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The Psychology of Money


(Chapter 12)

Scott Sagan (political scientist): “Things that have never happened before happen all the time.”


“History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future.”


Remember: Past performance is not indicative of future results, as the ubiquitous financial disclaimer states.


Focusing on past history and past patterns may cause two things:


Overlooking outlier events that move the needle.

Example: 15 billion people were born in the 19th and 20th centuries. But consider the handful that inordinately influenced historical events: Hitler, Stalin, Mao, Edison, Gates, MLK, etc.


Example: Consider the projects, events and innovations of the last century: The Great Depression, WW2, Vaccines, Antibiotics, the Internet, the fall of the Soviet Union.


Certain people and events have influence that is orders of magnitude more than others. Housel calls these “tail events.”


Tail events cause 2nd and 3rd order repercussions. “It is easy to underestimate how things compound…for example, 9/11 prompted the Federal Reserve to cut interest rates, which helped drive the housing bubble, which led to the financial crisis, which led to a poor jobs market, which led tens of millions to seek a college education, which led to $1.6 trillion in student loans with a 10.8% default rate. It’s not intuitive to link 19 hijackers to the current weight of student loans…”


“The majority of what’s happening at any given moment in the global economy can be tied back to a handful of past events that were nearly impossible to predict.”


These surprise events are nearly impossible to predict because they are so improbable and depend on the luck and occurrence of many similarly unlikely precursor events.


“This is not a failure of analysis. It’s a failure of imagination.” It is difficult to imagine a future that looks nothing like today or anything we have seen before.


Daniel Kahneman (psychologist and economist): “The correct lesson to learn from surprises: that the world is surprising.”


Similarly, we should be skeptical of those who profess to know with great certainty how the future will unfold.


Misreading the present by looking to the past because the past DOESN’T account for the structural changes that are relevant in today’s world.


Example: Certain financial mechanisms are new. Advice that predates these realities is obsolete. For instance: 401ks appeared in 1978. Venture capital barely existed 25 years ago. The S&P 500 did not include financial stocks until 1976.


Recent history is the most relevant to the future since it accounts for some of the important or relevant innovations and conditions that will impact the future.


“The further back in history you look, the more general your takeaways should be.”

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