May 27, 2021 Reading Time: 5 minutes

History doesn’t repeat itself, but according to the quote erroneously attributed to Mark Twain, it rhymes. My preferred objection to that saying comes from two of financial history’s greatest heroes, Rondo Cameron and Larry Neal; in their A Concise Economic History of the World, they retort that “those who are ignorant of the past are not qualified to generalize about it.”

A public intellectual who just falls shy of this error, yet whose work ensnares many a layman into its traps, is Michael Lewis. He’s a fascinating writer and a marvelous storyteller, to which anyone who has enjoyed The Big Short, Moneyball or Flash Boys can attest. Lewis’ latest book, The Premonition: A Pandemic Story, unfolds in the same vein as this prolific writer’s previous works. Oliver Wiseman in a long review at CapX writes: 

“Michael Lewis’s protagonists see things that other people miss. In The Big Short, it was the small group of investors who anticipated the financial crisis. In Moneyball, it was a coach at the Oakland Athletics who harnessed the power of statistics to upend the conventional wisdom of baseball scouting. In The Undoing Project, it was Daniel Kahneman and Amos Tversky, whose work more or less created behavioural economics.” […] 

“His characters buck conventional wisdom and change the world,” concludes Wiseman admiringly. But lots of people see things that others miss. Most of the time, these things are irrelevant; some of the time these things are even hallucinations. Wiseman does spot the error in Lewis’ book but doesn’t extract from it the faulty backward-looking search for knowledge that interests me most: 

“The key to a better pandemic response and better government in general, he seems to be saying, is about listening to ‘smart’ men and women. But how do we pluck the countercultural geniuses out from the crowd of risk-averse conformists?”

With hindsight as your guide, every quack or precocious teenager can confidently pronounce that they indeed would have foreseen the imminent disaster, that they had the solutions for the ills we went through. These are ridiculous propositions, that every contrarian and smart-a**e from time immemorial have fallen prey to. 

A few years ago, I had a conversation with a friend whose knowledge of the financial crisis and the workings of the banking sector mostly came from The Big Short. Looking at the world through the lens of Lewis’ books unfortunately gives you a very blurry appreciation for Great Men (or women; concept is taken from ‘Great man theory’): thinking that the world develops in predictable and easily-assessed ways, one clever person at a time. If that were true, the outsiders’ and the deviants’ clairvoyant abilities should indeed be admired. 

This is the main problem. The characters in Lewis’ books are not chosen at random; they’re carefully selected because their deviant forecasts happened to turn out correct, against varying degrees of impressive odds. That’s usually not how the world unfolds. 

We really want to believe that there is a way for smart, hard-working, perceptive people to see through the world, to spot that which others overlooked, to untangle what’s “really” going on. Usually, that strategy produces lots of mirages and false negatives: out of the people who at some point foresaw terrible things, very few turn out to be brilliant seers – and most of them, Chicken Littles. Instead of thinking that we should listen to the deviants, the ones warning for this or that future ill, we should recognize the power of hindsight selection. Lewis’ skill lies in compellingly weaving such survivors’ stories into a “everyone should have seen that” narrative. But at the time almost nobody saw that, and usually for quite good reason. 

This is looking at history with the benefit of hindsight, judging their contemporaries by an impossible standard: most of the time, they could not have known to what end the branch of their current decision tree would lead them. Often, critical decisions made by this or that historical figure were not so obvious from their point of view, even though we, with the knowledge of how the chips ultimately fell, consider their stance as completely disastrous. Radical turning points are rare, so when presented with them, should we really be inclined to believe that this really is one of them?

Time moves forward, asymmetrically, which allows Lewis to write these big stories. In a sense, he’s cheating, like picking numbers for Tuesday’s lottery tickets on Wednesday; for every major event, there will always be somebody who said something reasonably close to a prediction, which lets him find them and interview them later. But for us to take predictions like that seriously, assign it any importance – either in hindsight or as events unfold – the forecaster must be right more than once and more often than random. 

In financial history, and other fields using similar statistical methods, we call this survivorship bias: the documents we study are the ones that remain in the archives of banks, firms, or entities that survived. Other rivaling entities often existed alongside them, but we do not have access to their records or stock prices, since firms that go out of business usually don’t hand down their records for posterity’s historians to survey. If I assess, say, lending practices, equity cushions, returns on investments or other financial indicators only on the firms for which I have data (i.e. the ones that made it through the past and into the present) we will receive very biased numbers for what actually was history’s lived experience. (In a Nassim Taleb-sense, though, we could say that surveying only surviving firms provides us with more accurate numbers, as the ones who were more aggressive or took other kinds of risks “blew up,” weren’t sustainable, couldn’t survive, and hence shouldn’t count.)

Looking back at the pandemic, it’s fairly easy to say what and how we should have prepared, whose fears and premonitions in the early stages were the ones we should have listened to. The problem is that this information is not available in real time, and fighting the last war is a surefire way of losing the next one. We don’t know, at the time of emergent troubles, if those troubles will become large enough to demand our attention or – like most troubles do – just fizzle out; if they will play out in ways that require medical attention and equipment, take-away food and portable energy, radiation shelters and off-grid power sources. Every crisis requires different preparations to prevent it – and we don’t know which crisis we’re facing before it develops. We don’t know in real time if the premonitions that the characters Lewis conveniently track down after the case would play out the way they envisioned – or turn them into laughingstocks for the rest of their careers. 

None of this means we shouldn’t take looming threats seriously, or try to the best of our abilities to investigate dire forecasts or alarms raised by this or that well-placed insider. It does mean, however, that we can’t extract from history only the characters whose extreme warnings happened to be right, unless those people are consistently right. Forecasts, warns the legendary investor Howard Marks, have no value, since they’re only useful for radically deviant outcomes – and “nobody is right consistently in making deviant forecasts.”

What in history books look like an obvious move from one event to the next was in reality many different things, separated by plenty of time and many intermediate events, where people wondered which of the many false starts – now forgotten or ignored because they didn’t amount to anything – might be connected to the Big Things we comfortably investigate hundreds of years later. History is slow, with fascinating moments and events scattered among tons and tons of mundane and inconsequential things. When we select some of them and weave them into an iconic story, we often make a mockery of the past – and ourselves a disservice. 

There is a very fine line between Cassandras and lunatics. To look back admiringly at the Cassandras is a fine thing; to conclude from that that we can identify them and find them in our times is a great mistake.

Joakim Book

Joakim Book

Joakim Book is a writer, researcher and editor on all things money, finance and financial history. He holds a masters degree from the University of Oxford and has been a visiting scholar at the American Institute for Economic Research in 2018 and 2019.

His work has been featured in the Financial Times, FT Alphaville, Neue Zürcher Zeitung, Svenska Dagbladet, Zero Hedge, The Property Chronicle and many other outlets. He is a regular contributor and co-founder of the Swedish liberty site, and a frequent writer at CapXNotesOnLiberty, and

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