Episode 286: Errol Morris: Tuning out the Noise

0:03This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, and Cameron Passmore, portfolio managers at PWL Capital. We have a very special conversation with a very interesting person, Errol Morris, Academy Award-winning film director and author, joins us to talk about a recently released documentary called Tuning Out the Noise. So before Ben, you jump in and talk about the movie, let me give a quick background on Errol because it is so impressive. He, as I said, this recently released documentary called Tuning Out the Noise.

0:46But before that, he has won many awards, including an Oscar for The Fog of War. Roger Ebert called his first film Gates of Heaven from 1978, one of the 10 best films of all time. He's also the author of two New York Times bestsellers, Believing is Seeing and A Wilderness of Error. He's also a regular contributor to the New York Times Opinion Pages and Op Eds. He's also directed, get this, over a thousand television commercials, including campaigns for Apple. He tells a story in our conversation about working with Steve Jobs, who is actively engaged with Errol on the production and design of the ads.

1:25He's also directed short films for the 2002 and 2007 Academy Awards, ESPN, and many charitable and political organizations. In 2001, he won an Emmy for Photo Booth, which was a commercial he did for PBS. Yeah, pretty cool. Pretty cool. So we ended up talking to Errol. I mean, people may be wondering, okay, this sounds impressive, but why are we talking to him on this podcast about financial decision-making? So his, I think second most recent project, because he just had another new one come out, is a film called Tune Out the Noise, which is a documentary that Errol Morris directed. It's about the evolution or revolution that's happened over the last sort of 60 years in financial markets and investing.

2:07And the story includes many of the people that we've had as guests on the podcast. Obviously, we've had many people with connections to the University of Chicago. And a lot of that group, we've told bits and pieces of the story before, but a lot of that group cross paths at the University of Chicago just as computers were first getting the capability to analyze data. This is people like past guests, David Booth, Fama, Mac McCrone, other people like Rex and Jeannie Sinkfeld, and a ton more people that just took advantage of the technology that was becoming available and applied it to how we view and think about financial markets.

2:45The story is incredible. It runs over decades and it's really a story of science triumphing over, I don't know, human nature, the desire to speculate and compete and feel like we have control over our outcomes when in this case, we may not as much as we would like to think so. And Errol talks quite a bit about that throughout our conversation. So he's made this film and it's interesting to talk to him about the story in general, but the incredible thing is he came into this project without knowing any of it, without having the typical view of financial markets that you can pick stocks and you can, I think he said during our conversation, you can hunker down and really think and outperform.

3:23And so he went through this transition and this learning experience for his own personal investment philosophy as well. And so that given who he is and his ability to do research and tell stories, hearing how this story impacted him is a really interesting part of our conversation. Yeah. And how he decided to even tell the story that there was enough meat in this story to tell. and he was so taken by these characters and the serendipity that happened back in the 60s, 70s, and 80s for these characters that come together. We've talked about this story many times. You think back to our conversation with Robin Wigglesworth, for example, the book Trillions.

3:56It's largely what this story is about. It was quite something to hear how he decided to actually make this movie. Yeah, but you're right. It's the two pieces. It's the story, which we've heard bits and pieces of, and we've heard it from Robin Wigglesworth almost in full. So there's the story and talking about that is interesting. But then I really think talking about the impact of telling the story on Errol is also really interesting. We got both of those throughout this conversation. It's also worth mentioning that this is the most unique kickoff to conversation we've ever had. So we just started talking and it was just so good.

4:29We just let the tape roll without any sort of formal welcoming. So we're super thrilled to welcome him, obviously, even though there's not a formal welcome at the front end of our conversation, which as regular listeners know we do every time. Well, the chatting was just so good. It was like, we can't give up on the chat. You know what I mean? And we were both kind of stunned when he said he knew who we were when he jumped on the call. Stunned, more than stunned. He said that we're familiar faces or something like that. And I was kind of like, excuse me, are you saying that you've watched our podcast before?

