Page 125 - Morgan Housel - The Psychology of Money_ Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

because an airport security guard may have confiscated a hijacker’s knife
on 9/11. That’s all there is to it.
COBACOBA

The problem is that we often use events like the Great Depression and
World War II to guide our views of things like worst-case scenarios when

thinking about future investment returns. But those record-setting events
had no precedent when they occurred. So the forecaster who assumes the
worst (and best) events of the past will match the worst (and best) events of
the future is not following history; they’re accidentally assuming that the
history of unprecedented events doesn’t apply to the future.

Nassim Taleb writes in his book Fooled By Randomness:

In Pharaonic Egypt … scribes tracked the high-water mark of the Nile and
used it as an estimate for a future worst-case scenario. The same can be
seen in the Fukushima nuclear reactor, which experienced a catastrophic
failure in 2011 when a tsunami struck. It had been built to withstand the

worst past historical earthquake, with the builders not imagining much
worse—and not thinking that the worst past event had to be a surprise, as it
had no precedent.

This is not a failure of analysis. It’s a failure of imagination. Realizing the
future might not look anything like the past is a special kind of skill that is
not generally looked highly upon by the financial forecasting community.

At a 2017 dinner I attended in New York, Daniel Kahneman was asked how
investors should respond when our forecasts are wrong. He said:

Whenever we are surprised by something, even if we admit that we made a
mistake, we say, ‘Oh I’ll never make that mistake again.’ But, in fact, what
you should learn when you make a mistake because you did not anticipate
something is that the world is difficult to anticipate. That’s the correct

lesson to learn from surprises: that the world is surprising.