How to understand money stuff (w/ Matt Levine)

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2:13Chris Duffy: You're listening to How to Be a Better Human. I am your host, Chris Duffy. Today's episode is a bit of a departure for us. We're going to be covering a topic that is a little different than what we normally discuss on this show, which is international finance and the global economy, not the typical how to be a better human topic. Now, we're going to be talking about the big picture of money stuff, and we're going to be talking about that with Matt Levine, the author of the popular financial newsletter and podcast that is called, appropriately enough, Money Stuff. There are a couple of reasons why I really wanted to have Matt on our show, and the first is that I enjoy money stuff a lot.

2:46Chris Duffy: I think his writing is so funny. Matt makes me laugh. And I learn about things that I would have never thought about otherwise. But the bigger reason that I wanted to have Matt on the show is that I think too few of us have a deep understanding of the financial forces at play in our world and society. It is such a tiny, tiny percentage of people who actually understand the decisions, motivations and structural forces that affect businesses and governmental policies and our individual financial lives. And yet money plays an outsized role in how we're able to live our lives, how we're able to take care of our friends and families, how we're able to make decisions in our community and in our world.

3:24Chris Duffy: If we know more, we can be more empowered, more confident and more informed. So I want to know and I want everyone else to know the answers to questions like why do prices go up? How and why do banks make money? What even is a dollar or a peso or a euro? What do they represent? And what I love about Matt is that he explains the answers to questions like that. He explains how money actually works by making me laugh. As an example, here's a clip from his podcast where he and his co-host Katie are answering a listener question about whether Matt has any favorite quotes that explain something to him about how the modern financial system works.

4:00Chris Duffy: And here's Matt's answer to that. Warren Buffett has a lot of famous quotes in his famous shareholder letters. He does. I've probably quoted a lot of them. The one that I like the most is at some point, he's like talking trash about gold as an investment. Right. And he's like, you can invest, I think the number was like the market cap of the S &P. He's like, you can put, you know,$32 trillion into the S &P. You put the money into the S &P, you get all the productive capacity of America, all the companies, all the corporate profits, all the business. Or you can put that amount of money into a cube of gold that is like, yay high by yay long by yay wide.

4:34And he's like, and then it'll just sit there. You can fondle the cube, but it will not respond.

4:39Chris Duffy: It will not spin off any dividends, anything like that. No cash flow. I just think of Warren Buffett saying you can fondle the cube, but it will not respond.

4:52Chris Duffy: I am sure that when you downloaded this episode, you did not expect to hear a quote about Warren Buffett fondling a giant golden cube. And there are more surprises and a lot of fascinating insights about our financial world coming up right after this break. So stay tuned.

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8:34Chris Duffy: Today on the show, we're talking about the world of money and finance with journalist Matt Levine. Hi, I'm Matt Levine. I write the Money Stuff column for Bloomberg Opinion. I've been writing about the financial industry for more than a decade. And before that, I was a mergers and acquisitions lawyer and an investment banker. So, Matt, I don't think I've ever, you know, we've been doing this show for six seasons. And I don't think we've ever done this before, but I think for this episode, it would be actually really helpful to start with a caveat, which is that when we asked you to do this show, you were at first a little hesitant to do it.

9:07Chris Duffy: And you said specifically that what you want to avoid is like, where should I invest my 401k or will the stock market go up or will the Fed cut rates that like you don't really feel comfortable giving regular people advice about personal finance. That's not what you do. You're not the like, take your money and put it here and you end up with more money. For me, I'm a person who does not think of myself as a finance person. I don't think of myself as really understanding the world of economics and business very much. And then I started reading your writing and I started reading it because it is funny.

9:41Chris Duffy: Like I read it because it made me laugh. And week after week of reading your newsletter and listening to you, I realized that I was actually understanding a lot more about how the broader world works and all these big forces that are at play in politics and in international relations and in the global finance system that I just hadn't had any real understanding of before. And that's because you're so funny about them, but also you really break them down in a way that a regular person can understand. So that is the purpose of today's episode. And I just want to set that out upfront. That's what the point of the episode is.

