My boss Ken Fisher has been a pioneer in a lot of things: behavioral finance, the investment advisory business, to name a few of the biggies. To me, his newest book is especially important: Markets Never Forget (But People Do): How Your Memory Is Costing You Money-and Why This Time Isn’t Different (Wiley, November 2011).
So much of the work in psychology and economics/investing talk about the mistakes people commonly make in abstract terms or with lab experiments. But Ken Fisher’s book does something different: it takes many important lessons about how our minds fail (particularly our memories), and puts them in the context of market history. In particular Ken Fisher focuses on how short our memories are, collectively—how so many things we think are unprecedented actually have ample and clear precedence in our past, we just fail to remember. Psychologists call it “myopia”, “biases”, “aversions”, and many sorts of other official-sounding technical definitions.
Forget the technical terms and focus on the reality. This is a key reason to study market history carefully—it prevents you from forming false idols and notions about things that didn’t really happen the way we (you, me) remember them. Ken Fisher’s book reminds us it’s not that we simply forget (we do), it’s that we misremember routinely—brains tend to remember details based on emotion, not rationality.
Here’s a bit from a recent interview with Ken Fisher on history and market forecasting:
Ken Fisher: History doesn’t repeat, not exactly. And the past cannot predict the future, but it is one good tool in determining if something is reasonable to expect. Investing is a probabilities game, not a certainties game. Nothing is certain in investing—all you can do is determine what a range of reasonable probabilities are.
In the same way, it’s not a possibilities game. It’s possible the world gets hit by an asteroid and destroys life as we know it, but the far greater probability is no such terrible thing happens.
You can’t develop a portfolio strategy around endless possibilities. You wouldn’t even get out of bed if you considered everything that could possibly happen. Instead, as I show in the book, you can use history as one tool for shaping reasonable probabilities. Then, you look at the world of economic, sentiment and political drivers to determine what’s most likely to happen—while always knowing you can be and will be wrong a lot.
For more information on Ken Fisher’s latest book, visit Wiley’s website.