One Damned Thing After Another
The big lesson is to realize that you will again be hit by things you didn’t see coming, that no one was talking about, and that will move the needle more than all the things you expected to happen combined. Just one damned thing after another.
Capital Thinking · Issue #816 · View online
History is one damned thing after another.
A war ends, a boom follows, then a crash, then an uprising, then a pandemic, a breakthrough, a new boom, a new war. On and on, from agony to awe.
The Big Lessons of the Last Year
Morgan Housel | The Collaborative Fund Blog:
A question that always arises after a terrible event is why haven’t we learned our lesson?
Financial crises keep happening, again and again. People have been making the same investing mistakes for hundreds of years. The same military blunders, over and over. The characters change but the plot rarely does.
Jason Zweig explained years ago that part of the reason the same mistakes repeat isn’t because people don’t learn their lesson; it’s because people “are too good at learning lessons, and they learn overprecise lessons.”
A good lesson from the dot-com bust was the perils of overconfidence. But the lesson most people took away was “the stock market becomes overvalued when it trades at a P/E ratio over 30.”
It was hyperspecific, so many of the same investors who lost their shirts in 2002 got up and walked straight into the housing bubble, where they lost again.
The most important lessons from a big event are usually the broad, 30,000-foot takeaways. They’re more likely to apply to the next iteration of crisis.
Covid-19 is far from over, but we’re now more than a year into this tragic mess. Enough has happened that we can start to ask “what lessons have we learned?”
If you’re a doctor or a health regulator, some of those lessons are hyperspecific. But for most of us the biggest lessons are broad.
A few that stick out:
1. Big risks are easy to underestimate because they come from small risks that multiply.
“What are the odds that a group of scraggly young men can inflict massive damage on the strongest and most militarized nation in the world?” you might reasonably reply “extremely low.”
Maybe even zero.
But if asked,
“What are the odds a group of scraggly young man can be radicalized by a charismatic maniac (extremely high), sneak box-cutter knives through airport security (not hard), use those knives to kill pilots (easy), commandeer a plane (reasonably easy) and crash it into a building (inevitable at this point), your answer might be, “How could we not have seen this coming?”
Big risks are easy to overlook because they’re just a chain reaction of small events, each of which is easy to shrug off.
A bunch of mundane things happen at the right time, in the right order, and multiply into an event that might look impossible if you only view the final outcome in isolation.
Math is hard, but exponential math is deceiving. Covid is the same.
A virus shutting down the global economy and killing millions of people seemed remote enough for most people to never contemplate. Before a year ago it sounded like the one-in-billions freak accident only seen in movies.
But break the last year into smaller pieces.
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 bad news was likely suppressed (political incentives, don’t yell fire in a theater).
Other countries thought it would be contained (exceptionalism, standard denial) and didn’t act fast enough (bureaucracy, lack of leadership).
We weren’t prepared (common over-optimism) and the reaction to masks and lockdowns became heated (of course) so as to become sporadic (diversity, same as ever).
Feelings turned tribal (standard during an election year) and a rush to move on led to premature re-openings (standard denial, the inevitability of different people experiencing different realities).
Each of those events on their own seems obvious, even common. But when you multiply them together you get something surprising, even unprecedented.
Big risks are always like that, which makes them too easy to underestimate. How starkly we have been reminded over the last year.
2. A lot of undue pessimism comes from underestimating how quickly and firmly people adapt.
Real GDP per capita has increased 9.3x since 1900.
Imagine it’s 1900 and a time-traveler from 2021 says, “Great news everyone. Your great-grandkids will on average be 9.3 times wealthier than you are today.”
They would be ecstatic – that kind of wealth must have seemed unimaginable. They’d assume their great-grandkids will be walking balls of ecstasy, waking up every morning astounded at how rich they are.
Which, of course, describes virtually no one in 2021.