What 'The Big Short' Can Teach You About Money

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Ten years after the 2008 financial crisis, we’re still picking up the pieces. Historians will continue to pick apart the 2008 financial crisis for many years to come and new facts will come to light. But for the most part, we already know the basics of what happened.

It’s just that most of us don’t have a doctorate in Economics. Understanding what happened outside of “people lost their homes and everything generally sucked for a while” is difficult for laymen.

One recent film tried to help normal folks like me understand what went down behind the big bank curtain on Wall Street. The Big Short (2015) is a film based on a book of the same name by Micheal Lewis. The film takes the concepts laid out in the non-fiction title and tries to make them palatable and easily understood.

While the film writers do generalize and skew a few aspects of the crisis, their base estimations were correct. So what can we take away from the Oscar-winning film? Let’s take a look.

1. Don’t Believe the Delusion

When everything you touch turns to gold, it’s easy to believe that nothing you do will fail. This seems to be the biggest lesson the filmmakers try to teach in The Big Short.

One of the biggest problems in the pre-2008 housing market was that investors actually believed the market to be invincible. No matter what risky or criminal thing they did, the market grew and they made money.

Early on in the film, Selena Gomez (as herself — a fun meta the film uses throughout) explains how a Synthetic CDO is like a game of Blackjack where spectators are (stupidly in my estimation) making side bets on the players. When the house wins, everyone loses, even the side betters.

The lesson? The house always wins. While the metaphor does break down (one of the side-betters had to win, right? But nearly everyone involved lost in 2008), it is the perfect metaphor for what happens when you get caught up in the “game” of money.

You Will Fail, so Plan on Failure

You end up forgetting that there is a statistical probability of failure.

In fact, you will fail eventually, even if you know how to play the odds correctly (Blackjack being one of the few casino games you can play intelligently). The overall point of the film? Only a few people saw what was coming and so many people involved should have known better.

The mirage always looks real until it disappears. And when everyone believes the mirage is real, it’s easier to believe in it yourself.

Instead of investing in popular trends, investigate what is tried and true.

2. The Shortcuts Will Always Screw You Up

Say you wanted to buy a house in downtown Seattle pre-2008. Your credit history pretty much didn’t matter, there was always someone willing to lend you money, even if it was the crummiest mortgage out there. They didn’t care; you were giving them money and nobody was looking over their shoulder.

And in turn, people were buying into suboptimal mortgages called “subprime.” These mortgages were often variable, meaning the interest rate might have been low when they bought it, but could suddenly rise in the blink of an eye.

The banks were taking shortcuts. Investors were taking shortcuts. And they were convincing buyers to take shortcuts.

It screwed everyone. Royally.

As a consumer, it’s important you don’t blindly follow the “experts” or “professionals” when it comes to your own money. If you don’t understand something, ask them to explain it.

If you think about it, the people above were neck deep in the mortgage business. And they did not believe the housing market was a bubble ready to burst.

They were the experts.

In the film, another group of experts figured it out. So, I’m not saying don’t trust the experts. But be educated in your financial decisions.

An Anecdote About Education

Last year I bought my first house. We had enough saved up for a sizeable down payment and when we found our dream home, we went for it.

While going through the mortgage process, our broker was excellent. She’s been in the business for thirty years. But the fact she’s been in the business that long means she would sometimes gloss over terms. She forgot we were new.

I would often ask her to stop and explain. We signed nothing without fully understanding it first. It was stressful but well worth the effort.

While we should still blame the crooks in the pre-2008 mortgage business for deceiving people, it’s still up to the consumer to protect themselves and become educated.

3. Never Underestimate the Risk

Once you’re educated and know the risks, be realistic. If you have enough capital, it might be reasonable to take on something high-risk, high-yield.

But you must believe them when they tell you it’s “high-risk.” And you’ve got to know you could lose everything in that bracket.

The banks themselves did not take this advice. They thought that securitization, the packaging of mortgages and selling them to investors in droves, would keep the market stable. The problem is, although these mortgages made them a lot of money, they were all still high risk.

Interest rates went up too high and bam! Investors got finicky. Suddenly all those securitized mortgages were worth nothing on Wall Street.

The banks took a risk without really evaluating their risk. They made false assumptions about where to lay the chips.

Seek Wisdom in All Things

Wisdom and knowledge are two very different things. They can work hand-in-hand, but without wisdom, knowledge will only make you believe you’re secure in all things.

That’s essentially the lesson “The Big Short” teaches us all. Be wise in what you do.

What did you learn from The Big Short? Let’s continue the conversation in the comments below.

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