The Stove Is Hot

The Stove Is Hot

As I mentioned above, it is not natural for us to learn from history. We have enough clues to believe that our human endowment does not favor transfers of experience in a cultural way but through selection of those who bear some favorable traits. It is a platitude that children learn only from their own mistakes; they will cease to touch a burning stove only when they are themselves burned; no possible warning by others can lead to developing the smallest form of cautiousness. Adults, too, suffer from such a condition. This point has been examined by behavioral economics pioneers Daniel Kahneman and Amos Tversky with regard to the choices people make in selecting risky medical treatments—I myself have seen it in my being extremely lax in the area of detection and prevention (i.e., I refuse to derive my risks from the probabilities computed on others, feeling that I am somewhat special) yet extremely aggressive in the treatment of medical conditions (I overreact when I am burned), which is not coherent with rational behavior under uncertainty. This congenital denigration of the experience of others is not limited to children or to people like myself; it affects business decision makers and investors on a grand scale.

If you think that merely reading history books would help you learn "from other's mistakes," consider the following nineteenth-century experiment. In a well-known psychology case the Swiss doctor Claparède had an amnesic patient completely crippled with her ailment. Her condition was so bad that he would have to reintroduce himself to her at a frequency of once per fifteen minutes for her to remember who he was. One day he secreted a pin in his hand before shaking hers. The next day she quickly withdrew her hand as he tried to greet her, but still did not recognize him. Since then plenty of discussions of amnesic patients show some form of learning on the part of people without their being aware of it and without it being stored in conscious memory. The scientific name of the distinction between the two memories, the conscious and the nonconscious, is declarative and nondeclarative. Much of the risk avoidance that comes from experiences is part of the second. The only way I developed a respect for history is by making myself aware of the fact that I was not programmed to learn from it in a textbook format.

Actually, things can be worse than that: In some respects we do not learn from our own history. Several branches of research have been examining our inability to learn from our own reactions to past events: For example, people fail to learn that their emotional reactions to past experiences (positive or negative) were short-lived—yet they continuously retain the bias of thinking that the purchase of an object will bring long-lasting, possibly permanent, happiness or that a setback will cause severe and prolonged distress (when in the past similar setbacks did not affect them for very long and the joy of the purchase was short-lived).

All of my colleagues who I have known to denigrate history blew up spectacularly—and I have yet to encounter some such person who has not blown up. But the truly interesting point lies in the remarkable similarities in their approaches. The blowup, I will repeat, is different from merely incurring a monetary loss; it is losing money when one does not believe that such fact is possible at all. There is nothing wrong with a risk taker taking a hit provided one declares that one is a risk taker rather than that the risk being taken is small or nonexistent. Characteristically, blown-up traders think that they knew enough about the world to reject the possibility of the adverse event taking place: There was no courage in their taking such risks, just ignorance. I have noticed plenty of analogies between those who blew up in the stock market crash of 1987, those who blew up in the Japan meltdown of 1990, those who blew up in the bond market débâcle of 1994, those who blew up in Russia in 1998, and those who blew up shorting Nasdaq stocks. They all made claims to the effect that "these times are different" or that "their market was different," and offered seemingly well-constructed, intellectual arguments (of an economic nature) to justify their claims; they were unable to accept that the experience of others was out there, in the open, freely available to all, with books detailing crashes in every bookstore. Aside from these generalized systemic blowups, I have seen hundreds of option traders forced to leave the business after blowing up in a stupid manner, in spite of warnings by the veterans, similar to a child's touching the stove. This I find to resemble my own personal attitude with respect to the detection and prevention of the variety of ailments I may be subjected to. Every man believes himself to be quite different, a matter that amplifies the "why me?" shock upon a diagnosis.