Today, we have put together a collection of our articles in the Popular Topics section: Why are the majority so wrong at the same time and in the same ways? In line with this provocative question that is asked, we found an article by Peter L. Bernstein, a veteran financial consultant, economic historian, editor of the Economics & Portfolio Strategy newsletter and author of the investment classic, Against the Gods: The Remarkable Story of Risk. He wrote this article in the International Herald Tribune: To botch an economic forecast, rely on past experience,
A lot of people have been wrong about the markets and the economy in recent months. But how could so many people have been so wrong at the same time and in the same ways?
The question reminds me of the biggest and most embarrassing goof in my own career. This sad story happens to date back 50 years, to New Year’s Day of 1958.
In looking back, I can now see the source of my error: I was postcasting – extrapolating past experience instead of seeking change in future experience. The aftermath was embarrassing, but it taught me never to postcast again.
We agree wholeheartedly with Bernstein, as we mentioned before in our earlier article, Common mistakes in failing to see economic turning points:
Likewise, a common mistake that investors make is to look at the current situation as it is and project [extrapolate] what is current into the future [sometimes to the indefinite future!].
The conclusion of his article contains a paradoxical wisdom:
It has been said that good forecasters have a good sense of history. I suppose that is true. But the best lesson from the past is to forget it before it shoves you into trouble – and remember that surprises and ruptures surely lurk ahead.
Again, we agree wholeheartedly with Bernstein, as we mentioned before in our earlier article, Failure to understand Black Swan leads to fallacious thinking:
For this reason, that is why we delve more on the big picture and economic history and get mired less on minute statistics and detailed numbers. In technically philosophical terms, it means we are taking on a meta-view i.e. we are taking on a view of our view. At times, this means we have to expand our circle of understanding and venture outside of finance, investing and economics into fields such as psychology, politics and history. The broader our circle of wisdom and experience (that includes borrowed experience from a study of history), the less vulnerable we will be to being caught out like that turkey.
The root to the understanding of this paradox is this: It is not experiences (which include borrowed experiences from the study of history) that trip us. Rather, it is how we apply our experiences that lead us into fallacies.