Lessons from historical events - Morgan Housel

Jared Diamond is a compelling interpreter of historical events. So too is Yuval Noah Harari. But reading them I'm always left with a sneaking doubt about how accurate are their grand narratives. One gets the feeling that their urge to create an impression in their readers by explaining things in too intuitive a manner leaves them exposed when more deeply scrutinised. 

Such historical narratives have at least two major weaknesses. One, the post-facto inductive historical narrative runs the risk of cherry picking and being specious with interpretations of historical events. Two, past does not mean future will follow. 

One easy test is their interpretations of Indian history and culture, where both come out as extremely superficial and easily discounted. 

Here is my problem with grand narratives. It is about the reliability of the similarity of patterns with historical events. It is one thing to point to certain broad enough common factors or principles that are common across certain historical events. It is an altogether different thing to claim uncanny similarities in the specific details of historical events. I am inclined to accommodate the former and disbelieve the latter. 

Voltaire is credited to have said, "History never repeats itself, but man always does". And man often draws from such popular narratives which often get deeply collectively internalised.

In this context, Morgan Housel points to four behaviours that have been a constant feature of historical events. The first is about the compounding power of small risks,

Big risks happen when a bunch of small risks combine and compound. But small risks are easy to ignore, so people always underestimate the odds of big risks...

Big risks are easy to overlook because they’re just a chain reaction of small events, each of which is easy to shrug off. So people always underestimate the odds of big risks... No one in 1929 thought there would be a Great Depression. You’d be laughed away if you warned in 1929 that the stock market was about to fall 90% and unemployment rise to 25%. People weren’t complacent. The late 1920s saw an overvalued stock market, real estate speculation, and poor farm maintenance. That was obvious. It was well documented. It was discussed. But so what? None of those things are a big deal in isolation. It wasn’t until they happened at the same time, and fed off each other, that they turned into the Great Depression...

(With Covid 19) what happened – and I can only say this with hindsight – was a bunch of small risks colliding and multiplying at once. A virus transferred from animal to human (has happened forever) and those humans interacted with other people (of course). It was a mystery for a while (understandable) and then bad news was then likely suppressed (bad, but common). Other countries thought it would be contained (standard denial) and didn’t act fast enough (bureaucracy, lack of leadership). We weren’t prepared (over-optimism) and could only respond with blunt-force lockdowns (do what you gotta do). None of those on their own are surprising. But combined they turned into probably the biggest event of our lifetime.

Second, being "blissfully unaware" of problems and excessively optimistic is innately human,

Optimism is the fuel of progress, and without it people will grind to a halt. So you will often find it even when the odds are stacked against you and the facts don’t align.

... most of us suffer from being "blissfully unaware". But we don’t actually suffer from it, because it feels great. And the fact that it feels good is the fuel we need to wake up and keep working even when the world around us can be objectively awful... We tell ourselves stories about our potential for progress because if we’re realistic about how common failure and pain is, we’d never get off the couch... The idea that most people are overly optimistic about their own future – even if they’re pessimistic about others’ – shows up all over history... People believe things that aren’t true, are only loosely true, true but improbable, or true but lacking important context. To do otherwise hurts too much. They tell themselves stories, find statistics, and surround themselves with incentives to make their beliefs seem as real as possible.

The third is about the asymmetric response between the urge to enjoy pleasure and avoid pain,

People will avoid even the slightest discomfort, even when the pain is manageable and trying to avoid the pain creates bigger risks...

Pain is miserable. Life without pain is a disaster... there’s something to the idea that pain is the most useful map of what works and what doesn’t. Remove it, and you’re left wandering somewhere between oblivious and reckless. So it’s interesting how much effort we put into avoiding the slightest pain, even when it backfires...

The history of the stock market is that it goes up a lot in the long run but falls often in the short run. The falls are painful, but the gains are amazing. Put up with one and you get the other. Yet a large portion of the investing industry is devoted to avoiding the falls. They forecast when the next 10% or 20% decline will come and sell in anticipation. They’re wrong virtually every time. But they appeal to investors because asking people to just accept the temporary pain of losing 10% or 20% – maybe more once a decade – is unbearable. The majority of investors I know will tell you that you will perform better over time if you simply endure the pain of declines rather than try to avoid them. Still, they try to avoid them.The upside when you simply accept and endure the pain from market declines is that future declines don’t hurt as bad. You realize it’s just part of the game... Accepting a little pain has huge benefits. But it’ll always be rare, because it hurts.

Finally, major stresses and pains can leave enduring scars, and our difficulty of understanding such experiences of other people,

Disagreement is constant because it’s rooted in individual experiences. Experiencing a major stressor can permanently change your behavior, leaving certain countries and generations with extreme feelings toward specific topics...

People tend to have short memories. Most of the time they can forget about bad experiences and fail to heed lessons previously learned. But hardcore stress leaves a scar. Experiencing something that makes you stare ruin in the face and question whether you’ll survive can permanently reset your expectations and change behaviors that were previously ingrained... It’s why the generation who lived through the Great Depression never viewed money the same. They saved more money, used less debt, and were weary of risk – for the rest of their lives... It’s why countries that have endured devastating wars have a higher preference for social safety nets... It’s why baby boomers who lived through the 1970s and 1980s think about inflation in ways millennials can’t fathom. And why you can separate today’s tech entrepreneurs into two clearly different buckets – those who experienced the dot-com crash, and those who didn’t because they were too young to...

The oldest story of history is that of two sides who don’t agree with each other. It’s probably the most important storyline, the root of nearly every major social event. The question, “Why don’t you agree with me?” can have infinite answers. Sometimes one side is selfish, or stupid, or blind, or uninformed. But usually a better question is, “What have you experienced that I haven’t that makes you believe what you do? And would I think about the world like you do if I experienced what you have?” It’s the question that contains the most answers of why people don’t agree with each other. But it’s such a hard question to ask.

It’s uncomfortable to think that what you haven’t experienced might change what you believe because it’s admitting your own ignorance. It’s much easier to assume those who disagree with you aren’t thinking as hard as you are. So people will disagree, even as access to information explodes... Disagreement is less to do with what people know and more to do with what they’ve experienced.

Morgan Housel has another post with five lessons from history here.  

One, calm plants the seeds of crazy... Nothing too good or too bad stays that way forever, because great times plant the seeds of their own destruction through complacency and leverage, and bad times plant the seeds of their own turnaround through opportunity and panic-driven problem-solving... Crazy plants the seeds of calm, because wild times incentivize people to solve problems and stay alert, like a healthy dose of paranoia...

Two, progress requires optimism and pessimism to coexist... the long run is usually pretty good and the short run is usually pretty bad. It takes effort to reconcile those two, and learn how to manage them with what seem like conflicting skills. Those who can’t usually end up either bitter pessimists or bankrupt optimists...

Three, people believe what they want to believe, see what they want to see, and hear what they want to hear... everyone sees the world through a different lens, and incentives can cause smart people to embrace and defend ideas that range from goofy to disastrous. It shows up all over the place...

Four, important things rarely have one cause... big events are more complicated than we make them out to be – and the bigger the event, the more complexity. It makes forecasting hard, politics nasty, and learning specific lessons from big events harder than we’d like to think...

Five, risk is what you don’t see... the risks we talk about in the news are rarely the most important risks in hindsight. We saw that over the last decade of economists and investors spending their lives discussing the biggest risk to the economy – was it Ben Bernanke’s monetary policy? Barack Obama’s fiscal policy? Donald Trump’s trade wars? No, none of those. It was a virus. Out of the blue, causing havoc we couldn’t comprehend.