibillion-dollar companies in healthcare. He was the chief technology officer for the United States, brought in by Obama, and dealt with multiple crises of the federal government.

He was filling my ear about this while I was working on The Premonition. I stumbled into him when I was working on the book. At that moment, he was looking for the expertise to help Governor Gavin Newsom in California figure out how to respond to COVID back in March of 2020. He found it six levels down in the California state government. And that woman he found happened to be the main character of the book.

But leave that to one side. I was talking to myself. Well, how did you even know to go looking in the bowels of the state government for this particular pandemic expertise? He said, “Well Michael, my whole career, entire career, has been premised on this understanding. I myself only accidentally came across this understanding.”

He was 24, 25 years old, fresh out of the Harvard Business School. He was like a McKinsey consultant, wanted to start his own business. Formed a business with a friend. The idea for the business was, “We’re going to make pregnancy better for women and reduce catastrophic outcomes. Make the whole thing care for the mom better from conception to birth. It will actually reduce healthcare costs because they will have been so well taken care of that there not going to be really bad outcomes at the end.”

They buy a clinic, a maternity clinic in San Diego to try their idea out. It’s a disaster. The insurers don’t want to pay for preventative care. Nobody gets the idea.

However, while they’re managing this disaster, losing a million dollars a year on this clinic, they realize that, oh, there’s this other problem. The health clinic we bought is losing all this money because it’s not even getting paid for the stuff it’s doing by insurance companies. Because the insurance billing has gotten so complicated, half our bills are just rejected because we put the wrong item on the wrong line.

They realize, oh, we’re in the wrong business. We need to be in the business of figuring out how to get doctors and hospitals paid. It turns out it’s like a national crisis at that time. It’s like the 1990s insurance, the complexity is exploding. There are like 18 different healthcare plans in 50 different insurance companies, and each one has all these permutations on it. Everybody is having trouble getting paid.

They go casting around for someone who knows how to get hospitals paid. They find literally in the basement of a big hospital in Boston, Massachusetts, a woman named Sue Henderson, who is in her 50s, who is the littlest-picture person you ever met, who knows more about how to, it’s not game, how to solve the game that the health insurers have created to get people paid than anybody on the planet. They essentially try to code all of her knowledge into software, and they do, and this business becomes Athenahealth, which is a monster. And they ended up selling it for $5 billion dollars.

But Susan Henderson was literally six levels down on the hospital organization chart. She was the only person in the whole operation who had the answers to the question that if the hospital doesn’t answer, they go out of business. Even the hospital did not appreciate what they had or her knowledge.

That episode is exploring this. He calls it the L6. The L6s of the world. The people who have some critical understanding of a problem and who have real trouble, for odd reasons, being heard.

One other example is Todd Park, when he gets to the White House, he has his career of like looking for the person who knows the answer to the question buried in the organization. He gets there right as Obamacare is cratering. I don’t know if you remember, but the legislation gets passed, and then the website crashed. I mean, it was the biggest public relations disaster in the Obama presidency. It was just like, how did that happen? They worked so hard to get this thing passed and the website crashes?

Todd goes in, chief technology officer, “What the hell happened?” He knows like the secretary of the department is not going to know, the undersecretary is not going to know. He just went right down to a contractor, who is, again, I think it was seven levels down from the top, who actually had an answer to what was wrong with the software, and they fixed the software.

But I think you’re right. I think it’s like if I were running a big organization — thank God I’m not — I would be really alive to this problem that a lot of what I need to know doesn’t find its way to me. Naturally. They’re all these barriers coming up the chain before it gets to me. I need to find ways to open up those barriers. You could call it flattening the organization, whatever. But the truth is, especially in corporate America, the way we behave does not encourage this.

I mean, just like pay. You got a CEO who’s being paid $50 million a year. That is not a person who the L6 is going to feel comfortable dialing up and saying, “I can fix your problem.” The status differences are so great.

I’ll put it another way. The greater the status differences that you introduce in your organization between L1 and L6, the less likely the critical things the L6 knows is going to find its way to the L1. It’s just going to be, the status differences end up being barriers to understanding.

Chris Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.