Just Lose Hope Already

Casey Serin, a 24-year-old web pro­gram­mer with no prior ex­pe­rience in real es­tate, owes banks 2.2 mil­lion dol­lars af­ter ly­ing on mort­gage ap­pli­ca­tions in or­der to si­mul­ta­neously buy eight differ­ent houses in differ­ent states. He took cash out of the mort­gage (ap­plied for larger amounts than the price of the house) and spent the money on liv­ing ex­penses and real-es­tate sem­i­nars. He was ex­pect­ing the mar­ket to go up, it seems.

That’s not even the sad part. The sad part is that he still hasn’t given up. Casey Serin does not ac­cept defeat. He re­fuses to de­clare bankruptcy, or get a job; he still thinks he can make it big in real es­tate. He went on spend­ing money on sem­i­nars. He tried to take out a mort­gage on a ninth house. He hasn’t failed, you see, he’s just had a learn­ing ex­pe­rience.

That’s what hap­pens when you re­fuse to lose hope.

While this be­hav­ior may seem to be merely stupid, it also puts me in mind of two No­bel-Prize-win­ning economists . . .

. . . namely Mer­ton and Sc­holes of Long-Term Cap­i­tal Man­age­ment.

While LTCM raked in gi­ant prof­its over its first three years, in 1998 the in­effi­ciences that LTCM were ex­ploit­ing had started to van­ish—other peo­ple knew about the trick, so it stopped work­ing.

LTCM re­fused to lose hope. Ad­dicted to 40% an­nual re­turns, they bor­rowed more and more lev­er­age to ex­ploit tinier and tinier mar­gins. When ev­ery­thing started to go wrong for LTCM, they had equity of $4.72 billion, lev­er­age of $124.5 billion, and deriva­tive po­si­tions of $1.25 trillion.

Every pro­fes­sion has a differ­ent way to be smart—differ­ent skills to learn and rules to fol­low. You might there­fore think that the study of “ra­tio­nal­ity,” as a gen­eral dis­ci­pline, wouldn’t have much to con­tribute to real-life suc­cess. And yet it seems to me that how to not be stupid has a great deal in com­mon across pro­fes­sions. If you set out to teach some­one how to not turn lit­tle mis­takes into big mis­takes, it’s nearly the same art whether in hedge funds or ro­mance, and one of the keys is this: Be ready to ad­mit you lost.