10:15Chris Duffy: Yeah. It's weird to be a financial columnist because people are like, what stock should I buy? And I said, I'm not that kind of financial columnist. Let's talk about some of the stuff that I've learned from you and that we can talk about it. One thing is, I always knew that there was a thing called commodities, but I don't really understand what that was, right? Because like I go to the store and I buy a bag of cocoa powder because I'm going to use it for baking. That's a very clear purchase. And yet there's also people who are investing in cocoa. So can you like break down how commodities work?

10:46Chris Duffy: A thing you talk about in your newsletter sometimes is how they have become abstract and not just the concrete version as well. It's funny. I would almost push back on the word investing, although people do invest in cocoa. But what happens is that abstractly there are people who produce cocoa, cocoa growers, and there are people who use cocoa and making Hershey's, uses cocoa and making chocolate bars. And they might want to lock in the price of cocoa today so they can trade futures on the commodities exchange. which is a contract for conceptually, it's I'll deliver you a thousand pounds of cocoa in six months.

11:22And so we agree on a price today for a delivery of cocoa in six months. And that is a financial contract. Like it's a real thing. It's sort of like, oh, I'll deliver you cocoa in six months. But most people who trade these on exchanges, that's not really what's happening. They're not really, that's not really how Hershey's makes its plans to make cocoa bars, to make chocolate bars. What they do is they buy chocolate, they buy cocoa in the normal market when they need it. And then there's this separate financial market where they hedge their price risk. So they make financial bets on cocoa. I say that they don't really invest because most people doing this are hedging.

12:01They're not like, I'm going to store cocoa for the next 20 years to fund my retirement. They think I'm going to make some sort of bet on the price of cocoa in six bonds. And that is very related to Hershey's actual business of buying cocoa powder to be delivered to its factory to make chocolate bars, but it's not the same business. And so there are two sort of separate markets. And I read about this a lot because one, that's interesting. And two, it doesn't work. Like that idea of betting on the abstract price of cocoa can't work unless there's some way to link them. There's some way to turn abstract cocoa into actual cocoa.

12:39And there is, basically what it is, is like these financial contracts, they are for delivery of cocoa, but because people don't usually get it for their factory, like it's delivery of cocoa means something like you get a receipt for like some cocoa sitting in a warehouse and then you can trade that receipt again, or you could take it out of the warehouse if you wanted to. But I've written in the past, sometimes there are weird problems where the cocoa in the warehouses is not the very best cocoa, which when you think about it for a minute, makes total sense because it's just there to support financial contracts.

13:15If the best cocoa, you put it in chocolate bars, the second best or the older stuff. So there have been stories about coffee futures where it turns out the coffee beans in the futures warehouse are quite old because no one takes them out. And they probably wouldn't taste that good. there are rules about how old the coffee beans can be or how long they can sit in the warehouse. And there was a story about they couldn't be in the warehouse for more than a certain amount of time, but you would take them out and then put them back in. They would restock the clock, which is not good for coffee, but it's good for the abstract rules of the exchange that sort of allow you to connect the financial price of cocoa to the actual price of actual cocoa.

13:52But that messy linkage between them, I think, is really interesting. I read about the financial markets, right? And the financial markets are this sort of abstraction of the real world, right? Like everything in finance is that, right? Like a share of stock somehow represents something about like a collection of like factories and employees and, you know, actual business, right? But it's like abstracted into this one thing. And I like writing about like the places where those abstractions break down or get messy. It's interesting also, you started by saying something like, you don't know what a commodity is.

14:23My favorite commodity these days is like, who will win the Patriots game this weekend, which is another thing I've been writing about a lot, which is that through this confluence of very strange historical and regulatory and business factors, there are now regulated commodity exchanges in the US that allow you to bet on football games.

14:46Chris Duffy: These are the prediction markets and sports betting, right? Like there are two versions of ways you can do that or... Yeah, there's two versions, right? So one version is sports books, which are not regulated commodity exchanges. Those are gambling companies that used to be illegal in most places in the US. And in recent years, they've become legal in most states and a huge national business. And then very recently, basically since Trump was elected, prediction markets, which are registered as commodity exchanges and are regulated by the US commodity regulators, if they offered predictions on sports, no one would stop them.

