Yesterday we spent some more time on alternative histories, but what do we do with what has happened? What can we learn? Do we even learn?
We can discuss this point from different angles. Experts call one manifestation of such denigration of history historical determinism. In a nutshell we think that we would know when history is made; we believe that people who, say, witnessed the stock market crash of 1929 knew then that they lived an acute historical event and that, should these events repeat themselves, they too would know about such facts. Life for us is made to resemble an adventure movie, as we know ahead of time that something big is about to happen. It is hard to imagine that people who witnessed history did not know at the time how important the moment was. Somehow all respect we may have for history does not translate well into our treatment of the present. 1
We lived through something once, so of course we’d recognize it, should it reoccur. That is manifestly false. How many market crashes have there been since 1929? Besides the folks who lived through each crash, there were books recording the history. Yet with all of this help available, crashes continue to happen.
Part of the problem is that we always think we saw the big events coming. I think research done when Nixon went to China, previously discussed in an earlier post, illustrates this well.
When Richard Nixon announced his surprising intention to visit China and Russia, Fischhoff2 asked people to assign odds to a list of possible outcomes—say, that Nixon would meet Chairman Mao at least once, that the United States and the Soviet Union would create a joint space program, that a group of Soviet Jews would be arrested for attempting to speak with Nixon, and so on. After the trip, Fischhoff went back and asked the same people to recall the odds they had assigned to each outcome. “Their memories of the odds they had assigned to various outcomes were badly distorted. They all believed that they had assigned higher probabilities to what happened than they actually had. They greatly overestimated the odds that they had assigned to what had actually happened. That is, once they knew the outcome, they thought it had been far more predictable than they had found it to be before, when they had tried to predict it. A few years after Amos described the work to his Buffalo audience, Fischhoff named the phenomenon “hindsight bias.”3
We’ve always been good predictors in the past, so it makes sense to always trust our judgment in the future. Taleb continues:
When you look at the past, the past will always be deterministic, since only one single observation took place. Our mind will interpret most events not with the preceding ones in mind, but the following ones. Imagine taking a test knowing the answer. While we know that history flows forward, it is difficult to realize that we envision it backward.4
Looking backwards, we neglect the randomness, seeing only determinism in the clarity of hindsight. Since we’re wrong about that clarity, we overestimate our abilities and are at risk to make bad decisions in the future.
Don’t trust yourself.
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto) by Nassim Nicholas Taleb, link. ↩︎
One of Amos Tversky’s graduate students. ↩︎
The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis, link. ↩︎