Page 120 - Morgan Housel - The Psychology of Money_ Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

Stanford professor Scott Sagan once said something everyone who follows
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the economy or investment markets should hang on their wall: “Things that
have never happened before happen all the time.”

History is mostly the study of surprising events. But it is often used by
investors and economists as an unassailable guide to the future.

Do you see the irony?

Do you see the problem?

It is smart to have a deep appreciation for economic and investing history.
History helps us calibrate our expectations, study where people tend to go
wrong, and offers a rough guide of what tends to work. But it is not, in any
way, a map of the future.

A trap many investors fall into is what I call “historians as prophets”
fallacy: An overreliance on past data as a signal to future conditions in a
field where innovation and change are the lifeblood of progress.

You can’t blame investors for doing this. If you view investing as a hard
science, history should be a perfect guide to the future. Geologists can look

at a billion years of historical data and form models of how the earth
behaves. So can meteorologists. And doctors—kidneys operate the same
way in 2020 as they did in 1020.

But investing is not a hard science. It’s a massive group of people making
imperfect decisions with limited information about things that will have a
massive impact on their wellbeing, which can make even smart people

nervous, greedy and paranoid.

Richard Feynman, the great physicist, once said, “Imagine how much
harder physics would be if electrons had feelings.” Well, investors have
feelings. Quite a few of them. That’s why it’s hard to predict what they’ll do
next based solely on what they did in the past.