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Summary

While the portfolio was losing hundreds of millions of dollars, Robert Citron denied that they were real losses, claiming that they were only paper losses. He also clung to the hope that interest rates would soon fall and he would end the year with a gain. He had reason to believe he was right. After all, over the previous 13 years he had earned the county an extra $750 million. Ultimately, he lost $1.7 billion and bankrupted one of the richest counties in the United States —and he did it through investor problems that are common. First, he let past success trick him into being overconfident (see Chapter 2) and believing that his investment strategy was infallible (see Chapter 3, “Patterns and Predictions”). Second, when the economic environment changed, he refused to change investment strategies and sell his positions at a loss (see the discussion on loss aversion in Chapter 2). Third, he didn't understand the risks he was taking (see Chapter 6, “Foolish Risks”) and how leverage magnified those risks. Fourth, his optimism of a rebound clouded his judgment (see the discussion on optimism in Chapter 4). Lastly, Citron's hubris prevented him from admitting he made a mistake until it was too late.

Orange County wasn't the only municipality to lose money during the interest rate increases of 1994. For example, San Diego County lost $357 million and Ohio's Cuyahoga County lost $114 million.[15] However, they were able to overcome their investor biases and prevent the investment blunder from becoming a major disaster.


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