Key Ideas

• History is full of specific lessons that aren’t relevant to most people, and not fully applicable to future events because things rarely repeat exactly as they did in the past.
• The second kind of history to learn from is the broad behaviours that show up again and again, in multiple fields and different eras.
• Lesson #1: Calm plants the seeds of crazy.
  • When there are no recessions, people get confident. When they get confident they take risks. When they take risks, you get recessions. When markets never crash, valuations go up. When valuations go up, markets are prone to crash.
  • The opposite is true, too. Crazy plants the seeds of calm, because wild times incentivize people to solve problems and stay alert, like a healthy dose of paranoia.
  • 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. The same story, again and again.
• Lesson #2: Progress requires optimism and pessimism to coexist.
  • The best financial plan – and I think this extends beyond finance – is to save like a pessimist and invest like an optimist.
  • The trick is being able to survive the short-run problems so you can stick around long enough to enjoy the long-term growth.
  • An important lesson from history is that 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. The same story, again and again.
• Lesson #3: People believe what they want to believe, see what they want to see, and hear what they want to hear.
  • One is that everyone has a model in their head of how they think the world works, and that model is built mostly from what you’ve experienced and what people you trust have told you.
  • The most powerful way to get someone to believe something is not to show them facts, because facts can be interpreted in different ways. It’s to make their income or approval in a social circle depend on believing it.
  • An important lesson from history is that 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. The same story, again and again.
• Lesson #4: Important things rarely have one cause.
  • We desperately want simple answers to explain outlier events, because every good story needs one hero and one villain.
  • One is when several things occur at once. In his documentary on American history, Oliver Stone says, “Real history is the story of lots of things happening at the same time.”
  • Viewing events in isolation makes it easier to place blame or admiration on a single person. It’s not until you study an event’s long roots that you recognize the chain of events that leads to something meaningful happening.
• Lesson #5: Risk is what you don’t see.
  • The biggest risk is what no one sees coming, because if no one sees it coming no one’s prepared for it, and if no one’s prepared for it its damage will be amplified when it arrives.
  • Two things happen when you’re caught off guard. One is that you’re vulnerable, with no protection against what you hadn’t considered. The other is that surprise shakes your beliefs in a way that leaves you paranoid and pessimistic.

Nov 12, 2020 by Morgan Housel · @morganhousel

The Lessons of History