15:18And so even though it's probably illegal under the text of the rules, no one's quite sure, And so they're just like offering prediction markets on sports and you can predict who will win the Jets game. And if you predict correctly, you will win money. That's like the way around state gaming regulation and very bizarre.

15:37Chris Duffy: You wrote about how like a stock price is in some ways a prediction of where you think the stock is going, if it's worth that money or not. If this actual thing is going to happen, you were doing it in the context of a merger. Yeah. Any financial market, people have different motivations for it. So one reason to buy a share of stock is, the normal reason to buy a share of stock is you're a person, you have a retirement account, and you think explicitly or not, you think, I want to own a slice of American economic growth. And the simplest slice of American economic growth is you buy a lot of shares of, buy stock in a lot of big companies.

16:20That's an index fund, an S &P 500 index fund. Shares of stock in lots of big companies gives you some sort of broad cross-section exposure to American economic growth. That's the normal reason that you and I would buy stocks. But another reason is you like a bet. You're like, yeah, I think that this Tesla, I like the cut of this guy's jib. I'm going to bet on Tesla. People have all sorts of motivations. A thing that people have always said is the financial markets are a casino or they're partially a casino or there's a casino like element to them. And we've moved more of the real casino into the financial markets.

16:51Chris Duffy: So I want to just actually read a quote from one of your newsletters that I really enjoyed, which is you wrote a theme that I think about a lot these days is that modern finance creates layers of abstraction on top of real world activity. And sometimes those abstractions become unmoored from the reality. And a share of Apple Inc. stock encapsulates all of the labor and creativity that went into inventing the iPhone and manufacturing it and selling it and building app stores and everything else. All the factories and offices and decades of decisions are all reflected in the tradable electronic token that is a share of stock.

17:23Chris Duffy: And you can just buy Apple shares on your phone without knowing about any of that stuff. The abstractions are so successful that you might lose sight of the underlying activity. The complex apparatus that links a share of Apple stock to all of its underlying reality is largely invisible. And sometimes people forget about it. A thing that I think everyone would benefit from is understanding the ways in which like the actual underlying reality of our world and the linked financial reality of our world sometimes match up perfectly and sometimes don't. I feel like that's something that if more people understood, they would have a lot better sense of why things happen the way they do in the world and in politics and in economics.

18:03Yeah. And sometimes I feel bad because I more often write about places where it doesn't work, right? If you read my call, you might think the financial system is a mess. But that's not, that's just because like I write about the messes. I write about the, because I feel places where it breaks down, like sort of interestingly illuminates something about how the connections work, but also they're funny.

18:22Chris Duffy: That paragraph that I just read was an intro into you talking about how people had started trying to sell instead of gold that is out of the ground, gold that is still in the ground that has not yet been mined. It's so good. Yeah, this company is like, we're going to sell you tokens that represent some gold that we aren't going to bother to mine because this is more environmentally efficient. If we just don't take the gold out of the ground, you can own gold that's just in the ground. And if we did take the gold out of the ground, we'd make a mess. And then we'd get some rock and we'd crush the rock and we'd put the horrible chemicals in it.

18:49We'd extract the gold and we'd be very environmentally degrading. And we'd end up with these bars of gold. And then what we'd do is we'd put them in the basement of the Federal Reserve and you'd own gold underground anyway. So why not just leave it underground and not do any of this? which I think is a fabulous idea that can't really work, but like, yeah, you see where they're coming from. A bunch of people emailed to say, well, I mean, really, if you're buying share of stock in a speculative gold miner, which is a real thing, like there are a lot of gold miners who are not profitably producing gold, but like have speculative claims and like, you know, they'll hopefully eventually sell them to a bigger miner.

19:22If you buy a share of stock in that, like that's basically what you're buying. You're buying some gold in the ground that hasn't been mined and you're hoping that one day it'll be mined. Although this one, they're not hoping to mine it. They're specifically not going to mine it.

19:33Chris Duffy: The thing that I think is very funny, because as a concept, it's funny to be like, I invest in gold. And then someone says, oh, and where's your gold? And you go, oh, it's still in the ground. That's funny. If I am buying gold, and I'm probably doing it because I think that will result in more money. But when I think about what more money means, it's really like numbers on a computer screen. It's all numbers on a computer screen. I guess my question to you is like for a regular person, for someone like me, like how much is money real and how much is it just a shared understanding that like the numbers we're going to say the numbers are real?

