What Keynes can teach about economic forecasting : The Indicator from Planet Money Irving Fisher and John Maynard Keynes suffered terrible losses in the Great Wall Street Crash of 1929. But they responded in different ways, leading to tragedy for Fisher and triumph for Keynes.

Fisher Vs. Keynes: Investing Tragedy And Triumph

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In the early 20th century, arguably the greatest economist in the world, one of the most famous people on the planet, was Irving Fisher.

TIM HARFORD: But most people who know anything about Irving Fisher probably know only one thing...

VANEK SMITH: This is economist Tim Harford.

HARFORD: ...Which is that a couple of weeks before the great Wall Street crash of 1929, Irving Fisher said that stocks have reached a new and permanently high plateau.

VANEK SMITH: (Laughter).


Yeah, that was a bad call.

VANEK SMITH: Not quite, not quite. Yeah.

HARFORD: So for me, the story of Irving Fisher is a genius laid low by his own incredibly bad investment forecast.

GARCIA: And there was another great economist of the early 20th century who also failed to anticipate the great Wall Street crash of 1929 - John Maynard Keynes. Both Irving Fisher and John Maynard Keynes lost a lot of money in the crash, but they responded to that failure in completely different ways.

HARFORD: And John Maynard Keynes died a millionaire. Irving Fisher did not die a millionaire. He was completely ruined by his investment failure.


VANEK SMITH: And I'm Stacey Vanek Smith. Today on the show - why was John Maynard Keynes able to recover from the crash of '29 while Irving Fisher's life became this kind of tragic cautionary tale?

GARCIA: Turns out Keynes had one ability that Irving Fisher did not have; a trait that can make anyone a better economic forecaster. And hey, who doesn't want to be able to better predict the future? I know I do.

VANEK SMITH: (Laughter).

GARCIA: So we'll tell you what that trait is, but you got to wait until after the break.


VANEK SMITH: Irving Fisher was born in 1867 in the town of Saugerties, N.Y. He got his Ph.D. in economics from Yale in 1891. And for most of his adult life, he enjoyed this almost unparalleled streak of success.

GARCIA: Yeah, not just as a great economist but also as an entrepreneur and investor. Tim Harford is the author of "The Data Detective," a new book that includes a chapter about Irving Fisher.

HARFORD: He was the - basically, the inventor of what we now call the Rolodex, which is this card filing system. That made him a multimillionaire. He was a diet and fitness expert. He published a book called "How To Live," which was the "Freakonomics" of its day and sold 500,000 copies. He set up the Life Extension Institute. He was a campaigner on prohibition. He was a vegetarian. He was just an astonishing, prolific campaigner and thinker. And he made a lot of money in the markets for a while.

GARCIA: As the stock market in the 1920s was going up and up, Fisher was investing more and more money into it. In fact, even though he was already investing a ton of his own money, he was also borrowing even more money to invest in stocks so that he could boost his returns.

VANEK SMITH: Fisher was just supremely confident about his forecasts that the market would keep going up; confident both in his own intelligence and also in the possibility of using data and statistics to predict the future.

GARCIA: So that's where Irving Fisher was right before the crash of 1929. John Maynard Keynes, the other great economist of the era, got there a little differently. Keynes was definitely already considered one of the great economic minds of the time. And just like Irving Fisher, Keynes knew he was the smartest guy in every room he walked into.

VANEK SMITH: (Laughter) Same.

GARCIA: Yeah, me too - something we all share with Keynes. Right.


GARCIA: But unlike Irving Fisher, John Maynard Keynes had gotten some things wrong by that point. He had been humbled by the market before.

HARFORD: He had an early investment fund immediately after the First World War that just went bankrupt, and it was fine. Keynes raised them more money, went back into the markets, got everyone's cash back, and everyone lived happily ever after. But he had that experience of going, oh, yeah, I thought I was smarter than the market. Maybe I'm not smarter than the market.

GARCIA: When the crash of 1929 arrived, the stock market collapsed more than 20% in two days. And within three years, it had fallen more than 89% from where it was before the crash.

VANEK SMITH: Both Irving Fisher and John Maynard Keynes lost a lot of money on their investments in the crash, but there is a huge difference in how they responded. So after the crash, Fisher kept doubling down on the same investments. He even kept borrowing money to invest in the same losing stocks.

GARCIA: For example, Fisher owned stock in a company called Remington Rand. And right before the crash, Remington Rand's stock was at $58 a share. But after the crash...

HARFORD: After three months, it was $28 a share, and Fisher was borrowing money and buying more shares at $28. Four years into the crash, it was $1 a share. That is how to be a millionaire and to lose everything.

VANEK SMITH: Maybe Fisher believed that his precious data just could not be wrong or that he could not be wrong or that his self-worth was just tied up in this idea that he was right. Whatever the case, he couldn't change his mind, and he lost everything.

GARCIA: Keynes was different. Keynes treated his failures as a chance to learn, a chance to improve his process. Up to the crash, he had been investing based on his ability to predict the ups and downs of the whole economy. But after the crash, he decided that that was just too hard, too unknowable. So he changed his strategy to investing in companies that he believed had good management and that he thought would go up over time no matter what the overall economy was doing. Keynes made a fortune for himself and for the endowment of King's College, whose money he was managing.

HARFORD: One of the things he said when he was trying to raise money from his own father was, win or lose, this high-stakes gambling amuses me. That's just an amazing thing to say when you're trying to persuade someone to give you money. And yet in the end, it helped because he just didn't take it so personally.

VANEK SMITH: For the past few decades, a psychologist named Philip Tetlock has studied the behaviors that lead to better forecasting. Being very precise in your predictions, constantly checking to see if your forecasts are proving true and updating your forecasts if they are not true - All of these make you a better forecaster. But Tim says if he had to summarize all of this research on a bumper sticker...

HARFORD: Forecasters are better when they recognize they might be wrong and they're asking themselves, what am I missing? What perspective haven't I considered? Who haven't I talked to? That sort of almost paranoid suspicion that you might have messed up and the willingness to change your mind - that leads to much better forecasting.

GARCIA: You know, it sounds so obvious. Just be able to change your mind. And yet in practice, people really struggle to change their minds, especially about their deeply held beliefs. That Irving Fisher could not change his mind and John Maynard Keynes could ended up making all the difference in how they lived the rest of their lives.

HARFORD: A few months after the Second World War, Fisher and Keynes both died. Fisher was alone and nearly bankrupt. He had been bailed out by his millionaire sister-in-law and had completely lost his reputation as a result of his failed forecasts. It's such a tragic end to a great career. Keynes died a millionaire, the most famous and celebrated economist on the planet.

GARCIA: And there is a quote that sometimes gets attributed to Keynes that Tim also likes to remember him by.

HARFORD: He probably never said it, but he lived it, which is, when the facts change, I change my opinion. What do you do? I wish he had the chance to teach that lesson to Irving Fisher.

GARCIA: Tim Harford's new book, where he tells the story of Keynes and Fisher, is called "The Data Detective."

This episode of THE INDICATOR was produced by Jamila Huxtable and fact-checked by Sam Cai. THE INDICATOR is edited by Paddy Hirsch, and it is a production of NPR.


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