What the Dog Saw and Other Adventures

by Malcolm Gladwell

  The mystery solvers of the Second World War were small groups of analysts whose job was to listen to the overseas and domestic propaganda broadcasts of Japan and Germany. The British outfit had been around since shortly before the First World War and was run by the BBC. The American operation was known as the Screwball Division, the historian Stephen Mercado writes, and in the early 1940s had been housed in a nondescript office building on K Street, in Washington. The analysts listened to the same speeches that anyone with a shortwave radio could listen to. They simply sat at their desks with headphones on, working their way through hours and hours of Nazi broadcasts. Then they tried to figure out how what the Nazis said publicly — about, for instance, the possibility of a renewed offensive against Russia — revealed what they felt about, say, invading Russia. One journalist at the time described the propaganda analysts as “the greatest collection of individualists, international rolling stones, and slightly batty geniuses ever gathered together in one organization.” And they had very definite thoughts about the Nazis’ secret weapon.

  The German leadership, first of all, was boasting about the secret weapon in domestic broadcasts. That was important. Propaganda was supposed to boost morale. If the Nazi leadership said things that turned out to be misleading, its credibility would fall. When German U-boats started running into increasingly effective Allied resistance in the spring of 1943, for example, Joseph Goebbels, the Nazi minister of propaganda, tacitly acknowledged the bad news, switching his emphasis from trumpeting recent victories to predicting long-term success, and blaming the weather for hampering U-boat operations. Up to that point, Goebbels had never lied to his own people about that sort of news. So if he said that Germany had a devastating secret weapon it meant, in all likelihood, that Germany had a devastating secret weapon.

  Starting from that premise, the analysts then mined the Nazis’ public pronouncements for more insights. It was, they concluded, “beyond reasonable doubt” that as of November 1943 the weapon existed, that it was of an entirely new type, that it could not be easily countered, that it would produce striking results, and that it would shock the civilian population upon whom it would be used. It was, furthermore, “highly probable” that the Germans were past the experimental stage as of May of 1943, and that something had happened in August of that year that significantly delayed deployment. The analysts based this inference, in part, on the fact that, in August, the Nazis abruptly stopped mentioning their secret weapon for ten days, and that when they started again, their threats took on a new, less certain, tone. Finally, it could be tentatively estimated that the weapon would be ready between the middle of January and the middle of April, with a month’s margin of error on either side. That inference, in part, came from Nazi propaganda in late 1943, which suddenly became more serious and specific in tone, and it seemed unlikely that Goebbels would raise hopes in this way if he couldn’t deliver within a few months. The secret weapon was the Nazis’ fabled V-1 rocket, and virtually every one of the propaganda analysts’ predictions turned out to be true.

  The political scientist Alexander George described the sequence of V-1 rocket inferences in his 1959 book Propaganda Analysis, and the striking thing about his account is how contemporary it seems. The spies were fighting a nineteenth-century war. The analysts belonged to our age, and the lesson of their triumph is that the complex, uncertain issues that the modern world throws at us require the mystery paradigm.

  Diagnosing prostate cancer used to be a puzzle, for example: the doctor would do a rectal exam and feel for a lumpy tumor on the surface of the patient’s prostate. These days, though, we don’t wait for patients to develop the symptoms of prostate cancer. Doctors now regularly test middle-aged men for elevated levels of PSA, a substance associated with prostate changes, and, if the results look problematic, they use ultrasound imaging to take a picture of the prostate. Then they perform a biopsy, removing tiny slices of the gland and examining the extracted tissue under a microscope. Much of that flood of information, however, is inconclusive: elevated levels of PSA don’t always mean that you have cancer, and normal levels of PSA don’t always mean that you don’t — and, in any case, there’s debate about what constitutes a normal PSA level. Nor is the biopsy definitive: because what a pathologist is looking for is early evidence of cancer — and in many cases merely something that might one day turn into cancer — two equally skilled pathologists can easily look at the same sample and disagree about whether there is any cancer present. Even if they do agree, they may disagree about the benefits of treatment, given that most prostate cancers grow so slowly that they never cause problems. The urologist is now charged with the task of making sense of a maze of unreliable and conflicting claims. He is no longer confirming the presence of a malignancy. He’s predicting it, and the certainties of his predecessors have been replaced with outcomes that can only be said to be “highly probable” or “tentatively estimated.” What medical progress has meant for prostate cancer — and, as the physician H. Gilbert Welch argues in his book Should I Be Tested for Cancer?, for virtually every other cancer as well — is the transformation of diagnosis from a puzzle to a mystery.

  That same transformation is happening in the intelligence world as well. During the Cold War, the broad context of our relationship with the Soviet bloc was stable and predictable. What we didn’t know was details. As Gregory Treverton, who was a former vice-chair of the National Intelligence Council, writes in his book Reshaping National Intelligence for an Age of Information:

  Then the pressing questions that preoccupied intelligence were puzzles, ones that could, in principle, have been answered definitively if only the information had been available: How big was the Soviet economy? How many missiles did the Soviet Union have? Had it launched a “bolt from the blue” attack? These puzzles were intelligence’s stock-in-trade during the Cold War.