20:10I think it's very hard to imagine money being real. I think of money as primarily, loosely speaking, a way to track people's claims on society. If you have a lot of money, what it means is you can get people to give you stuff and do stuff for you. It doesn't mean I can make you take out my trash. It just means, yeah, if I have a lot of money, I can pay someone to take out my trash. That is its level of reality. If you're being cynical, you can say it's a collective delusion, but that's not, I don't think that's right. I think it's a collective agreement to like, you know, track claims in that way.

20:47If you have dollars, the thing you mainly have, like not just dollars in your wallet, but the thing you mainly have is an entry on a computer at a bank saying that you have X dollars at that bank. And what that is literally is that the bank owes you that number of dollars. Like it's a debt claim on the bank. It's a special kind of debt, but it's debt. The bank owes you that money. And if you said, well, I don't want to be owed dollars. I just want to have dollars. That's like kind of a category error. There's no such thing. You can't have dollars that aren't owed to you. You can in the sense of dollars in your wallet, but although like those are sort of in theory, like money that the Fed owes you, not really, but like whatever.

21:29Most people don't have all of their wealth in dollar bills, right? And if you have dollars in any other form, it's like a computer entry saying what the bank owes you. And this is controversial. And there's talk about having a system where instead of having dollars at the bank, you have dollars at the Fed. And then the Fed owes you the dollars and they're like more real dollars. But for the most part, the way it works is that dollars are debt claims on someone. And that makes sense when you realize that's what they are. Like dollars are claims on society to do stuff for you.

22:01Chris Duffy: Okay, we're going to take a quick break so we can make some claims on society, otherwise known as money, and then we will be right back.

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24:39Chris Duffy: and we're back. So Matt, one of the questions that I have for you is about AI, because when I think about all of the things that I understand or think I understand about finance and money and value, it has to do with making a product that has some sort of clear value. And yet these AI companies are some of the most funded companies in the world. They have unprecedented values, and yet they don't really make anything yet, right? Like they make the promise of a thing. So I guess what would an AI company do to actually make money? OpenAI's business model is famously, we'll ask the AI to tell us how to make money.

25:12Chris Duffy: Exactly. But they're also kind of saying, we're going to create a world where money has no value, where it's meaningless now because the AI can just do everything for everyone. OpenAI sort of famously said explicitly, it is hard to know the role of money in a post-artificial general intelligence world. If you think of money as like a way to keep track of people's claims on each other, or people's claims on society, you accrue money by doing stuff for society, doing stuff for other people, right? Doing stuff that people want, and then they give you money for it. And then you have money, and then you can get other people to do stuff you want, right?

25:42Everything you want can be provided by a computer. Then what's the use of money? And how do you earn money, right? I mean, this is like a real thing that people talk about with AI is if in a world where a lot of jobs are replaced with AI, what happens to the people who have those jobs? It's a question of like, how do we reallocate our claims on each other if we don't do anything about it? What happens is that everyone loses their job and has no way to make money. And Sam Altman has all the money because he owns the AI that accrues all the claims on society. And that's a pretty dystopian outcome, which is why people in Silicon Valley like to talk about universal basic income and why OpenAI used to like to talk about building AI for the benefit of humanity rather than for commercial purposes, although they changed because it turns out they needed a lot of money.

26:27Those are probably overblown and science fictionalized. Those are the real philosophical issues of AI economics, which is that these money claims don't make sense in a world where people aren't doing stuff for each other, but computers are doing stuff for everyone.

26:43Chris Duffy: I've been talking to you about some of the big philosophical stuff, but you often write about how in overheated financing markets, certain types of startups become very easy to get money for them. And so they kind of become quickly like the more absurd cases exist more and more quickly. And one that you read about is right now, so many people want to invest in AI companies that there was an AI company that refused to talk about what they were going to do. And that it might very well have just been people wanting to hang out with each other, but they got a bunch of money. Yeah. And to be clear, I was exaggerating.

