The new Nathan Fielder movie You Can See Everything about Elizabeth Holmes is the rare documentary that has reached the popular culture zeitgeist.
There have been a lot of think pieces written about what the movie means or is trying to say. I don’t need to go into all that.
The fanfare around the movie reminded me that I actually wrote about Holmes in a chapter of my book, Don’t Fall For It.
I forgot just how many intelligent, wealthy people fell for her fraud. One of the biggest problems for rich smart people is overconfidence and herding when it comes to listening to other rich smart people.
It’s worth revisiting, since confidence tends to rise with financial markets in boom times. Here is an edited version of what I wrote in the book:
John Kenneth Galbraith once wrote, “Fools, as it has long been said, are indeed separated, soon or eventually from their money.”
But are the fools really the only ones who get taken? Is it just the poor schmucks who are willingly handing their money over to hucksters and fraudsters? In a word – no. Intelligent people have no problem making irrational choices with their money.
A high income, large portfolio, diploma from a prestigious university, or enviable job title doesn’t automatically qualify you to manage money successfully. In fact, many of the worst investors are highly successful in other fields.
In a roundtable discussion following a visit to Theranos in 2015, Vice President Joe Biden stated he had just witnessed, “the laboratory of the future.” Theranos is the Silicon Valley healthcare company that promised it could take a pinprick of blood from a patient’s fingertip to run a series of diagnostics that would revolutionize the blood-testing process. The company was founded by Elizabeth Holmes, who dropped out of Stanford at age 19 to create a device that, according to her, was “the most important thing humanity has ever built.”
The Holmes story was the perfect Silicon Valley fairy tale, destined to become a best-selling business book and movie. Sadly, this fairy tale turned out to be more of a horror flick, for patients and investors alike.
The chutzpah of Holmes to even invite Biden to take a tour of the facilities is next level considering the entire company was a fraud. The lab Holmes showed Biden was staged. The devices didn’t actually work. The majority of the lab workers were told to stay home that day. Holmes even faked the inflection of her voice, making it much deeper than it actually was in an attempt to sound more serious. Biden was far from the only big name to be conned by Holmes.
Her story was so convincing she managed to fool a who’s who of the wealthy elite. The Walton family, heirs to the Walmart fortune, lost $150 million. Media mogul Rupert Murdoch put $125 million into the company based strictly on gut feel alone. He would later sell the entire stake for $1 to take a tax write-off for the enormous loss on a worthless investment. Betsy DeVos, the Education Secretary for President Trump, and her wealthy family lost $100 million. The list of investors also included New England Patriots owner Robert Kraft, Mexican billionaire Carlos Slim, and a Greek shipping magnate.
Partner Fund Management, a well-known hedge fund, purchased shares at a valuation that pegged the company’s value at $9 billion. On paper, that made Holmes worth a staggering $5 billion.
These investors never suspected anything out of the ordinary was going on with the company because of the prestigious names involved in the project. The Theranos board included former US Defense Secretary Jim Mattis, former Secretary of State George Shultz, retired US Navy Admiral Gary Roughead, former Secretary of State Henry Kissinger, and former Secretary of Defense William Perry. Shultz, the man many credit with helping win the Cold War, anointed Holmes as “the next Steve Jobs or Bill Gates.”
Instead Holmes orchestrated one of the biggest frauds ever, fooling some of the richest investors and well-connected aristocrats around.
Successful people can fall prey to such grievous financial errors because it’s easier to personalize your successes once you’ve reached a certain status in life.
Brendan Moynihan tells the story of Jim Paul in his book, What I Learned Losing a Million Dollars. Paul made a killing trading commodities as a young man but lost a fortune once the fianncual windfall went to his head.
Moynihan learned from Paul that, “Personalizing successes sets people up for disastrous failure. They begin to treat the successes totally as a personal reflection of their abilities rather than the result of capitalizing on a good opportunity, being at the right place at the right time, or even being just plain lucky. They think their mere involvement in an undertaking guarantees success.”
When you have money, name recognition, celebrity or power it can make you feel invincible.
Too much intelligence can be a dangerous thing because it can lead to overconfidence in your own abilities. And when others around you assume intelligence is the be-all, end-all, no one else holds you accountable for your decisions.
We as a species are prone to hundreds of documented cognitive biases, but the hardest one to wrap your head around is blind spot bias. This is the idea that it’s much easier to see bias in others than yourself. Intelligent people are more prone to this issue than anyone because you become so good at self-deception.
Researchers Richard West, Russell Meserve, and Keith Stanovich performed a variety of studies that confirm this idea. Not only did they find an inherent blind spot bias through their research, but they found an even bigger blind spot towards biases from those with higher cognitive abilities. After testing for seven cognitive abilities, these researchers concluded, “In addition, cognitive ability did not attenuate this metacognitive bias. Furthermore, people who were aware of their own biases were not better able to overcome them.”
Said another way, smarter people may be worse off than others at recognizing their own limitations. This makes sense when you realize intelligent people have more firepower to convince themselves through the power of self deception.
This is why even smart people make dumb decisions with their money.
Further Reading:
Type I and Type II Charlatans
