Knowing Without Knowing

In 1913, Sigmund Freud wrote about "the strange behavior of patients in being able to combine a conscious knowing with not knowing" -- and went on to dramatically demonstrate the behavior personally, since he was diagnosed with cancer yet continued a habit of incessant cigar smoking. Beginning in the 1920s, Freud got regular reminders that he was risking death: He underwent more than 30 surgical operations to have precancerous growths removed from his nasal and oral cavities. 

This Verleugnung, as Freud called it, or "denial," is also common in the business world, says Harvard Business School historian Richard S. Tedlow. The behavior pattern was there when Henry Ford refused to acknowledge the signs all around him that car buyers were no longer satisfied with a one-size-fits-all Model T. It was there in the 1960s when Sears refused to take notice of the emergence of such discount retail chains as Target, Wal-Mart -- and Kmart, the company that would absorb the once proud Sears in 2005.

Tedlow's new book, Denial: Why Business Leaders Fail to Look Facts in the Face -- And What to Do About It is a provocative and enjoyable reflection on numerous business blunders and successes. These aren't just errors in judgment, mind you. They occur when executives avert their eyes from a reality of which they cannot but be aware. My review of Tedlow's book can be found at: http://www.dailyfinance.com/story/company-news/books-daily-finance-facing-up-to-the-awful-truth/19411308/

More on Michael Lewis' Book

Reuters has a very interesting video q&a with Michael Lewis, now on its website. You can find it at: http://live.reuters.com/Event/Live_chat_with_Michael_Lewis

Eyesight to the Blind

Henry Paulson admits he didn't see the meltdown coming. In his memoir On the Brink, the former Treasury Secretary describes a 2006 meeting of the White House economic team at Camp David, where he warned of the possibility of a coming economic "disruption," which he said was overdue. But, he adds, "I misread the cause, and the scale, of the coming disaster. Notably absent from my presentation was any mention of problems in housing or mortgages."

So if Paulson missed it, and Treasury Secretary to-be Timothy Geithner missed it, and Fed chairman Ben Bernanke missed it...who saw the cataclysm coming?

In the words of Michael Lewis, only a handful of unusual, “almost by definition odd” outsiders were able to look past the conventional wisdom and see the subprime-mortgage-inflated market for what it was. Lewis profiles this tiny group who were able to "see the ugly facts and respond to them" -- and thereby make a killing even as most of Wall Street was decimated--in his new book, The Big Short: Inside the Doomsday Machine (Norton, $27.95). My review of this very informative and, believe it or not, entertaining book appears today on Reuters at http://blogs.reuters.com/great-debate/2010/03/11/michael-lewis-big-short-an-unsettling-experience/.

As is common with Lewis, there are some funny bits -- but given the subject matter, the volume could hardly be a laugh riot. After all, fortunes were destroyed and many, many people were financially ruined. Still, consider this passage, where the author describes his protagonists' hunt for the worst subprime-mortgage-backed bonds, which they were preparing to short:  “Looking for bad bonds inside a CDO [or collateralized debt obligation] was like fishing for crap in a Port-O-Let: the question wasn’t whether you’d catch some but how quickly you’d be satisfied you’d caught enough.”

That's typical of Lewis's not-for-family-hour prose. Darkly funny stuff. And also highly insightful. For a writer who made his reputation on claims that he knew nothing about nothing when hired to work on Wall Street in the '80s, somehow Lewis has learned a great deal about some very sophisticated investing.