There are two things Vikram Mansharamani really likes to talk about: financial bubbles and generalist thinking. And they’re intricately connected, because Mansharamani is convinced that one of the reasons bubbles occur is that the people who might prevent them are overly specialized in their thinking and their training.
What does that mean for everyone else in the world? Mansharamani will explain at PCMA Convening Leaders 2014 next month, where he’ll present a Masters Series program on “The Generalist Advantage: Going Beyond Expertise” and a Business School session on “Global Prosperity: Why Everything Is About to Change.” A lecturer at Yale University and author of Boombustology: Spotting Financial Bubbles Before They Burst, Mansharamani runs Kelan Advisors, which offers management consulting and research on “a wide range of strategic and financial matters,” according to his website.
Convene talked to the affable, enthusiastic Mansharamani in the middle of October, during the U.S. government shutdown — a convenient jumping-off point for a conversation about financial instability and narrowly defined thinking.
I feel like I’d be remiss if I didn’t ask you to comment on the shutdown.
I believe it’s a symptom of a much larger political problem. And it has to do with, I believe, an increasing polarization on the part of our political parties, and an inability to compromise toward a higher objective, namely the good of all. And that’s very problematic.
How is it affecting us economically? Well, the government shutdown itself is having a very direct economic impact, as we all are aware, in numerous ways. We’re seeing it very directly, because the government is a major participant in the economy. Second, you’re seeing it in housing loans that are not being approved due to delays in governmental approvals, given that most lenders actually require IRS verification of tax returns, etc. Third, there is an enormous indirect cost. For instance, what is the cost of the extra friction on the economy due to a slower TSA screening experience at the airport? Although it’s hard to be precise, I suppose we might estimate it by calculating average delay multiplied by the average value of the flyer’s time multiplied by the number of flyers. Thinking about this one example helps me visualize the indirect costs and loss of productivity.
If we’re not able to resolve the debt-ceiling issues that we’re currently facing and default, meaning we do not pay interest or principal on the debt owed, I believe that’s a serious problem that would have ripple-through effects on virtually every asset class, every business, everywhere. Everyone keeps assuming, hoping, and dreaming that it’s not going to happen, and I do, too. But the underlying causes of the first problem, i.e., the shutdown, may in fact still be present and haven’t been addressed. And so, is it conceivable that we would do something as disastrous as defaulting on our debt? It’s unfortunately more conceivable, although I believe unlikely, than I would like to believe.
What kind of effect might that have on the United States’ international reputation?
Just think of what happened this past week. We don’t even need to go further than that. This past week, President Obama canceled his trip to Asia, where he was supposed to go talk at the APEC [Asia-Pacific Economic Cooperation] summit and then the ASEAN [Association of Southeast Asian Nations] events. He canceled the whole trip because of the government shutdown, which is, again, because of the political polarization manifesting itself through Congress. So, he doesn’t travel, but who does? The president of China had a grand old time making very important state visits throughout the region, ramped up Chinese government aid to numerous countries, and was very prominent at both APEC and the ASEAN events. It’s sending a very direct message that the Americans can’t get out of their own way, and asking if the region’s historical image of the United States is still valid: How will the Americans help you if they can’t help themselves? How can they help the world economy when they’re not able to keep their government operational?
Let’s talk a little bit about Boombustology, which looks at booms and busts, and explores how to spot financial bubbles. What made you want to write about that?
It comes from a background of 20-plus years of watching booms and busts transpire. I was on the international sales and trading desk at Bear Stearns, watching the Japanese bubble hit its all-time high in 1990. At the same time I was watching the Japanese bubble burst, I was reading the academic literature which implied that markets are efficient. There was something I couldn’t quite reconcile there. And then, of course, the Asian financial crisis [in 1997] was followed by the tech boom-bust [in 2000-2001], followed by the housing boom-bust [in 2006-2007], etc. Financial bubbles became a major focus of my curiosity. I ended up designing and teaching a class at Yale on financial bubbles that was extraordinarily popular and oversubscribed, and the book is a written version of the class. It’s my attempt to share the ideas that had come out of the seminar and my thinking about bubbles over 20-plus years with the rest of the world.
