Five Lessons From History

Big takeaways about how, and why, people do what they do.

By Morgan Housel, The Collaborative Fund

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 “The dead outnumber the living fourteen to one, and we ignore
the accumulated experience of such a huge majority of mankind
at our peril.”

-- Niall Ferguson on the lessons of history.

“History never repeats itself. Man always does.”

-- Voltaire

The most important lessons from history are the takeaways that are
so broad they can apply to other fields, other eras, and other people.
That’s where lessons have leverage and are most likely to apply to
your own life.

But those things take some digging to find, often sitting layers below
the main story.

***

The Great Depression began with a stock market crash. October 24th,
1929. That’s the story, at least.

It makes for a good story because it’s a specific event on a specific

day. But if you were to go back to October 1929, during the crash,
the average American might seem unfazed. Only 2.5% of Americans
owned stocks in 1929.

The huge majority of Americans watched in amazement as the mar-

ket collapsed, and perhaps lost a sense of hope that they, too, might
someday cash in on Wall Street. But that was all they lost: a dream.
They did not lose any money because they had no money invested.

The real pain came nearly two years later, when the banks started to
fail.

Just over 500 U.S. banks failed in 1929. Twenty-three hundred failed
in 1931.

When banks fail, people lose their savings. When they lose their sav-
ings they stop spending. When they stop spending businesses fail.
When businesses fail, banks fail. When banks fail people lose their
savings. And so on endlessly.

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 The stock market crash wasn’t a relevant lesson to the vast majority
of Americans who didn’t own stocks in 1929 and likely never would
for the rest of their lives. But the bank failures upended the day-to-
day lives of tens of millions of Americans. That’s the real story of how
the Depression began.

As we look back at the Depression 90 years later, you might think the
main lesson is “don’t let the banks fail.” And it’s a good lesson.

But it’s also a lesson that’s not useful to many people today.

I don’t know.

And does it even apply to bank regulators in 2019, when things like
FDIC insurance now lower the odds of repeating the kind of consum-
er bank runs we saw in the 1930s?

Only a little, I’d say.

The point is that the more specific a lesson of history is, the less rel-
evant it becomes. That doesn’t mean it’s irrelevant. But the most im-
portant lessons from history are things that are so fundamental to the
behaviors of so many people that they’re likely to apply to you and
situations you’ll face in your own lifetime.

Let me offer one of those lessons from the Great Depression. I think
it’s one of the most important lessons of history:

Lesson #1: People suffering from sudden, unex-

pected hardship are likely to adopt views they
previously thought unthinkable.

One of the most fascinating parts of the Great Depressions isn’t just that
the economy collapsed, but how quickly and dramatically people’s views
changed when it did.

Americans voted Herbert Hoover into office in 1928 with one of the biggest
landslides in history (444 electoral college votes). They voted him out in
1932 with a landslide in the other direction (59 electoral college votes).

Then the big changes began.

The gold standard, gone. Gold actually became illegal to own.

Public works, surged.

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 Attempts to provide taxpayer-funded old-age pension insurance
made no progress for decades, with supporters arrested on the Cap-
itol lawn during the most serious push after World War I. The De-
pression practically flipped a switch: a fringe idea was suddenly em-
braced. The Social Security Act was passed in 1935 372 to 33 in the
House of Representatives, and 77 to 6 in the Senate.

On the other side of this was an alleged coup by wealthy business-

men to overthrow Franklin Roosevelt, with a Marine General named
Smedley Butler taking his place as dictator, similar to fascist trends
sweeping Europe at the time.

These are not the kind of things that occur when people are sleep-
ing well and have stable jobs. It’s not until your life is upended, your
hopes dashed, your dreams uncertain that people begin to take ideas
they’d never consider before seriously.

Nowhere was this more powerful than in Germany, where the Great
Depression was preceded by a devastating hyperinflation that de-
stroyed all paper wealth.

The book What We Knew interviews German civilians after World

War II, seeking to understand how one of the most civilized cultures
turned so sharp, so quickly, and committed the worst atrocities in
history:

[Interviewer]: At the beginning of this interview, you said that

most grown-ups
welcomed Hitler’s measures.

