I consider reading about and studying financial history to be part of my job, and luckily I love it, which makes it easy and enjoyable for me. This isn’t the case for some, though, and I believe it is partly why we suffer ftom the pitfall of failing to learn from past mistakes.
Lendary investor Warren Buffet said it well in this quote:
“What we learn from history is that people don’t learn from history.”
If you haven’t specifically lived through an event or set of circumstances and you haven’t read or studied about the subject, you will likely make similar mistakes that have been made in the past.
This is all well and good and understandable. However, what we also see occurring is people that have lived through certain situations in history repeating those almost exact behaviors that led to bad outcomes! So what gives?
This is where our biases come into play.
One of the most prominent biases impacting how we look at history is hindsight bias. Looking back now who doesn’t see how obviously overpriced dot.com stocks were, or how ridiculously overpriced spec houses were, or how dumb it was to lend gobs of money to people without income, assets or jobs?!?
So, because this seems so clear to us now, we convince ourselves that we will just as clearly be able to see the dangers when the next big issue or issues are about to hit. The problem with that mentality, though, is that we can’t because things are slightly different in each circumstance, and unless we do a thorough analysis of where we are and really study the factors that have impacted the past, our flash judgments based on our biases will lead us to make poor decisions.
Being mindful of how our behaviors can negatively impact our finances and studying financial history can help us avoid repeating mistakes over and over again.
If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.