The other reason that I thought it was interesting is that most academics had historically believed that bubbles were not identifiable in advance of their bursting — that is, with certainty. That’s probably a true statement, but it’s possible to tip the odds in your favor of having identified a bubble. Given a probabilistic exercise as opposed to a binary exercise — meaning that there are gradations of “bubbliness” — I believe we can label certain situations as highly likely, less likely, or not likely to be a bubble. And if you change your question from “Is it a bubble?” to “How bubbly is this asset?,” you can gain tremendous insight that is helpful in navigating uncertainty.
Many of the commentators that had indicated financial bubbles were not spottable before they burst were looking through a single disciplinary lens — most of the time, it was an economist. I personally believe that specialists are likely to miss some obvious things as they focus exclusively on the margin rather than seeing the whole. And so my whole approach was to bring a generalist approach to thinking about something that had historically been dominated by specialists. Just that mere shift of approach has the ability to generate powerful new insights.
Are there certain characteristics that all bubbles tend to share?
The book is organized around five key lenses, which in aggregate help force a generalist approach to thinking about bubbles. The first lens is a microeconomic lens and looks for dynamics that imply self-fulfilling and unsustainable price action. For instance, if higher prices, which usually incentivize supply, stimulate more demand — which in turn is likely to result in higher prices — then we have a bubble dynamic.
The second lens is a macroeconomic lens, helping us in looking more broadly than the micro lens. In particular, it looks for signs of misallocated capital and overinvestment. I love seeing signs of overinvestment in the face of overcapacity, meaning you see excess capacity and you still feel motivated to build more. If it’s done with borrowed money, all the better.
The third lens I use is psychology, to look for signs of hubris, overconfidence, and what one might call new-era thinking: “This time it’s different.” This can manifest itself in lots of different ways. One of the ways I have found particularly intriguing is to look at world-record art prices. If someone outbids someone else and proudly and triumphantly pays a world-record price, that’s a sign of hubris and overconfidence. I also look at architecture markets. I’ve paid attention to the world’s tallest skyscrapers under construction. We can go back in time, and this is another confirmation of overconfidence. In 1929, three buildings competed for the world’s tallest tower status in New York City. You had 40 Wall Street and the Chrysler Building, then the Empire State Building; then you got the Great Depression. In 1973 and ‘74, we had the Sears Tower and the World Trade Center, and then a decade of stagflation. In 1997, the world’s tallest tower moved to Malaysia in Kuala Lumpur, and we had the Asian financial crisis shortly thereafter. In 1999, we started construction of Tai Pei 101, which was effectively ground zero of the boom in hardware for technology. In 2007, the Burj Dubai took the title, even before completion, within weeks of global equity markets peaking.
My fourth lens is politics. When there are signs of government interference, whether it’s taxes, subsidies, incentives, or moral hazard of any sort, you usually see disproportionate risk taking. When people have political motivations for economic decisions, unexpected, possibly even irrational, outcomes are likely.
Lens five is a herd-behavior lens. It comes out of an inspiration I found in the epidemiology literature. If you were to analogize that a speculative mania was not dissimilar to a flu or fever spreading through a population, you could take the toolbox of that epidemiologist and apply the logic of what was happening in terms of the speculative mania. You would care about the infection rate, how quickly is the idea spreading; you would care about the removal rate, how quickly are people dying off and losing their money; and, most importantly, you would care about how much of the population is still vulnerable, because that would be the rate at which the fuel could be poured on the fire. In the case of financial bubbles, it’ s my belief that amateur investor participation in areas that have historically been characterized by professional participation is a telltale sign that the bubble is long in the tooth and maybe ripe for bursting.
Those are the five lenses. And whereas I think any of them is interesting by itself, in aggregate they become powerful.
What is your hope that people would do with that information?