  With the collapse of the Eastern bloc, Treverton and others have argued that the situation facing the intelligence community has turned upside down. Now most of the world is open, not closed. Intelligence officers aren’t dependent on scraps from spies. They are inundated with information. Solving puzzles remains critical: we still want to know precisely where Osama bin Laden is hiding and where North Korea’s nuclear-weapons facilities are situated. But mysteries increasingly take center stage. The stable and predictable divisions of East and West have been shattered. Now the task of the intelligence analyst is to help policymakers navigate the disorder. Several years ago, Admiral Bobby R. Inman was asked by a congressional commission what changes he thought would strengthen America’s intelligence system. Inman used to head the National Security Agency, the nation’s premier puzzle-solving authority, and was once the deputy director of the CIA. He was the embodiment of the Cold War intelligence structure. His answer: revive the State Department, the one part of the US foreign-policy establishment that isn’t considered to be in the intelligence business at all. In a post–Cold War world of “openly available information,” Inman said, “what you need are observers with language ability, with understanding of the religions, cultures of the countries they’re observing.” Inman thought we needed fewer spies and more slightly batty geniuses.

  6.

  Enron revealed that the financial community needs to make the same transition. “In order for an economy to have an adequate system of financial reporting, it is not enough that companies make disclosures of financial information,” the Yale law professor Jonathan Macey wrote in a landmark law review article that encouraged many to rethink the Enron case. “In addition, it is vital that there be a set of financial intermediaries, who are at least as competent and sophisticated at receiving, processing, and interpreting financial information… as the companies are at delivering it.” Puzzles are “transmitter-dependent”; they turn on what we are told. Mysteries are “receiver-dependent”; they turn on the skills of the listener, and Macey argues that, as Enron’s business practices grew more complicated, it was Wall Street’s responsibility
to keep pace.

  Victor Fleischer, who teaches at the University of Colorado Law School, points out that one of the critical clues about Enron’s condition lay in the fact that it paid no income tax in four of its last five years. Enron’s use of mark-to-market accounting and SPEs was an accounting game that made the company look as though it were earning far more money than it was. But the IRS doesn’t accept mark-to-market accounting; you pay tax on income when you actually receive that income. And, from the IRS’s perspective, all of Enron’s fantastically complex maneuvering around its SPEs was, as Fleischer puts it, “a non-event”: until the partnership actually sells the asset — and makes either a profit or a loss — an SPE is just an accounting fiction. Enron wasn’t paying any taxes because, in the eyes of the IRS, Enron wasn’t making any money.

  If you looked at Enron from the perspective of the tax code, that is, you would have seen a very different picture of the company than if you had looked through the more traditional lens of the accounting profession. But in order to do that you would have to be trained in the tax code and be familiar with its particular conventions and intricacies, and know what questions to ask. “The fact of the gap between [Enron’s] accounting income and taxable income was easily observed,” Fleischer notes, but not the source of the gap. “The tax code requires special training.”

  Woodward and Bernstein didn’t have any special training. They were in their twenties at the time of Watergate. In All the President’s Men, they even joke about their inexperience: Woodward’s expertise was mainly in office politics; Bernstein was a college dropout. But it hardly mattered, because cover-ups, whistle-blowers, secret tapes, and exposés — the principal elements of the puzzle — all require the application of energy and persistence, which are the virtues of youth. Mysteries demand experience and insight. Woodward and Bernstein would never have broken the Enron story.

  “There have been scandals in corporate history where people are really making stuff up, but this wasn’t a criminal enterprise of that kind,” Macey says. “Enron was vanishingly close, in my view, to having complied with the accounting rules. They were going over the edge, just a little bit. And this kind of financial fraud — where people are simply stretching the truth — falls into the area that analysts and short-sellers are supposed to ferret out. The truth wasn’t hidden. But you’d have to look at their financial statements, and you would have to say to yourself, ‘What’s that about?’ It’s almost as if they were saying, ‘We’re doing some really sleazy stuff in footnote 42, and if you want to know more about it, ask us.’ And that’s the thing. Nobody did.”

  Alexander George, in his history of propaganda analysis, looked at hundreds of the inferences drawn by the American analysts about the Nazis, and concluded that an astonishing 81 percent of them were accurate. George’s account, however, spends almost as much time on the propaganda analysts’ failures as on their successes. It was the British, for example, who did the best work on the V-1 rocket problem. They systematically tracked the “occurrence and volume” of Nazi reprisal threats, which is how they were able to pinpoint things like the setback suffered by the V-1 program in August of 1943 (it turned out that Allied bombs had caused serious damage) and the date of the Nazi V-1 rocket launch. K Street’s analysis was lackluster in comparison. George writes that the Americans “did not develop analytical techniques and hypotheses of sufficient refinement,” relying instead on “impressionistic” analysis. George was himself one of the slightly batty geniuses of K Street, and, of course, he could easily have excused his former colleagues. They never left their desks, after all. All they had to deal with was propaganda, and their big source was Goebbels, who was a liar, a thief, and a drunk. But that is puzzle thinking. In the case of puzzles, we put the offending target, the CEO, in jail for twenty-four years and assume that our work is done. Mysteries require that we revisit our list of culprits and be willing to spread the blame a little more broadly. Because if you can’t find the truth in a mystery — even a mystery shrouded in propaganda — it’s not just the fault of the propagandist. It’s your fault as well.