27:17They have since launched a product that people like. And these people are very accomplished AI people who left fancy jobs at other fancy AI firms. And you could very reasonably, as a venture capitalist, think they will do something good in AI. But as we just talked about, doing something good in AI, the economics of that are unclear. And the people who seem to have attracted a lot of funding in AI are often the people who are genius fundamental AI researchers. This is shifting, right? Some of the genius fundamental AI researchers are leaving the biggest labs because the biggest labs are pivoting to selling ads online, which is a natural progression.

28:00But for a while, if you were just an intellectual leader in the field, you could just get money for being an intellectual leader in the field. And in that case, why would you sell ads, right? Why would you be like, oh yeah, we're going to have a really good commercial product. Why wouldn't you just be like, we're going to do fundamental research. We're going to hang out with our friends who love fundamental AI research. Yeah, maybe a product will come out of that somewhere. But right now, investors will give us$10 billion, so we don't have to worry about it very much. I make fun of that because it's fun and because I'm very jealous, but it's not clear that it's wrong on the part of the investor.

28:30It is the case that people at OpenAI were doing fundamental AI research in the wilderness for a while. They haven't made hundreds of billions of dollars of profit. But if you're an early investor in that, you did well without necessarily asking hard questions about how will you make money, right? I don't know. We'll ask the AI when we have an AI. And you're like, fine, take my money. And you made 100 times your money. So it worked out fine.

28:54Chris Duffy: Yeah, in some ways that did work. Well, another of these speculative kind of will it or won't it pan out examples in the finance world was the world of cryptocurrency, where it's confusing to understand what its actual use case was and would it actually make money. And yet there was a ton of money going in and continues to be a ton of money going in. Yeah, I still don't know if it worked out or not. Something that you have written about with cryptocurrency is that the crypto world has relearned the lessons of banking and finance, except in a much more compressed timeline. That like a lot of the problems and solutions that crypto has developed are ones that the finance world developed over hundreds of years or a hundred years.

29:33Chris Duffy: And they're doing it in like decades instead. Yeah. And they're all like 24 and on Twitter. So it's like you see it more. It's really fun. In 2022, there was a crypto meltdown that truly replicated. To me, the touchstone event in financial markets is the 2008 financial crisis. I was working at an investment bank then. I came into journalism a few years later. And for me, and I think for a lot of people in financial journalism, that's the reference point for a lot of what you think about in terms of structured products, in terms of banking meltdowns, in terms of where the risks are. You think about 2008.

30:07And in 2022, crypto just had 2008. They just did it again. And it's fascinating to watch it. Me and everyone in traditional finance and everyone in financial journalism, we're like, oh, yeah, we know how this works. But in crypto, they're like, we're going to make it much worse. And it's great. It's great to be like, oh, yeah, I know this deal. Can you be more specific about what that was for people who aren't familiar about it? Fundamentally, a financial crisis is someone is borrowing short-term to make long-term bets and their short-term borrowing is from people who think it's safe. And then people are like, oh, we have all this short-term borrowing that people think is safe.

30:41We're going to invest it in magic beans. And then you lose some money and the whole thing topples over and all the people who thought their money was safe find out it wasn't. And there's a run on the bank. They want their money back. All the money flees. Everything gets worse. And people's not speculation, not their like fun money, but like their money they needed to be safe evaporates and they come looking for a bailout. And in 2008, that's kind of what happened. Roughly speaking, that's what happened. And like a lot of what's happening there is essentially institutions, some of which were banks, some of which were not banks, taking money that people thought was safe and transmuting it into second mortgage, interest only mortgages to like people who could not afford their houses, buying million dollar houses.

31:24And so when you looked at that and you're like, well, this is really speculative and risky. And then you look to the other end, it's like, oh, I'm just putting my money in the bank. That's where a financial crisis comes from. And in crypto, that's kind of what happened. People were like, I'm going to park my money at FTX because it's a safe crypto exchange. I'm not going to buy the weird cryptos on FTX. I'm going to just park my money in a stable coin there. And then FTX explodes, right? Because it's making weird, risky bets with the money that people thought was safe and that they parked there.