5:00And he had, I guess that was part of his research for this project. Okay. Good to roll, Ben. Yeah, I think that's good. Let's go ahead to the episode. All right. Here's our conversation with film director, Errol Morris.

5:15So we have you for about an hour. Well, you have me as long as you need me. Do you have any questions for us? I'm a fan of your podcast. So there you go. It's quite something to have interviewed many of the guests that you had on the documentary. Incredible personalities. I was fortunate. It's a great collection of, it's a kind of rogues gallery, if you like, of very disparate, in many ways, disconnected characters, all of whom are really quite extraordinary. Compelling and extraordinary. I got to ask her, you said that we are familiar faces and that you're a fan of our podcast. You're saying that you've listened to our podcast?

5:58You have made the appropriate inference. Wow. It was an obvious inference, but it's surprising to hear you say that. I was not expecting to hear you tell us that you have listened to our podcast. That's a treat to hear. Absolutely. I sometimes say I make movies so I can learn something. And certainly making this movie tune out the noise, I learned an enormous amount. An extraordinary experience. just the opportunity to interview all of these people, to film a lot of David Booth's art, certainly not all of it, but some of it. And I have a background in history and philosophy of science. And very early on, I still am interested in this.

6:47I should write a book if I had the wherewithal, the time, or the intelligence of just the connections between the financial revolutions in the 50s and 60s and the scientific revolution in the 16th and 17th centuries. The parallels seem to be extraordinary, extraordinarily interesting. I hint at it in the movie, but of course, I don't really have any time to fully explore it. That would take a movie in and of itself. So, can you tell us what story it is that you are telling with the film Tune Out the Noise? Well, the central story is these massive changes in how investing was done that Dimensional was a big part of.

7:44And certainly, a lot of the people who are central figures in Dimensional were a big part of that financial revolution. And it's not like it has one part to it. It has many parts, as you well know, the whole appreciation of markets, what a market does, what a market is. But to me, the central comparison between the scientific revolution in the 16th and 17th centuries and what happened in finance in the 50s and 60s was the accumulation of data. It's really an interesting and powerful parallel. You have not the total replacement, but the replacement in part of astrology with empirical observation and theory based on empirical observation.

8:46It's hard to believe, I think, it's hard even for me to believe, and I'm not steeped in this stuff to be sure, that there was a time when people just didn't have data about markets. It just didn't exist. And all of a sudden, that's changed. People started accumulating all kinds of data, and they were amazed by what they found. Totally amazed. And as the data from organizations like CRISP started rolling in, people started building theories on that data. It's a great story. I mean, it's been told by a whole number of different writers, but it's an extraordinary story of how close to nothing was replaced with a new universe of information.

9:50Go figure. Go figure. And the way you describe it, I've seen the movie twice. Would you describe data as being the starring role? I would say data and theory. but the two working together, I guess the data started it off, maybe. Cause and effect is really hard to analyze in these things, but it's clear that once you start having information about markets, you can start assessing what markets really are and how they work. Otherwise, you're just the blind leading the blind. How important is this story to the average person? Well, I don't know about the average person. Or maybe that's me. Maybe I'm the average person.

10:44I know these stories are important to me. I've been an investor for many, many, many years. and learning about the nature of passive investment and the markets was something completely new to me. I just watched Tuning Out the Noise again yesterday to prepare for you guys. And I'm not sure it prepared me very well. You should be the judge. But I was struck by so many things in that movie. Among them is something that I truly believe. There may be no rhyme and reason in history. History is inherently chaotic. Or to quote Merton's father, it's serendipitous in many instances. Things happen, odd connections are made, people with diverse backgrounds are brought together, usually by some odd set of circumstance, and things move forward.