  In the spring of 1998, Macey notes, a group of six students at Cornell University’s business school decided to do their term project on Enron. “It was for an advanced financial-statement-analysis class taught by a guy at Cornell called Charles Lee, who is pretty famous in financial circles,” one member of the group, Jay Krueger, recalls. In the first part of the semester, Lee had led his students through a series of intensive case studies, teaching them techniques and sophisticated tools to make sense of the vast amounts of information that companies disclose in their annual reports and SEC filings. Then the students picked a company and went off on their own. “One of the second-years had a summer-internship interview with Enron, and he was very interested in the energy sector,” Krueger went on. “So he said, ‘Let’s do them.’ It was about a six-week project, half a semester. Lots of group meetings. It was a ratio analysis, which is pretty standard business-school fare. You know, take fifty different financial ratios, then lay that on top of every piece of information you could find out about the company, the businesses, how their performance compared to other competitors.”

  The people in the group reviewed Enron’s accounting practices as best they could. They analyzed each of Enron’s businesses, in succession. They used statistical tools, designed to find telltale patterns in the company’s financial performance — the Beneish model, the Lev and Thiagarajan indicators, the Edwards-Bell-Ohlsen analysis — and made their way through pages and pages of footnotes. “We really had a lot of questions about what was going on with their business model,” Krueger said. The students’ conclusions were straightforward. Enron was pursuing a far riskier strategy than its competitors. There were clear signs that “Enron may be manipulating its earnings.” The stock was then at $48 — at its peak, two years later, it was almost double that — but the students found it overvalued. The report was posted on the website of the Cornell University business school, where it has been, ever since, for anyone who cares to read twenty-three pages of analysis. The students’ recommendation was on the first page, in boldfaced type: “Sell.”*

  January 8, 2007

  Million-Dollar Murray

  WHY PROBLEMS LIKE HOMELESSNESS MAY BE EASIER TO SOLVE THAN TO MANAGE

  1.

  Murray Barr was a bear of a man, an ex-Marine, six feet tall and heavyset, and when he fell down — which he did nearly every day — it could take two or three grown men to pick him up. He had straight black hair and olive skin. On the street, they called him Smokey. He was missing most of his teeth. He had a wonderful smile. People loved Murray.

  His chosen drink was vodka. Beer he called “horse piss.” On the streets of downtown Reno, where he lived, he could buy a 250-milliliter bottle of cheap vodka for $1.50. If he was flush, he could go for the 750-milliliter bottle, and if he was broke, he could always do what many of the other homeless people of Reno did, which is to walk through the casinos and finish off the half-empty glasses of liquor left at the gaming tables.

  “If he was on a runner, we could pick him up several times a day,” Patrick O’Bryan, who is a bicycle cop in downtown Reno, said. “And he’s gone on some amazing runners. He would get picked up, get detoxed, then get back out a couple of hours later and start up again. A lot of the guys on the streets who’ve been drinking, they get so angry. They are so incredibly abrasive, so violent, so abusive. Murray was such a character and had such a great sense of humor that we somehow got past that. Even when he was abusive, we’d say, ‘Murray, you know you love us,’ and he’d say, ‘I know’ — and go back to swearing at us.”

  “I’ve been a police officer for fifteen years,” O’Bryan’s partner, Steve Johns, said. “I picked up Murray my whole career. Literally.”

  Johns and O’Bryan pleaded with Murray to quit drinking. A few years ago, he was assigned to a treatment program in which he was under the equivalent of house arrest, and he thrived. He got a job and
worked hard. But then the program ended. “Once he graduated out, he had no one to report to, and he needed that,” O’Bryan said. “I don’t know whether it was his military background. I suspect that it was. He was a good cook. One time, he accumulated savings of over six thousand dollars. Showed up for work religiously. Did everything he was supposed to do. They said, ‘Congratulations,’ and put him back on the street. He spent that six thousand in a week or so.”

  Often, he was too intoxicated for the drunk tank at the jail, and he’d get sent to the emergency room at either Saint Mary’s or Washoe Medical Center. Marla Johns, who was a social worker in the emergency room at Saint Mary’s, saw him several times a week. “The ambulance would bring him in. We would sober him up, so he would be sober enough to go to jail. And we would call the police to pick him up. In fact, that’s how I met my husband.” Marla Johns is married to Steve Johns.