Surprise!

The most important events in history are the ones nobody saw coming. The Great Depression, World War II, the collapse of the Soviet Union, 9/11, the 2008 financial crisis, COVID-19—none were predicted by the experts. Yet we continue to use history as a guide to the future.

History can teach us principles, but it can’t tell us what will happen next. The future will surprise us.

Daniel Kahneman’s Observation

Nobel Prize-winning psychologist Daniel Kahneman once said: “The correct lesson to learn from surprises is that the world is surprising.”

We tend to learn the wrong lesson: we think we now understand why the surprise happened and can predict the next one. But the nature of surprises is that they’re unpredictable.

The Problem with Historical Data

Economists and investors love historical data. But consider the limitations:

• The modern economy is only about 150 years old
• The S&P 500 started in 1957
• Most market data comes from a narrow slice of history
• The world has changed dramatically even in recent decades

Using this data to predict the next 50 years is like using a teenager’s life to predict their entire adulthood.

Structural Changes

The economy of 2024 is fundamentally different from the economy of 1924. Consider:

Then: Manufacturing dominated, few regulations, no social safety net, different demographics

Now: Service economy, global markets, 401(k)s, venture capital, technology companies

How much can we really learn from historical periods that look nothing like today?

The Limits of Experience

Even personal experience has limits. If you’re 40, your meaningful experience with money spans maybe 20 years. During that time, you’ve seen perhaps two recessions, one or two bubbles, and a handful of major economic events.

That’s your entire sample size for understanding how the financial world works. It’s not nearly enough.

What History Can Teach Us

History is more useful for learning about human behavior than for predicting specific events:

• How people react to fear and greed (consistent across eras)
• How bubbles form (driven by timeless psychology)
• How panics unfold (similar patterns, different triggers)
• General principles (diversification, long-term thinking)

But it can’t tell you when the next crisis will hit or what form it will take.

The Forecaster’s Dilemma

If the most important events are unpredictable, what’s the point of forecasting? Housel suggests we should focus less on predicting specific outcomes and more on being prepared for a wide range of possibilities.

The Confident Predictor

Be wary of anyone who speaks with confidence about what will happen in markets or the economy. The track record of expert predictions is poor. Those who sound most confident often turn out to be the most wrong.

Building for Uncertainty

Instead of trying to predict surprises, build a strategy that survives them:

• Diversification: Don’t bet everything on one outcome
• Margin of safety: Build in room for error
• Flexibility: Be able to adapt when the unexpected happens
• Humility: Accept that you don’t know what’s coming

Key Takeaways

• Surprises define history: The most important events are the ones nobody predicted
• Historical data has limits: The world changes; patterns don’t always repeat
• Learn behaviors, not predictions: Human psychology is more consistent than events
• Beware confident forecasters: Nobody can predict the next surprise
• Build for uncertainty: Plan for what you can’t predict