11:55Yeah, it's a version of the Dirty Dozen, maybe. You see all of these incredibly different characters funneling in good measure through the University of Chicago, now the Booth School, so many different backgrounds. It's hard to even describe. You have a shoe salesman from Kansas. It's a great and compelling story for me. I still find it truly compelling. What were your personal thoughts on investing before you started doing your research for this film? Probably like a lot of other people. A lot of it involves magical thinking. A lot of it involves thinking, well, I can be smarter than the next guy.

12:47I can hunker down. I can apply myself to stock tables. I can read articles in the Wall Street Journal. And I can figure it all out. I can figure out how to invest money and how to make it multiply. And of course, it's a sobering thought to think that you can't really outguess the market. And I have to say, having done all of this work? Do I really believe it? In my heart of hearts, have I been convinced by overwhelming evidence? Not completely. Part of us want to see ourselves as somehow in control of our own destinies, of what happens to us. And the idea that markets are efficient and that the prices are already contained in the market itself, the correct prices are already contained in the market itself, it's kind of a downer.

13:58Do you recall some of the points that caused your own views to start to shift a bit, like some of those aha moments perhaps? Interviewing all of these people and watching what they have been able to achieve, how they created a sea change in investing. I wish Bogle had been alive because I would have loved to add Bogle to my list of characters, but it's a pretty great list right there. French, Scholes, Merton. That's a good list. It is a good list. I love these guys. Oh, they're incredible guys. You mentioned being not completely convinced. Can you talk a little bit about how your own investment philosophy evolved throughout this project?

14:52Well, part of it is luck. I have directed over a thousand commercials. I'm not sure I should brag about this. Maybe I should apologize rather than brag. But years ago, I did probably well over a hundred commercials for this little-known company, Apple Computer, I would talk to the CEO. This is the only instance I can think of where the CEO would call me in the middle of the night to talk about commercials. Who does that? I mean, it's really unheard of, but Jobs did do that. and we would argue. I loved it. We had serious differences in opinion on how commercials should be made, what the truly effective commercials could be.

15:48And I invested in the company. This is the 90s. So that accrued to my benefit. Love it. Can you talk about where the idea for this project, Tuning Up the Noise, came from? I'm not altogether sure that I even remember. I know that I started talking with David Booth, and David Booth was interested in a film. It's not altogether clear what kind of film, but a film about his investment philosophies. And often people will come to me and say, well, I have a great idea for a film. And I will say, well, do you have a great idea about how to pay for it? In this instance, there was a great idea for a film and a great idea about how to pay for it.

16:49and so it came into existence. David has been a wonderful partner in all of this, a person who really facilitated everything, but didn't try to control everything. And that in itself is really unusual. Take my word for it. You don't see that every day. That's interesting. Are there parts of the film that you think David or Dimensional would have rather not have told as part of the story? There are parts of it that made people nervous, and it's inevitable when you're making a film for a company. I mean, it is a company, and there are investors. And so there is always that inevitable concern, are we going to do damage to our business?

17:45It's not inappropriate either. It would be inappropriate if you didn't have those concerns. But I like to think that I made a movie that I'm happy with and they're happy with. Maybe I achieved the impossible. How could that be? That's not supposed to happen. So you mentioned working with Apple and Steve Jobs, and you mentioned all of your commercial work. But my understanding is this is an Errol Morris film as opposed to a commercial project. How did you decide to make it an Errol Morris film? I just made it. And I don't look at it as an advertisement for Dimensional. I think it probably could serve as an advertisement for Dimensional.

18:30Because Dimensional is, and I'm sorry, I'm probably advertising them as I say this. I think it's a good company. It's hard to imagine all of these Nobel laureates in a line signed up to work. at this place. But it happened. And a lot of the people who didn't receive Nobel Prizes either should have gotten them, or they did work that's certainly compatible with a Nobel Prize. I don't know why French doesn't have a Nobel, but it's easy to imagine that he could have one or should have won. I was once interviewing Peter O'Toole years ago and asking him, how is it possible, sir, that you didn't get an Oscar for Lawrence of Arabia?