[German civilian]: Yes, clearly. One has to remember that in

1923 we had the inflation … nobody had anything, everybody was
unhappy. Then Adolf came to power with his new idea. For most
that was indeed better. People who hadn’t had a job for years had
a job. And then the people were all for the system. When some-
one helps you get out of an emergency situation and into a better
life, then you’re going to give them your support. Do you think
people would then say, “This is all such nonsense. I’m against
that”? No. That doesn’t happen. How things were done later on is
something else. But the people at that time were happy, even full
of enthusiasm, and they all joined in.

These are some of the most extreme examples that exist. But the idea
that people who are under stress quickly embracing ideas and goals
they never would during calm times has left its fingerprints all over
history.

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 In investing, saying “I will be greedy when others are fearful” is easier
said than done, because people underestimate how much their views
and goals can change when markets fall apart.

The reason you may embrace ideas and goals you once thought un-
thinkable during a downturn is because more changes during down-
turns than just asset prices.

If I, today, imagine how I’d respond to stocks falling 30%, I picture

a world where everything is like it is in 2019 except stock valuations,
which are 30% cheaper.

But that’s not how the world works.

Downturns don’t happen in isolation. The reason stocks might fall

30% is because big groups of people, companies, and politicians
screwed something up, and their screw ups might sap my confidence
in our ability to recover. So my investment priorities might shift from
growth to preservation. It’s difficult to contextualize this mental shift
when the economy is booming. That’s why more people say they’ll be
greedy when others are fearful than actually do it.

The same idea holds true for companies, careers, and relationships.
Hard times make people do and think things they’d never imagine
when things are calm.

***

Lesson #2: Reversion to the mean occurs be-

cause people persuasive enough to make some-
thing grow don’t have the kind of personalities
that allow them to stop before pushing too far.

What kind of person makes their way to the top of a successful com-
pany, or a big country?

Someone who is determined, optimistic, doesn’t take “no” for an an-

swer, and is relentlessly confident in their own abilities.

What kind of person is likely to go overboard, bite off more than they
can chew, and discount risks that are blindingly obvious to others?

Someone who is determined, optimistic, doesn’t take “no” for an an-

swer, and is relentlessly confident in their own abilities.

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 Reversion to the mean is one of the most common stories in history.
It’s the main character in economies, markets, countries, companies,
careers -- everything.

Part of the reason it happens is because the same personality traits

that push people to the top also increase the odds of pushing them
over the edge.

This is true for countries, particularly empires. A country determined

to expand by acquiring more land is unlikely to be run a person ca-
pable of saying, “OK, that’s enough. Let’s be thankful for what we
have and stop invading other countries.” They’ll keep pushing until
they meet their match (usually Russia).

It’s true for companies. The kind of corporate culture that lets com-
panies dominate an industry is not friendly to people who say, “I
think we’ve grown too fast. Maybe we should scale back.” They’ll
keep pushing until they’re forced to make painful cuts.

It’s true for investors. The kind of personality willing to take enough
risks to earn outsized returns is generally not compatible with the
kind of personality willing to shift everything into muni bonds once
they’ve made enough money. They’ll keep taking risks until those
risks backfire. It’s why the Forbes list of billionaires has 60% turn-
over per decade.

Long-term success in any endeavor requires two tasks: Getting

something, and keeping it. Getting rich and staying rich. Getting
market share and keeping market share.

These things are not only separate tasks, but often require con-
tradictory skills. Getting something often requires risk-taking and
confidence. Keeping it often requires room for error and paranoia.
Sometimes a person masters both skills -- Warren Buffett is a good
example. But it’s rare. Far more common is big success occurring be-
cause a person had a set of traits that also come at the direct cost of
keeping their success. Which is why downside reversion to the mean
is such a repeating theme in history.

Take the best current example: Elon Musk.

What kind of 32-year-old thinks they can take on GM, Ford, and
NASA at the same time? The kind of person who thinks normal con-
straints don’t apply to them – not in an egotistical way, but in a gen-
uine, believe-it-in-your-bones way. Which is also the kind of person
who doesn’t worry about, say, SEC rulings about your Twitter eti-
quette.
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 The kind of person who says there’s a 99.9999% chance humanity is a
computer simulation is not the kind of person worried about making
untenable promises to shareholders.

