Half way through reading "The Big Short: Inside the Doomsday Machine" by Michael Lewis, I knew that I was reading the best book I have read in years. It is not a book that I obtained free from the publishing house for review purposes, so I do not have any obligation to write anything about it, but I simply feel the urge to recommend to anyone I know, this book, a powerful insight into one of the darkest times in the financial history.
Before reading The Big Short, I read Andrew Ross Sorkin's Too Big To Fail, which was a fantastic book covering how the crisis was unraveled and how the government tried any means to contain the disaster. I enjoyed reading Sorkin's book, but it was a completely different experience when I read Lewis' book. Sorkin's book is an honest record of history; Lewis' book is a deep revelation of human nature.
The Big Short has one theme throughout the book: People create incentives and they themselves become motivated by the incentives they create, and they collectively hoax themselves into making huge mistakes. Lewis struck at this point again and again with his non-stop unfolding of the story. He had no hesitation in tearing people's faces off, which I greatly appreciated.
A typical example is this Greg Lippmann, a trader from Deutsche Bank. You won't understand this character fully without reading the book. This is a person who was almost completely unreliable but was preaching the ultimate true gospel of CDO to the investor community. Lewis tore Lippmann's mask off in his book only to patch it on with a slap. What incentivized Lippmann?
Another unbelievable figure is a CDO manager Wing Chau. This is a person who most probably understood the true value of CDO, and yet he pumped his clients' money into CDO and walked away with his own pocket full. What is the problem?
Lewis had two interviews with CBS '60 minutes' on his book. It has two parts. In part I he talked mostly on incentives, and the part II he talked about the compensations. I watched the interview again after reading the book -- it made a lot more sense.
Humans take incentives, and they create incentives. In many cases they create incentives to blind themselves, which my psychology professor would call positional bias. Bill Miller of Legg Mason is no exception: He foolishly blinded himself with his wrong belief. It is so hard to believe that a person who was so closely knitted to the financial sector did not discern the biggest Ponzi scheme in the human history. When a lie is repeated a thousand times, it becomes truth...
There are a lot of lessons in this book, so many so that I don't think I can list every one of them. Among them I feel closeto Michael Burry's story -- I am thankful for his lesson.
Lewis finished the book with questions left for everyone. The crisis may have passed, but the incentive system is still screwed up, and the task to fix the system is far more difficult than inject hundreds of billions dollars to save the financial system.
I hope you enjoy the book as I did, and I sincerely hope that this book can make it to the big screen.
In memory of my lost soldiers (my capital) in the crazy time, I am ending this sketchy article with the opening quote from the book itself.
The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.
-- Leo Tolstoy, 1987
Author's Disclosure: No Positions