19:22This might be the greatest movie performance in motion picture history. This is unbelievable. How is it you didn't get an Oscar? And he said to me, because someone else did. And it was Gregory Peck. So, yeah, there's a kind of crapshoot in all of these things. But what's really clear about the people that I was interviewing, four-dimensional, people connected with dimensional, is that they were extraordinary economists who made very, very important contributions to economics. economics, pure and simple. When did you realize that this is a story worth telling? You mean the epiphany? Yeah, like you're meeting these people, you're learning the economics, the data, but when is it like, man, this is something I want to tell?

20:24The I could have had a V8 moment? I think pretty early on. But what interests me when I made for the first time that connection between a history of science and a history of finance. It really, really is interesting that you have these central figures, Copernicus, Tycho, Brahe, Kepler, all before Galileo. And what did Brahe do? He built these observatories and he started accumulating data. I mean, the amazing thing is that this was data done without the aid of telescopes. This was data accumulated with just the naked eye and a lot of astronomical instruments. And as this data starts to pour in, it enabled Kepler to come up with his three laws of planetary motion.

21:25in the end, it enabled a small group of people to change the way we see the world, utterly change the way we see the world. It was called a scientific revolution, probably for good reason, because everything changed. And data played a very important part in all of it. Without Rahi's data, perhaps none of this would have happened. But that's one of those counterfactuals, one of those hypotheticals, which you can never know the real answer to these things, but you can observe that conjunction of data and then people building on that data with new models, new conceptions of planetary motion, new conceptions of the cosmos.

22:16and for whatever reason, we look at it now and you say, well, people really didn't have information about stock prices? How could that be? How could that possibly be? People didn't have information about how markets move and just the realization of what you could have had in your pocket, what you could have had in your wallet if you just left stocks alone or a group of stocks alone and just allowed to increase in value. And all of these changes in our notion of risk and probability, it's a deeper understanding of the world and of the mechanisms in the world from the late 19th century on to the present time.

23:09With your personal experience with the Apple stock as the example, were you skeptical? I don't know if you can generalize on that. I think I was just plain lucky. Although, I will make this claim. I often thought, I'm really stupid. I'm earning good money directing commercials. People seem to like the commercials that I'm making and they hire me to make more and on and on and on and on. But if I had just created a portfolio of the stocks, companies, stocks, companies I was making commercials for, I don't know. I could be living in a castle with turrets rather than just an extremely comfortable home.

24:05So with that though, you come into this project with that experience, with the Apple experience and the other example that you just gave, well, the one counterfactual and the one actual experience. Did you have skepticism when you start hearing that there's data suggesting that people can't beat the market? Of course. I'm human. When data arrived on the scene suggesting that maybe you can beat the market, but most likely you ain't gonna, did that put an end to gambling? I don't think so. I don't know what you would have to do to stop the impulse to gamble. Shoot everybody in the head. I'm not sure that it's possible.

24:48It's just that it's innate in us, the desire to have something for nothing. And if you're asking me, am I immune to those kinds of feelings? Of course not. And I doubt that either of you are immune to them as well. You're right about that. You mentioned that just the level of the people that you were speaking with being impactful. Were there any particular characters that you talked to and came away from the conversation, having a big shift, and you're thinking about this stuff? Each and every one of them. I mean, these guys, I remind myself, they're professors of this, that, and the other thing, but they're used to talking to classes.

25:29They're used to talking to groups of people, and they're eloquent. They really are. Each and every one of them. And another thing which I found amazing, many of them are really funny. They really are. They have extraordinary senses of humor. I interviewed Maquan and Fama early on. And, you know, I've seen your podcast with Fama. Of course I have. And Fama is irresistible. I mean, when I talk about the dirty dozen, when I talk about the shoe salesman from Kansas, you have the guy who created an economics revolution from a suburb of Boston, a crummy suburb of Boston, who really changed the way investment is done.

