History is needed to do good finance

 

“There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present”. - Galbraith

There is no history without memory and there is limited memory with most investors. Yet, finance is a study of history. All theory and analysis are based on reviewing and manipulating the past to make judgments on the future. There are no financial experiments that can be run in a laboratory. There is no controlled environment. All we can do is study past data and look for generalization that may help us understand something about the future.

When we only look at a few years of data, we are closing our minds to history. Old data have to be reviewed in the context of the time; however, the past provides the fundamental insight that behavior often does not change. We repeat good behavior and bad mistakes. 

Our knowledge of known events may improve over time because we can use today as a context for yesterday. Better understanding of yesterdays will help explain tomorrows.