A mindset that can dump a personal fortune into colonizing Mars is not
the kind of mindset that worries about the downsides of hyperbole.

Musk is a visionary genius. He’s an extraordinary engineer. He’s a lot of

amazing things. But the same traits that have fueled success have coun-
teracting sides that make keeping that success a challenge, which partly
explains Tesla’s current state.

History is full of these things in varying degrees. At some level they ap-
ply to all of us because the successes we have -- at any level -- trigger be-
haviors that can make keeping those successes difficult. Overconfidence.
Over-optimism. Cherry-picking.

Jason Zweig summed this up so well: “Being right is the enemy of stay-
ing right because it leads you to forget the way the world works.”

***

Lesson #3: Unsustainable things can last longer

than you anticipate.
There’s a long history of military leaders following a logic that goes like
this: “The enemy is outnumbered. They are out-gunned. We are gaining
ground each day. Their morale will soon break and, accepting reality,
they will surrender.”

And then that outnumbered, out-gunned enemy keeps fighting, and

fighting, and fighting. Sometimes to the last man.

A rational person might look at this and say, “Why are they still fight-
ing? It’s unsustainable, and they have to know it.”

But wars often aren’t governed by spreadsheets and clean reasoning.

During the Vietnam War, Ho Chi Minh put it bluntly: “You will kill ten
of us, and we will kill one of you, but it is you who will tire first.”

Identifying that something is unsustainable does not provide much in-

formation on when that thing will stop. To tie this into the last lesson:
Knowing there will be a reversion to the mean does not mean you know
when things will revert. Unsustainable things can sustain for a long
time.

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 There are two reasons why. One is incentives. The other is story-
telling.

If you looked at the U.S. housing market in 2003 and said, “Prices
are too high. Growth is being fueled by low interest rates that are
going to rise soon. This is unsustainable,” you were 100% right.

But the housing market kept rising for another four years. Bank-
ers kept lending, buyers kept buying.

Why?

Put yourself in the shoes of a subprime mortgage broker in 2003.

Your job was to make loans. Feeding your family relied on you
making loans. And if you didn’t make those loans, someone else
would, so quitting in protest just lowers your pay and hurts you
more than it hurts anyone else. Plus, that pay was huge. Rule of
thumb: The more unsustainable an industry gets, the more it re-
lies on inexperienced workers pulled from less prosperous indus-
tries to expand. Exposed to pay they couldn’t dream of before,
those workers become more susceptible to looking the other way
as their industries go off the rails.

True story about a guy I knew well: A pizza delivery man who be-
came a subprime mortgage banker in 2005. Virtually overnight
he could earn more per day than the earned per month delivering
pizza. The bar for him to say, “This is unsustainable so I’m going
to quit and deliver pizza again” is unbelievably high. It would be
high for most of us. I didn’t blame him then, and I don’t blame
him now. A lot of people screwed up during the financial crisis.
But an unpopular view I have is that most of us underestimate the
extent to which we’d act similarly if we wandered into the same
incentive pool.

This goes up the food chain, from the broker to the CEO, the in-
vestors, the real estate appraiser, the realtor, the house flipper,
the politician, the central banker -- incentives lean heavily to-
wards not rocking the boat. So everyone keeps paddling, long af-
ter the market becomes unsustainable.

Then there’s the storytelling.

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 If enough people believe something is true, unsustainable ideas can
gain durable life support.

Stories are more powerful than statistics because they take less effort
for your brain to contextualize complex issues.

“Housing prices in relation to median incomes are now above their

historic average, and typically mean revert, but historically a lot de-
pended on the direction of interest rates, building costs, and many
other variables,” are statistics.

“Jim just made $300,000 flipping homes and can now retire early
and his wife thinks he’s amazing” is a story. And it’s way more per-
suasive in the moment.

It’s more persuasive because the gap between what works in a

spreadsheet and what’s practical in real life can be a mile wide. This
usually isn’t because we don’t know the statistics. It’s because spread-
sheets are cold and rational, but real life is messy and involves all
kinds of variables from different parts of the world that are easy to
leave out of spreadsheets but easy to tell in stories.

