Albert Einstein and Arthur Eddington

HBO is airing a docudrama they produced in conjunction with BBC on the pursuit for a new theory of gravity.  The movie “Einstein and Eddington” details (if not dramatizes a bit…) Albert Einstein’s efforts to come up with his theory of general relativity, and Arthur Eddington’s efforts to prove him right, all in the backdrop of World War I.

The tensions of the times (and within the movie) highlight that, with World War I pitting German and English armies against each other, Einstein was German-born and Eddington was English, so their long distance correspondence went against the nationalistic trends of the day.

As many people know, Einstein allowed us to realize that objects with heavy mass, such as the Sun, bend the space around it, which is why planets orbit around the Sun.  The theory would also predict that light would also be bent in the same way as it traveled by the Sun. 

If this were true, stars would appear to us in slightly different places in the sky when stars are behind the Sun.  Eddington realized that this could be tested by photographing stars at night, and then photographing these same stars during a total solar eclipse.  In the solar eclipse, the starlight would have to pass by the Sun, but the Moon would block out any sunlight, allowing us to view the stars themselves.

Eddington had to wait several years for the right eclipse conditions, traveling to Africa in 1919.  There were rain and clouds that made the expedition a near failure – but only a near failure because he actually got two good pictures that were enough to confirm Einstein’s theory.  As a result of Eddington’s efforts, Einstein became a celebrity overnight and changed the way we view the universe around us.

There are some interesting ideas that are brought to light in this movie, which track the real-life arcs of these two great scientists pretty well, although there is a little literary license to make the scientists “Hollywood” interesting.  Still, if you run across it, “Einstein and Eddington” is worth the hour-and-a-half of your time.

Michael Lewis, author of The Big Short, interviewed on 60 Minutes

60 Minutes did a two-part story interviewing Michael Lewis on his new book, The Big Short.  In his book, Lewis details how probably only 10 or 20 people in the entire financial sector knew what was going to happen, and how Wall Street nearly created its own demise.

In the 60 Minutes piece, Lewis describes how, at a result of the financial crisis, many people think that everyone on Wall Street were just a bunch of crooks and knew that they were getting themselves into.  So the post-trauma reaction would be to punish a few banking CEOs and the problem will be taken care of.

However, according to Lewis, it’s quite the contrary – the financial meltdown is probably much closer to an example of mass delusion.  Everybody just kept thinking it was going to keep going – until it didn’t.

Probably the most telling part (at least in my mind) is where he describes the incentives that the financial industry operate under on Wall Street.  I am a strong believer that people make decisions based upon the incentives and disincentives in their environment – change the rules of the game and you’ll change the behavior.

Here’s what Lewis had to say on this topic:

 ”Wall Street is able to delude itself because it’s paid to delude itself.  That’s one of the lessons of this story is that people see what they are incentivized to see.  If you pay someone not to see the truth, they will not see the truth, and Wall Street organized itself so people were paid to see someone other than the truth. 

And that’s one of the central messages of the story, you have to be very careful how you incentivize people, because they will respond to the incentives.”

Also described is how Michael Barry, an independent manager of a hedge fund, made $725 million on the credit default swaps that were created to “insure” the subprime mortgages that eventually defaulted.  He was able to do this by examining – by himself – the public information about the declining creditworthiness of these financial products.  Anyone, especially the bond rating agencies, should have been able to see this for themselves, but the Wall Street community was collectively blinded to the reality of the numbers that Barry was able to spot.

(Turns out Barry only has one good eye himself, and he wasn’t blind to this oncoming catastrophe…)

Lewis credits Barry’s ability to take advantage of this as “not being part of the collective”.  Even though Wall Street could have (and should have) seen this as well, they had different incentives at work than Barry did.  He was incentivized to look at the numbers rationally, and he profited from them – Wall Street was incentivized to keep the profit center going as long as they could, which they did, and it almost took the world’s financial markets down with it.

Change the incentives and you’ll change the behavior. 

Lewis is the author of 13 best selling books including Liar’s Poker and Moneyball.

You can watch the two-part 60 Minutes interview here…