War, boom, crash, uprising, pandemic, vaccine, another boom, a new war. On and on from agony to awe.
The question is, why don’t we learn from terrible events?
Financial crises happen again and again. Investors repeat the same mistakes over and over. And political leaders make the same military blunders time and again.
Wall Street Journal writer Jason Zweig explained that people repeat the same mistakes because they are too good at learning the lessons in small detail.
The dotcom bust taught us the perils of over-confidence. But the lesson most people took away was that “the stock market is overvalued at a PE ratio over 30”. It was too specific, and the same investors who lost their shirts in 2002 walked straight into the housing bubble, where they lost again.
The most important lessons from a big event are usually the big picture ones.
More than a year into the tragic mess of Covid-19, we can start to ask, “what lessons have we learnt?”.
A few that stick out:
- Big risks come from small risks that multiply.
I asked, “Could a group of young men inflict massive damage on the strongest, most militarised nation in the world?” you might reasonably reply, “Very unlikely”.
But if asked, “Could that same group be radicalised by a charismatic maniac and persuaded to sneak box-cutter knives onto planes, use them to kill pilots and then commandeer the plane and fly it into a building”, you might answer, “How could we not have seen it coming?”.
We overlook the big risk because it results from a series of smaller events, a chain reaction of small things happening at the right time to allow them to multiply into a big catastrophic event. We see the big event but not the small ones leading up to it.
Covid is the same.
At the beginning of 2020, a virus shutting down the global economy and killing millions of people would have seemed like the stuff of movies.
But break it down into smaller pieces:
- A virus transfers from animal to human.
- Those humans interact with other people.
- The outbreak is hushed up for political reasons.
- Other countries believed it wouldn’t affect them, so they didn’t act to halt the spread.
- Reaction to masks and lockdowns became heated, and tribal and politicians were slow to react for fear of the political and economic fallout.
- A rush to move on led to premature easing of restrictions and further spread of the virus.
Each of those events is unsurprising in itself but put them together, and the outcome is multiplied into the catastrophe we have experienced over the last 18 months.
We fail to see how the small events might come together to create the big risk.
- Pessimists underestimate how quickly people adapt.
Real GDP per capita has increased 9.3 x since 1900.
If you went back to 1900 and told people that their great-grandkids would be 9.3 times wealthier than them, they would assume those great-grandkids would be ecstatic at their level of wealth.
But how many of us feel that way in 2021?
People are astoundingly good at adapting. We assume that a change in circumstances leads to an equal difference in how we feel. But what happens is that people say, “OK, this is the new baseline, and our expectations start from here”.
And the same thing happens in reverse.
If at the beginning of 2020 you’d been told that for a year or more, the whole world would be in lockdown, you might reasonably have believed it would be worse than the Great Depression.
But, without minimising how many jobs have been lost and businesses closed, this has not been the case. It is too easy to assume that, when faced with a crisis, people would muster a normal response. But look how quickly we adapted to the new “normal”.
Businesses shut down production in response to the expected crash in demand. But demand came back faster than anyone imagined.
A lot of that demand came from stimulus - six trillion dollars of it. That would have been unfathomable 18 months ago, but policymakers adapted and found it, almost without fuss. And voters adjusted their expectations.
Virtually every business operates in a new world today - a world that was hard even to imagine 18 months ago.
Hard to even imagine is the key point. Although many restaurants have closed in the last year, many more have survived by selling takeout. They’ve adapted to the new demand, which was hard even to imagine before Covid hit.
The history of pessimism is as long as the history of progress, and I think part of the reason is that it’s so easy to overlook how people adapt to adversity.
- History is only fascinating because nothing is inevitable
The Behaviour Gap author Carl Richards says, “Risk is what’s left when you think you’ve thought of everything.”
I’ve found no better definition.
For a decade, economists debated what the biggest risk to the economy was. Tax hikes? Money printing? Budget deficits? Trade wars? Low-interest rates?
Guess what. It was a virus.
In every decade, the most important news wasn’t news until it happened.
It’s the surprising stuff that makes history. Pearl Harbor, 9/11, Covid-19. The most common denominator of those events isn’t that they were big; it’s that they were surprises.
The world is different after Covid. Maybe Covid’s biggest lesson is accepting how true that will be going forward too.
To paraphrase Daniel Kahneman, the founder of behavioural economics, “when you experience a surprise, the lesson is not to assume that event will happen again; to accept that the world is surprising. The big lesson is to realise that you will again be hit by things you didn’t see coming, that no one was talking about, and that will change the world more than all the things you expected to happen combined”.
Just one damned thing after another!