If you’re a regulator, I would say it would be really interesting if you applied this framework and decided that there were bubbly conditions under way and take whatever regulatory action could be possible to remove that adverse incentive that comes out of my political lens. If you’re a simple investor in the world, I would like you to remove your capital from areas that are higher-risk. If you’re a corporate executive about to build a factory in a booming city, state, or country, evaluate how sustainable that boom is before you make unrecoverable commitments.
You talked about specialist thinking being something that can blind you to the existence of a financial bubble, but in your writings you also identify specialization as a greater problem throughout the business world. Can you talk a little bit about the importance of generalism?
It’ s my belief that we’ve created a society where we’ve motivated people to become increasingly specialized, specialized, specialized; narrower, narrower, narrower; more focused, more focused, more focused. And the result is very few people are seeing the big picture. The other result of increasing specialization is those who eventually deem themselves experts, either by self-label or being labeled by others, believe they know more than they actually know. In the language of psychology, you might deem them to be overconfident or poorly calibrated.
There’s a wonderful academic who’s done work on this, Philip Tetlock, and his findings from large studies are that experts tend to be less accurate predictors in areas of their expertise than non-experts. Why is that? It’s my belief that specialists maybe overconfident. Generalists are less likely to be overconfident, I believe, because the mere fact that they don’t know everything in great depth gives them a natural appreciation for what they do not know;… a generalist’s value is in breadth, not depth. If you have a better appreciation for what you do know, for what you do not know, and for what you do not know you do not know, you’re more likely to successfully navigate uncertain situations. Given the inherent uncertainty that characterizes business generally, I think many managers would benefit from adopting a more generalist approach.
Is that generalist mindset something that meeting planners can apply to the content they offer at their own live events, even if they’re for a specialist society?
Sure. I’ve been increasingly invited to speak at events that are outside of the financial-services domain. I think there’s enormous value in getting seemingly irrelevant perspectives into a meeting. In the course of a typical talk, I often find myself discussing art history, and I may get into specific pieces of art that sold at world-record prices. Let me share one specific example: At the absolute peak of the Japanese bubble in 1990, a paper executive named Ryoei Saito paid $82.5 million for a Van Gogh painting called Portrait of Dr. Gachet and $78 million for a Renoir painting called Le Moulin de la Galette. He then went on to shock the art world by announcing he would cremate the paintings with his body when he passed away. Seems to me there’s a lot of insight in that story, particularly about hubris.
Let’s say you were a finance firm and you had an art historian come and talk to you about stuff like world-record art prices. There might be value in that. But who would think of talking to an art historian at an investment conference?
I guess the point I’m getting at is there is insight and value in connecting dots across seemingly disparate domains. It seems to me — and I realize I’m heavily biased — that someone who can present information from various domains and weave them together to create relevance would be great for almost any meeting. For instance, I’ve spoken at events in the fertilizer sector. I’m a finance guy — what do I have to say about fertilizer? Frankly, not that much. But I was able to discuss different dynamics relating to my bubble-spotting framework to understand how they might affect the fertilizer supply chain, its customer base, or the geopolitical regulations they face. What might be happening in their demand areas of ultimate demand, their customers’ customers’ customer, etc., and their suppliers’ suppliers’ supplier. In many ways, not being an industry insider allowed me to take a unique and unadulterated perspective.
When you have the chance to participate in a conference as an attendee, what do you look to get out of the experience?
I may be anomalous on this point, but it’s first and foremost about meeting people. So it’ s all about who’s coming to the event, who will I get to mingle with, what is the opportunity to actually get to know other attendees. Secondly, I do like getting content that forces me to think, or interesting ideas, thought-provoking in any way. And then, lastly, one of the things I’ve really enjoyed is, occasionally there will be some of these probabilistic questions posed to the audience where there isn’t a right or wrong answer, and they poll the audience with electronic devices to give us a sense as to what the audience thinks. If it’ s an audience of attendees that I care about and I like and I want to meet, the responses to interesting and probabilistic topics is sometimes the most valuable takeaway of an event. It tells me a great deal about my views relative to my peers and the direction of the herd, if there is one.