26:21These guys have changed the way in which, and I don't exaggerate by using this. I have my tendency is twice hyperbole, but this isn't hyperbole. They changed how trillions of dollars were invested. They changed the whole nature of investment. I mean, this is a big, big, big, big thing. I'm not telling you anything you don't know, or probably anything that your listeners don't know. But yes, it's one of my favorite scenes in the movie. I ask Fama, did you really get pleasure from second-guessing Wall Street from proving all of these financial analysts wrong? And you know it as well as I do. He has this fabulous laugh.

27:16He really does. And he starts laughing. He says, of course I did. Of course he did. Of course I enjoyed doing that. You know, poor kid from Malden, Massachusetts, confronts the world of finance and wins. Come on. It's an amazing David and Goliath story, among others. Sure is. Now, you mentioned Bogle. Are there other people who were not in the film that you think are an important part of this story? Well, one regrettable thing, and there's very little I can do about it, is people have a tendency to die. All of them. And so there are people who I wish were still around that I could interview. But we were lucky.

28:02We got a lot of really great people, great characters, and great stories. I mean, I just love the story of Iron Shoals talking about the development of option pricing formula, Black Shoals. and he then tells us it got published in some peer-reviewed journal and Texas Instruments came out with a calculator that could apply his formula to option pricing. Way to go. And I ask Myron, I ask him, did you get any money out of this? Again, you changed how trillions are being invested. Did you get a little runoff from this? Maybe a little skimming off the top of the pond? And the answer is no. Texas Instruments developed a calculator that used their formula for pricing options, and they got nothing.

29:12And then Scholes asked them, well, could you give me a calculator? Maybe just one? Can I have a calculator? And he said, no, no, you can't. It's filled with kind of amazing, ridiculous stories that I find hard to believe. Working at Wells Fargo, the chairman of Wells Fargo, they're developing this idea of index funds and passive investment. And the question is, Bogle becomes interested. And the chairman of Wells Fargo says, I just give it to him. Give it to him. What? You probably know better than I do. How much is Vanguard managing today? Six trillion or more. That seems like a large figure. It's a pretty big number.

30:05It's a big number. Just give it to them. So, I mean, I'm a storyteller, truth be told. And did I really want to make a didactic movie where I was explaining? We were talking about it just in my office this morning. Merton is saying how after he had been shown the Black-Scholes formula for option pricing, he read their arguments and he said, you know, you're right, but for the wrong reasons. Now, I have to fess up here. Do I explain in the movie what the wrong reasons were and why Merton had the right reasons? I don't really, but it's such an extraordinary story I included in what I did. And yes, he developed a stochastic calculus.

31:01He had a different way of mathematizing the problem and conceiving of the problem. But these are really interesting stories of incredibly smart people changing the way we look at the world. I have to ask you, I'm a big fan of learning about storytelling. How important is having a story like this to getting people to understand how important this evolution has been. It's absolutely essential. You don't want a big, fat textbook. Maybe I like big, fat textbooks. I do kind of like them. I like papers. I like reading. I like thinking about stuff and learning stuff. But what propels us to do things?

31:48Inevitably, it's stories. There's a paper that I really love from the 19th century, written by author Schopenhauer, a fun fellow. And it's called The Art of Controversy. And in it, he says there's two ways to win an argument. It's really about how to win an argument. Two ways to win an argument. How do you win an argument? He says, well, there's logic. He says, but we all know no one wins an argument with logic. That's a non-starter. Let's get rid of that right from the start. And he says, this is dialectic. And then he proceeds to give you 36 ways to win an argument any way you can. So the guy has made you look like a complete ass, a complete fool.

32:44you look them right in the eye and you say, I'm glad you've come around to my way of thinking. And on and on and on and on and on. The ugly truth about the world is that it's not based on rationality, at least to my way of thinking. Maybe rationality slips in under the rug from time to time. But for the most part, we're looking at a lot of irrational behaviors. Do I think that history is rational? No, I don't. If I look around me today in the world, I don't see some kind of rational process at work. I see people with competing interests, people contrary values, people confused about what they're doing.