31:49That's what happened in 2022. And at a variety of crypto places, all of which were kind of like, we'll keep your money safe and pay you 14 % and then did not.

31:59Chris Duffy: So I feel like a lot of the underlying, like the story beneath the story of a lot of modern finance and a lot of what we've talked about is basically like trust and deceit, right? It's like you trust that one thing is happening and then there's a level of deception. And sometimes you know that there might be a level of deception and a lot of times you don't. So I wonder, what would you want regular people to understand about finance in a broader sense so that they can protect themselves? Because I don't think your view is that it's just it's all the casino. You're always gambling. It's not that like everyone can be as savvy as people who are spending 14 hours a day trading these esoteric products.

32:42If you're a sophisticated trader at a hedge fund and someone comes to you with a trade and you're like, ooh, that looks like it makes a lot of money. The question you ask is, why am I making money? What am I getting paid to do? And if you're at a hedge fund, you have sophisticated answers about what risk you are bearing and what behavioral problems are on the other side that you're solving. And if you're a normal person, you should ask yourself the same question. and very occasionally the answer to the question is, I know something about this penny stock or this cryptocurrency or this prediction market that no one else knows.

33:20And so I can make money on it, but you shouldn't expect that to be the case that often. And so like, what are you getting paid for? You've get served an Instagram ad that's make a million dollars a month in passive income from affiliate marketing. It's like, why? Like, what are you getting paid for? What am I, what am I doing that is providing value that is sufficient to be compensated a million dollars a month, right? And so the normal way to invest, the way that I invest, this is not investing advice, is I put my money in an index fund, right? What am I getting paid for? I am providing capital to like economic growth, right?

33:52I'm like investing in a broad slice of American corporations. American corporations, for fairly understandable reasons of their own, like to issue stock. So I can buy some of that stock and if like their profits go up, I get a share of it, right? I can put my money in a high yield savings account at a bank. I can understand why the bank is paying me 3 % a year for that money, whatever, three and a half. If someone on Instagram is up to you 15 % a month, like why? Why does he need my money? Like why am I the person who's getting that opportunity? That's the top for me. That and like the stock market are kind of the top for me.

34:30If I'm getting 30 % of my money, that doesn't make sense. Like, why? Why me? You always have to ask that question and have an answer.

34:38Chris Duffy: Let me take it one level back, though, which is say you're, again, a regular person and you're not thinking about your own money. You're not actually thinking about investing. You're just thinking about understanding. Like, I want to learn more about how finance works. I want to learn more about, like, why people are getting paid that money and why the bank is able to give this interest rate and not that interest rate. and what would make 30 % and who would get access to that? If you're trying to understand the answers to those questions, how do you start to understand this stuff? Like before you worked in finance, how did you learn it?

35:10I was a classics major in college. I was the most unworldly person. A lot of people took the introductory economics class, giant lecture class, and I did not take that class. And when they would talk about it at lunch, I would go to another table because I didn't want to hear about it. And then like, yeah, I didn't have a job lined up after graduation. So I taught Latin in high school for a year. And then as one does with the classics degree, I went to law school and in law school, I was like, oh, this is, I like contracts. Like it turns out that contracts are interesting. And so I became an M and a lawyer because you write contracts and, and it turns out like if you go to a good law school, like they'll just give you a job being an M and a lawyer for without knowing anything.

35:45Chris Duffy: And just to clarify, that's a mergers and acquisitions lawyer. Yeah. And then I did that for a little while and that was like enough for me to move to the financial industry. I worked at a bank and sold derivatives, which is a great way to learn. Yeah. Because it's truly an education process. I was there for about four years. And each year I learned more, not about how the products that we sold worked, but why they worked, why we were making money. So I was a lawyer for a little while, and now I'm a journalist. But one thing that I try to do is look at financial news and try to understand the economic and arbitrage intuitions behind it.

36:25And why is this thing happening?

36:27Chris Duffy: You have spent a lot of time thinking about and researching and writing about the finance industry, about things like insider trading, monopolies, securities, fraud. How has it affected the way that you think about virtues, like being cautious with your money or thrift or honesty? How has it affected the way that you think about those big picture virtues, if at all? My impression is that people are pretty honest. People are trying to do a good job. I was an M &A lawyer, and there are all sorts of theories about what executives and directors are doing when they run companies and when they sell companies.

