In September, 2008, Dick Fuld, the Chairman and CEO of Lehman Brothers, traveled from his office on the thirty-first floor to Lehman’s trading floor to make an announcement. “I know some of you are unhappy with the performance of the stock,” Jared Dillian, a former Lehman employee reports in his memoir Street Freak. “And so am I. As you know, I own a lot of stock. And this has been just as painful for me as it has been for you. But we’re going to… get the stock back up to eighty-five bucks.” Fuld concluded on a reassuring note. “And don’t think I forgot about that one-fifty!” alluding to his long-term goal. Lehman filed for Chapter 11 bankruptcy protection on September 15th.
In September, 1998, precisely ten years before the collapse of Lehman Brothers, John Meriwether, the founder of Long-Term Capital Management, wrote a letter to investors announcing that “we see great opportunities in a number of our best strategies.” Long-Term’s equity plummeted from $2.3 billion to just a few hundred million dollars by the end of the month. The fund was liquidated two years later. According to Roger Lowenstein, author of When Genius Failed, “[Merriwether’s] analysis was devoid of any suggestion that anyone at Long-Term had made a mistake.”
Why does overconfidence sometimes flourish as our odds diminish? In nearly every corner of human life involving prediction—from poker tables in Las Vegas to corporate board rooms in Manhattan—we’d be better off if we were more realistic about our chances. But no. We double down. And we usually pay the price.