On paper, or to outside observers, decisions should be made with

facts. In reality, to those in the field, they’re made with facts contex-
tualized with things like social signaling, time horizon, office politics,
government politics, year-end bonus targets, making up for past mis-
takes, massaging insecurities, and so on. There are so many moving
parts that the easiest way to answer the question “What should I do?”
is to be guided by a story that makes sense to you. Not a statistic, and
not a fact. A good tale.

That’s not ideal. But it’s realistic and reasonable. And it helps explain
why people keep doing things long after they’re factually unsustain-
able.

The solution is knowing the difference between expectations and

forecasts. The former are good, the latter should be used sparingly.
The difference between “That looks unsustainable so I don’t want to
be a part of it,” and “That looks unsustainable so I’m going to bet that
it will end by Q1 2020” is enormous.

***
Lesson #4: Progress happens too slowly for peo-
ple to notice; setbacks happen too fast for peo-
ple to ignore.

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 There are lots of overnight tragedies. There are rarely overnight mira-
cles.

On January 5th, 1889, the Detroit Free Press pushed back against the
long-held dream that man could one day fly like a bird. Airplanes, the
paper wrote, “appear impossible”:

The smallest possible weight of a flying machine, with the neces-

sary fuel and engineer, could not be less than 300 or 400 pounds
… but there is a low limit of weight, certainly not much beyond fif-
ty pounds, beyond which it is impossible for an animal to fly. Na-
ture has reached this limit, and with her utmost effort has failed to
pass it.

Six months later, Orville Wright dropped out of high school to help
his brother, Wilbur, tinker in their backyard shed to build a printing
press. It was the brothers’ first joint invention. It would not be their
last.

If you had to make a list of the most important inventions of the 20th
century, the airplane would be at least top five, if not number one. The
airplane changed everything. It started world wars, it ended world
wars. It connected the world, bridging gaps between cities and rural
communities; oceans and countries.

But the story of the Wright Brothers’ quest to build the first plane has
a fascinating twist. After they conquered flight, no one seemed to no-
tice. Nobody seemed to care.

In his 1952 book on American history, Frederick Lewis Allen wrote:

Several years went by before the public grasped what the Wrights
were doing; people were so convinced that flying was impossible
that most of those who saw them flying about Dayton [Ohio] in
1905 decided that what they had seen must be some trick with-
out significance – somewhat as most people today would regard
a demonstration of, say, telepathy. It was not until May, 1908 –
nearly four and a half years after the Wright’s first flight – that
experienced reporters were sent to observe what they were doing,
experienced editors gave full credence to these reporters’ excited
dispatches, and the world at last woke up to the fact that human
flight had been successfully accomplished.

Even after people caught on to the plane’s wonder, they underestimat-

ed it for years. First it was seen mainly as a military weapon. Then a
rich person’s toy. Then, perhaps, used to transport a few people.

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 The Washington Post wrote in 1909: “There will never be such a thing
as commercial aerial freighters. Freight will continue to drag its slow
weight across the patient earth.” The first cargo plane took off five
months later.

Now compare that slow, years-long awakening to how quickly people

pay attention to a corporate bankruptcy.

Or a major war.

Or a plane crash. Some of the first mentions of the Wright’s plane

came in 1908 when an Army Lieutenant named Thomas Selfridge was
killed during a demonstration flight.

Growth is driven by compounding, which always takes time. Destruc-

tion is driven by single points of failure, which can happen in seconds,
and loss of confidence, which can happen in an instant.

The irony is that growth -- if you can stick around -- is a more power-
ful force, because it compounds. But setbacks capture greater attention
because they happen suddenly.

If you want to measure the progress of medicine, looking at the last

year will do you little good. Any single decade won’t do much better.
But looking at the last 50 years will show something extraordinary --
the age-adjusted death rate per capita from heart disease has declined
more than 70% since 1965, according to the National Institute of
Health. A 70% decline in heart-disease death is enough to save some-
thing like half a million American lives per year. Picture the population
of Atlanta saved every year. But since that progress happened so slow-
ly, it captures less attention than quick, sudden losses like terrorism or
plane crashes. We could have a Hurricane Katrina five times a week,
every week -- imagine how much attention that would receive -- and
it would not offset the number of annual lives saved by the decline in
heart disease in the last 50 years.