37:04Many of these theories are kind of cynical. And when you're in a boardroom with people thinking about selling their company, it is striking. The boardrooms I was in, there was very little cynicism and a lot of serious attention paid to trying to do the right thing for shareholders. One reason I got into financial journalism is I worked in finance. And from 2008 to 2011, I'd be reading stories about how evil everyone in finance was. I was like, no, we're fine. We're fine.

37:28Chris Duffy: One thing that money stuff has really helped me to understand is the way that the rules of the systems are set up and the way that different systems have different rules. And one, which I think is a very funny example, but also is very revealing to me, is you've written several times about how if you are working in a specific type of finance and it is your job to invest, losing a billion dollars is not bad for your career. In fact, it is good for your career. am i exaggerating slightly there is definitely a surprising resiliency of people who get blown out of their jobs at hedge funds startups all sorts of places and the next job is like wow someone trusted that person with a lot of money and she took big risks with it which is what we want and she probably learned her lesson right yeah she's not gonna do it again so like yeah you people get rehired after people get hired elsewhere after losing a billion dollars because like the all press is good press thing.

38:27Like you, you were a big name if you're doing that. And like people want to hire big names.

38:30Chris Duffy: That to me is so mind blowing, right? Because it's like, you would think that just on its face, losing an unfathomable sum of money is bad. But as you point out, right, it means that someone trusted you with an unfathomable sum of money and you took a big enough risk to lose it. So we want someone who was trusted. One thing that like people in professional finance, like one thing that people think about really clearly is that the realized results don't give you total insight into whether your decision-making was good. If you have something that has a 70 % chance of making money and you lose money, that'll happen 30 % of the time.

39:08And so people who work in professional finance try to have some sort of rigorous model for understanding what people's edge is and how good they are. and that model tolerates the idea that if you have edge and are good, sometimes you will lose money. There are more sophisticated versions of the model where it's like, yeah, you had a 70 % chance of making money and you lost money, but that will only happen 30 % of the time. So you're a bargain now. And people are thoughtful about that. And so there's an understanding that there's variability there. And you have to have some way of measuring the goodness of the decision-making that is not surely like how much did you make yesterday?

39:49Chris Duffy: I want to ask you about one other kind of, to me, very interesting and surprising element of the modern finance system, which is that there are quite a lot of companies that are these index funds that have big holdings in kind of everything in a way, right? Like they own all of the companies. And you've written before about how there's some question about like, is that a good thing or not for companies to own for the biggest shareholders in many companies to also own all of the other companies in that field. Right. So if you invest in like an index fund, that index fund probably owns quite a bit of other companies.

40:25Chris Duffy: And that's, that's a relatively new thing. This is what I talked about. Like if you're a person and you're investing and you're asking, what am I getting paid for? And the answer is I'm picking the stocks that will go up and not the stocks that will go down. Like, that's a weird thing to think. Like a lot of people are really trying to do that. And they're really, you know, they do it 16 hours a day and they've spent years on it and they have a lot of training and a lot of access to data. And like, surely they're better at picking which stocks will go up than you are. But you can just put all your money in all the companies, right?

40:53You can just get broad exposure to economic growth. And like, that's a reasonable thing to get paid for. And that's why indexing is so big. And look, they're really interesting and like theoretically appealing and funny theories about why these big index funds are bad. but I put my money in index funds and this is not investing advice but like the reason they're so big is that they obviously do an enormously good thing for the average investor but there is some question as to whether like that is outweighed by the bad things they do for competition one of which is there is this idea that if they own all the companies then the companies will have less incentive to compete with each other right it's like every airline has the same shareholders they're all you know BlackRock and Vanguard the big index funds but also like the non-index funds that kind of often a lot of the stock in the new way.

41:40If one airline cuts prices to win business from other airlines, and that just reduces the total profits of the airlines and is bad for the shareholders who own all of them. And so why would they do that? Why would they compete on price when they could just not do that and all be fat and happy? And this is like an academic theory. There's some evidence for it, but it's like a lot of people don't believe it in part because they've met executives who are very competitive, right? It just doesn't sound like a good psychological model of how companies operate. Even if they all have index fund shareholders, they're like, yeah, we want to win.

