What experience and history teaches us is that
people and governments have never learned anything from history, or acted on
principles deduced from it.
- Georg Hegel 1832
This is a quote heard before; however, many
have not given it specific operational meaning. This is
especially true for financial analysts. What is learned in history can be
varied, but what is critical is accepting that what people and governments will
do is often mistaken. Current motivations for action will differ from should be
done if there is a close reading of history. There is a strong distinction
between what people and government "should" do if they internalize
history and "will" do.
If people and government learn from history, they
should behave in a way to minimize errors. They will learn from mistakes so
that past failures do not occur again. Learned behavior suggests that mistakes
will be made, so caution with action is appropriate.
Now some history can be learned through
quantitative methods if there is enough sampling. The problem is that many
events that have a strong market impact do not often happen. Crashes are rare.
Large policy changes and possible mistakes do not often occur. The link between
a policy choice and the market impact may not be immediate.
In reality, many often do not act in a way that
would suggest that they have learned lessons from experiences. Overleverage
still hurts. Euphoria is eventually offset with large corrections. Policies
that have not worked in the past are tried again because they are easy to
implement. This is tied together with trying to determine how behavior will
change when faced with new circumstances. Learning often does not happen.
Why focus on the distinction between "should"
versus "will"? Too often analysts will talk about what, for example,
the Fed "should" do. The "should" is based on their
learning from experience, but this is irrelevant. The focus has to be on what
"will" the Fed do based on current knowledge and behavior. Mistakes
will be repeated. We may know that governments should not engage in austerity
and should finance debt at low rates to boost the economy, but this is very different
from what they will do. Actual behavior is often not rooted in experience and
history.
The lessons from history or experiences are not singular. History can be
interpreted in many ways. Clearly, there are still arguments about the causes
and effects with many historical events. The causes of the Financial Crisis are
still being debated, but understanding differences in learned behavior will
make money for investors. History is not learned and analysts should
behave accordingly.
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