This same thing applies to businesses, where it takes years to real-

ize how important a product or company is, but failures can happen
overnight. And in markets, where a 40% decline that takes place in six
months will draw congressional investigations, but a 140% gain that
takes place over six years can go virtually unnoticed. And in careers,
where reputations take a lifetime to build and a single email to de-
stroy.

Understanding the speed differences between growth and loss explains

a lot of things, from why pessimism is seductive to why long-term
thinking is so hard.
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 ***

Lesson #5: Wounds heal, scars last.

More than thirty million people -- about the population of California

-- died over four years on the Eastern Front during World War II. The
dozen or so territories that made up the Soviet Republic represented
about 10% of the world’s population in 1940. By 1945, 13.7% of that
group was dead. Forty thousand villages were completely destroyed.

But most of the physical damage was cleared away and rebuilt by 1960.
There are stories of people still finding bones, bullets, and bombs to-
day. But the physical damage of the war was cleaned up. Industries re-
built. People reorganized. Total population surpassed its pre-war level
less than a decade after the war ended.

This trend was bigger in Japan, whose economy opened up to global

markets after the war. In 1946 Japan was producing enough food to
provide only 1,000 calories a day for its people. By 1960 it was one of
the fastest-growing economies in the world. Its GDP increased from
$91 billion in 1965 to $1.1 trillion in 1980, with technology and manu-
facturing rivaling and surpassing any other region in the world.

The same is true for recessions; things heal. And markets -- things re-
cover. And businesses -- past mistakes are forgotten.

Those who survive calamities -- an important distinction -- have a re-

markable ability to adapt and rebuild. It’s often far greater than you
expect it to be at the end of the calamity.

But there’s a big difference between a wound healing and a scar re-
maining.

There’s a long history of people adapting and rebuilding while the scars
of their ordeal remain forever, changing how they think about risk, re-
ward, opportunities, and goals for as long as they live.

A study of 20,000 people from 13 countries who lived through World

War II were 3% more likely to have diabetes as adults and 6% more
likely to suffer depression. Compared to those who avoid the war, they
were less likely to marry and less satisfied with their lives as older
adults.

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 In 1952 Frederick Lewis Allen wrote about those who lived through the
Great Depression:

[They] were gnawed at by a constant lurking fear of worse things

yet, and in all too many cases actually went hungry; but because
what was happening to them seemed without rhyme or reason.

Most of them had been brought up to feel that if you worked hard
and well, and otherwise behaved yourself, you would be rewarded
by good fortune. Here were failure and defeat and want visiting
the energetic along with the feckless, the able along with the un-
able, the virtuous along with the irresponsible. They found their
fortunes interlocked with those of great numbers of other people
in a pattern complex beyond their understanding, and apparently
developing without reason or justice.

Even if they tried to hide their dismay, their children sensed it

and were marked by it. The editors of Fortune wrote in 1936: “The
present-day college generation is fatalistic . . . it will not stick its
neck out. It keeps its pants buttoned, its chin up, and its mouth
shut. If we take the mean average to be the truth, it is a cautious,
subdued, unadventurous generation. . . .”

As time went on there was a continuing disposition among Ameri-

cans old and young to look with a cynical eye upon the old Horatio
Alger formula for success; to be dubious about taking chances for
ambition’s sake; to look with a favorable eye upon a safe if unad-
venturous job, social insurance plans, pension plans. They had
learned from bitter experience to crave security.

They had learned from bitter experience to crave security. This,

again, was written in the 1950s, when the U.S. economy was roaring
and the unemployment rate was near a record-low of less than 3%.

It is too easy to examine history and say, “Look, if you just held on
and took a long-term view, things recovered and life went on,” with-
out realizing that mindsets are harder to repair than buildings and
cash flows.

We can see and measure just about everything in the world except
people’s moods, fears, hopes, grudges, goals, triggers, and expecta-
tions. That’s partly why history is such a continuous chain of baffling
events, and always will be.

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 More on this topic:

You Have to Live It to Believe It

The Greatest Story Ever Told

What We Said When the World Changed

Collaborative Fund is a leading source of capital for entrepreneurs pushing the world forward.

More at [Link]
Collaborative Fund 2019