42:13So I don't know how true that is, but it's a theory that has some legs. And then the other thing that people worry about with these index funds is like they are three or so particular big companies that have particular executives who have particular views. And so for a while, BlackRock in particular, one of the biggest fund companies, shorthanding it a little bit, they were a big advocate for companies caring about the environment and paying attention to their emissions and reporting to shareholders about what they were doing about climate change. And some people didn't like that and would say things like, who made Larry Fink God?

42:48Larry Fink is the CEO of BlackRock. And there's been a huge backlash to that. Whatever you think of the substance of it, it's just interesting that one guy tells all the public companies what to do. And it's not quite true. That's a shorthand. But one guy kind of is in charge of 7 % of every public company. It's unusual. Cool.

43:05Chris Duffy: There's obviously there's so much more to talk about with that, but I'm just curious to hear you talk a little bit about why you think humor and comedy have been so effective for you letting getting people who wouldn't otherwise be interested in finance to be interested in it. Because it seems to me that you have a keen sense of absurdity in the finance world. That is, it's really delightful as a reader. And I'm just curious how you think about it. Like the stuff that's weird is illuminating about the systems, right? Like the places where you can take the coffee beans out of the warehouse and put them back in so they look fresh abstractly, that tells you something about like how the financial system works, but it's also very funny, right?

43:44So that's, there's a lot of overlap there. The other thing that I think about a lot when I think about like the extent to which I do comedy is Elon Musk does a bunch of weird stuff. And I often find myself writing imagined dialogue for Elon Musk, which is like one of the things that people find the funniest about the column is like when I write imagined dialogue for Elon Musk. And it's the same thing, right? It's like Elon Musk is this guy who's going around thinking about like, where can I push against the rules of the system? Where can I do stuff that people just don't do, but that will work for me?

44:19because he is often in the business of sort of pushing back against like how the system works like writing that imagined dialogue clarifies how the system works and is also funny because like he's a funny guy or some of the stuff he does produces comedy so there's a lot of there's a lot of that like absurdity also sort of like explains the system i think a lot about like what i do in terms of um having some niche in the ecosystem where i'm not facing a lot of competition I'm trying to do stuff that other people don't do. And I often find myself reading articles in the financial press that are very serious and thinking, that's absurd.

44:55There's some simple value add there of being like, this stuff isn't always serious. There are just things that don't make sense and that you can point out the things that don't make sense and highlight that they're funny. And that's a differentiator from people who think that's very serious and you should be angry about it.

45:13Chris Duffy: Matt, thank you so much for doing this, for being on the show. I'm such a fan of your work, and it's so cool to get to talk to you. I really appreciate it. Thank you. This is fun.

45:23Chris Duffy: That is it for today's episode of How to Be a Better Human. Thank you so much to Matt Levine. You can listen to his podcast, Money Stuff, or sign up for his fascinating and very funny newsletter, which is also called Money Stuff. Neither are investing advice. I am your host, Chris Duffy, and my new nonfiction book, Humor Me, is out now. you can find out more about my book, my live show dates, and other projects at chrisduffycomedy.com, and I also do not provide investing advice. How to Be a Better Human is put together by a team so good you couldn't buy a better one. On the TED side, we've got the highly valuable Daniela Balarezzo, Ban Ban Cheng, Michelle Quint, Chloe Sha Sha Brooks, Valentina Bohanini, Laini Lott, Tanzika Soongmanivong, Antonia Leigh, and Joseph De Bruyne.

46:01Chris Duffy: This episode was fact checked by Mateus Salas, whose currency is facts. On the PRX side, they're worth their weight in gold, platinum or rare earth metals, Morgan Flannery, Norgil, Patrick Grant and Jocelyn Gonzalez. Thanks to you for listening. You are the most valuable ingredient in this podcast because without you, this is just me talking alone in a closet. So thanks for making it a real thing. Please send this episode to anyone and everyone who you think would value it. We will be back next week with even more how to be a better human. Until then, take care and thanks again for listening.

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