The Big Short Book Summary

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Brief Summary

There is a great disparity between what those who work in finance know and what is accessible to the average American. In fact, even something as seemingly small as the lack of knowledge the average American has about financial terminology played a key role in something huge: the historical financial crisis of 2008. In Michael Lewis’ The Big Short, he chronicles the reasons behind the financial collapse, and how much of it had to do with those who preyed on low-income American’s with a lack of foresight or financial awareness. The book also details the experiences of those who managed to profit off of the economic downturn: those individuals who bet against the housing bubble and won. Read on to learn more about the circumstances that lead up to this historical crisis, why those who caused the collapse didn’t bear the brunt of the financial burden (and who did) and why these seemingly random folks were able to profit.

About the Author

Michael Lewis is an American financial journalist and bestselling non-fiction author. He has written for Vanity Fair since 2009. He has published 18 books, three of which were turned into best selling movies. He is the best selling author of The Undoing Project, Liar's Poker, Flash Boys, Moneyball, The Blind Side, Home Game and The Big Short, among other works. He graduated from Princeton University with a bachelor’s degree in art history in 1982. He enrolled at the London School of Economics and received an MA in economics in 1985. After graduating, he worked in New York for the Saloman Brothers as part of their training program and later in their London office as a bond salesman. He married three times and currently resides in Berkeley, California with his wife Tabitha Soren.

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The Big Short Book Summary Preview

There is a great disparity between what those who work in finance know and what is accessible to the average American: and this can be a huge detriment for American’s in successful financial planning. In fact, even something as seemingly small as the lack of knowledge the average American has about financial terminology played a key role in something huge: the historical financial crisis of 2008. In Michael Lewis’ The Big Short, he chronicles the reasons behind the financial collapse, and how much of it had to do with those who preyed on low-income American’s with a lack of foresight or financial awareness. The book also details the experiences of those who managed to profit off of the economic downturn: those individuals who bet against the housing bubble and won. These outsiders included Greg Lippman, a trader: Steve Eisman, an investor: Charlie Ledley and Jamie Mai, founders of Cornwall Capital: and Ben Hocket, a former investor. Each one profited from the collapse of the housing market by “shorting” big bankers and the like: meaning they invested against credit default swipes, which would only become profitable if the housing market failed. Read on to learn more about the circumstances that lead up to this historical crisis, why those who caused the collapse didn’t bear the brunt of the financial burden (and who did), and why these seemingly random folks were able to profit.

Unchecked optimism was a big problem for sellers and bankers

There were many factors that lead to the 2008 financial crisis. One of which was unchecked optimism on the part of those who were selling the houses. Many of those who were selling houses like crazy were doing so because they had two unchecked beliefs. First, they assumed that since the housing market had never failed in the past, it couldn’t possibly fail now. Second, they held onto the belief that there was no way that all of the people who had taken out loans could possibly default at the same time, which would cause a financial crisis. Both beliefs didn’t have much data to support them but were widely held anyway. Bankers, investors, and others made the mistake of assuming that since they hadn’t ever experienced the housing market crash, it was not going to happen. This lapse in logical reasoning is called the optimism bias. This bias is the tendency for people to underestimate risk in a situation because they can’t remember any recent experiences showing that this sort of risk would end in an undesirable result. Sellers had no recent experience of a housing collapse to draw on: so it seemed like an impossibility while they were selling houses and profiting.

Overconfidence and manipulation ruled sales tactics

In combination with underestimating just how risky giving out those loans was, financial analysts also indulged in another bias: overconfidence. They were overconfident in their ability to predict whether they had the abilities, skills, and judgment to accurately predict the future. Overconfidence was illustrated in the way that lenders gave almost anyone...