By David Preston
[Analysis of the movie “The Big Short” now showing in theaters everywhere.]
Imagine that you’re in the building trades and your company – which installs computer networks – has been subcontracted, along with dozens of others, to build the city’s tallest skyscraper. The building space has already been rented and everyone’s excited about the project because a new type of space-age steel is being used in the construction.
When the tower reaches the 180th floor you make a casual inspection, and while doing so you notice that some of the new-type steel girders have a slight defect which could, theoretically, cause catastrophic failure. When you point this out to the steelworkers, you discover that not only are they aware of the defect but that they have pointed it out to their boss, who told them to shut up and keep working.
You next approach the subcontractor in charge of the steel work who acknowledges that there could theoretically be a problem but maintains that stopping the project now would throw a lot of people out of work. Since the risk of failure cannot be demonstrated, and since he’s not authorized to stop the project in any case, he’s decided not to do anything and he advises you to take the same approach.
You then contact some government inspectors and journalists, who admit that they too were aware of a statistical chance of failure but have decided to allow the work to continue the work on the grounds that if the structure did fail it would be a disaster of unimaginable scale. Since nothing like that has happened yet, they reason, clearly the odds are against it.
You then make a second, more thorough, inspection tour, and this time you observe girders buckling on the lower floors, indicating that failure is not only likely but imminent. In a panic, you call a meeting of the project underwriters, explaining to them that fortunes are at risk, as well as lives. To your surprise, they don’t want to see your evidence or make an inspection tour. God is obviously smiling on this project, they assure you, the proof being that everyone connected with it has been getting rich.
Having failed at every attempt to warn people about the coming disaster, you decide to make the best of it. With just months to go before the building is likely to come crashing down, you pull your own company out of the project, and you now have a nice nest egg. You approach the project underwriters one last time and offer to make a bet with them over whether the building will fail.
Oh yeah? they say, chuckling, still incredulous at your naivete. How much you want to bet?
“Everything I’ve got.”
Marten van Valckenborch: The Tower of Babel