The financial geniuses who caused the loss of trillions of dollars worldwide in 2008 should have listened to my brother, Steve.

     The year 2008 will be remembered as the year the world, led by the USA, melted down financially. Trillions of dollars (how many zeroes is that?) were lost. Self-proclaimed financial geniuses, (both in government and private business) who said it would never happen, were wrong.
    They were betting on several things not happening: AIG not losing its Triple A credit rating, sub-prime borrowers not defaulting on their loans, housing prices not falling…
    Wait. Housing prices not falling? Anybody who has ever looked at a chart showing prices of houses for the past 100 years knows that they go up for a while and down for a while. Always. No exceptions. That’s the way the business cycle, brought on by easy credit supplied by the government, works.
    To give these financial geniuses some credit, we have to assume that deep in their hearts they knew this, even if they didn’t want to acknowledge it. But they were wrong about a bunch of other things too. This could have been avoided. They could have consulted my brother, Steve. Steve has won the Turing Award, which some might say labels him as a mathematical genius. So of course he could have predicted what would happen. But the folks who caused the financial meltdown were financial geniuses—or at least they said they were. Besides, Steve could have predicted what would happen when he was a teenager—smart, but not yet Turing material.
    Let me explain. Our father, who was financially risk-averse (he had lived through the depression) told Steve that he had a betting scheme that would always win. It went like this: Bet a modest amount (say $2) on an even bet. An even bet is a coin flip; it’s either heads or tails. You win half the time and lose half the time. Statistically, you should break even in the long run.
    But Dad said he could win in the long run by doubling his bet every time he lost. He would continue doubling his bet until he won again and then go back to betting $2. Steve, a teenager at that time, said no, he would lose in the long run. Steve’s argument, boiled down to one sentence, is that anything that can happen in the world of statistics eventually will happen. (See my mystery/suspense novel Aces and Knaves, available on Amazon Kindle, in which the hero finds out the sad truth of this.)
    In the doubling case, there are limits to what Dad could bet—either the limit of his own capital or the betting limit the House (whoever he was betting against) would allow. Let’s say that Dad started with $1,024. If he lost 8 times in a row, his 9th bet would be $512. If he lost that bet, his capital would be gone. Scoffers will say that you’ll never lose 9 coin flips in a row (betting heads and having it come up tails). Wanna bet? Of course it can happen. And if you don’t believe it you’re going to end up in the poorhouse. Or maybe, thanks to the financial geniuses, you’re already there.
    Another example. A while back I fell down while on my morning walk and cracked 2 ribs. I’ve been walking all my life, and this is the first time that happened. It probably won’t happen again. But let’s play a game for a minute to show that large numbers can be deceptively comforting.
    Let’s say that the odds against me falling and cracking ribs are a million to one each time I take a step. Good odds, right? I walk 1,500 miles a year. I walk a mile about every 2,000 steps. That means I walk 3 million steps a year. Oops. According to that logic, I should fall and crack my ribs 3 times a year! A million suddenly isn’t such a large number.
    So where did the financial geniuses go astray? Some will say that greed clouded their thinking. I believe that. I also believe that they deluded themselves into thinking that their ventures wouldn’t ultimately fail—that the laws of statistics didn’t apply to them.  They should have talked to Steve. Wanna bet as to whether they would have listened to him?