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Crazy doesn’t mean broken. Crazy is normal; beyond the point of crazy is normal.
There is a very common life cycle of greed and fear. It goes like this: First you assume good news is permanent. Then you become oblivious to bad news. Then you ignore bad news. Then you deny bad news. Then you panic at bad news. Then you accept bad news. Then you assume bad news is permanent. Then you become oblivious to good news. Then you ignore good news. Then you deny good news. Then you accept good news. Then you assume good news is permanent. And we’re back where we began. The cycle repeats.
Minsky’s seminal theory was called the financial instability hypothesis. The idea isn’t heavy on math and formulas. It describes a psychological process that basically goes like this: • When an economy is stable, people get optimistic. • When people get optimistic, they go into debt. • When they go into debt, the economy becomes unstable. Minsky’s big idea was that stability is destabilizing. A lack of recessions actually plants the seeds of the next recession, which is why we can never get rid of them.
A growing belief that things will be okay pushes us—like a law of physics—toward something not going okay.
Surprise has six common characteristics: • Incomplete information • Uncertainty • Randomness • Chance • Unfortunate timing • Poor incentives
The irony is that when markets are guaranteed not to crash—or more realistically, when people think that’s the case—they are far more likely to crash. The mere idea of stability causes a smart and rational movement toward bidding asset prices up high enough to cause instability. Stability is destabilizing. Or, put another way: Calm plants the seeds of crazy. Always has, always will.
“Everything feels unprecedented when you haven’t engaged with history,” writer Kelly Hayes once wrote. It’s such an important idea. Historian Dan Carlin wrote in his book The End Is Always Near: Pretty much nothing separates us from human beings in earlier eras than how much less disease affects us. . . . If we moderns lived for one year with the sort of death rates our pre-industrial age ancestors perpetually lived with, we’d be in societal shock.
For those who grew up in the 1930s and 1940s, there was nothing unusual about finding yourself threatened by contagious disease. Mumps, measles, chicken pox, and German measles swept through entire schools and towns; I had all four. Polio took a heavy annual toll, leaving thousands of people (mostly children) paralyzed or dead. There were no vaccines. Growing up meant running an unavoidable gauntlet of infectious disease. Compare this to my generation—who benefit from a half dozen vaccines within weeks of birth—and it’s like we live in separate worlds. I can’t fathom what was normal two
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Part of what made COVID dangerous is that we got so good at preventing pandemics in the last century that few people before 2020 assumed an infectious disease would ever impact their lives. It was hard to comprehend. So people were utterly unprepared for a pandemic when it arrived. The irony of good times is that they breed complacency and skepticism of warnings.
A common irony goes like this: • Paranoia leads to success because it keeps you on your toes. • But paranoia is stressful, so you abandon it quickly once you achieve success. • Now you’ve abandoned what made you successful and you begin to decline—which is even more stressful. It happens in business, investing, careers, relationships—all over the place.
Importante
What calm planting the seeds of crazy does is important: It makes us fundamentally underestimate the odds of things going wrong, and the consequences of something going wrong. Things can become the most dangerous when people perceive them to be the safest.
A final word about why things have a tendency of getting out of hand. It’s that optimism and pessimism always have to overshoot what seems reasonable, because the only way to discover the limits of what’s possible is to venture a little way past those limits.
If you want to know why there’s a long history of economies and markets blowing past the boundaries of sanity, bouncing from boom to bust, bubble to crash, it’s because so few people have Seinfeld’s mentality. We insist on knowing where the top is, and the only way to find it is to keep pushing until we’ve gone too far, when we can look back and say, “Ah, I guess that was the top.”
The only way to know we’ve exhausted all potential opportunity from markets—the only way to identify the top—is to push them not only past the point where the numbers stop making sense, but beyond the stories people believe about those numbers. When a tire company develops a new tire and wants to know its limitations, the process is simple. They put it on a car and run it until it blows up. Markets, desperate to know the limits of what other investors can endure, do the same thing. Always been the case, always will be. There are two things you can do about it. One is accepting that crazy
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Maybe there’s more potential out there, but it’s fine to say, “You know what, I’m pretty happy with this level of risk and I’m fine just watching this game play out.” Not everyone can do it—and markets on average can never do it—but more of us should try.
Importante
Too Much, Too Soon, Too Fast A good idea on steroids quickly becomes a terrible idea.
Warren Buffett once joked that you can’t make a baby in one month by getting nine women pregnant. You’d be surprised, though, how common it is for people to attempt to speed up a process beyond what it can handle. Whenever people discover something valuable—particularly a lucrative investment or a special skill—there is a tendency to ask, “Great, but can I have it all faster?” Can we push it twice as hard? Can we make it twice the size? Can we squeeze some more juice out of it?
Wadlow grew too large given the structure of the human body. There are limits to scaling.
The same action at different sizes produces massively different problems.
“For every type of animal there is a most convenient size, and a change in size inevitably carries with it a change of form,” Haldane wrote. A most convenient size. A proper state where things work well but break when you try to scale them to a different size or speed. It applies to so many things in life.
Schultz wrote in his 2011 book Onward: “Growth, we now know all too well, is not a strategy. It is a tactic. And when undisciplined growth became a strategy, we lost our way.”
Tire tycoon Harvey Firestone understood this well, and wrote in 1926: It does not pay to try to get the business all at once. In the first place, you can’t get it, so a good deal of your money is thrown away. In the second place, if you did get it, the factory could not handle it. And in the third place, if you did get it, you could not hold it. A company that gets business too quickly acts just about as a boy does who gets money too quickly.
Nassim Taleb says he’s a libertarian at the federal level, a Republican at the state level, a Democrat at the local level, and a socialist at the family level. People handle risk and responsibility in totally different ways when a group scales from 4 people to 100 to 100,000 to 100 million.
Fish with slowed-down growth in their early years go on to live 30 percent longer than average. Those with artificial, supercharged growth early on die 15 percent earlier than average.
Growth is good, if only because runts eventually get eaten. But forced growth, accelerated growth, artificial growth—that tends to backfire.
Robert Greene writes: “The greatest impediment to creativity is your impatience, the almost inevitable desire to hurry up the process, express something, and make a splash.”
An important thing about this topic is that most great things in life—from love to careers to investing—gain their value from two things: patience and scarcity. Patience to let something grow, and scarcity to admire what it grows into. But what are two of the most common tactics when people pursue something great? Trying to make it faster and bigger. It’s always been a problem, and always will be. Same as ever.
Stress focuses your attention in ways that good times can’t.
A constant truth you see throughout history is that the biggest changes and the most important innovations don’t happen when everyone is happy and things are going well. They tend to occur during, and after, a terrible event. When people are a little panicked, shocked, worried, and when the consequences of not acting quickly are too painful to bear.
Stress, pain, discomfort, shock, and disgust—for all its tragic downsides, it’s also when the magic happens.
The army’s early interest in cars and planes wasn’t a fluke of lucky foresight. Go down the list of big innovations, and militaries show up repeatedly. Radar. Atomic energy. The internet. Microprocessors. Jets. Rockets. Antibiotics. Interstate highways. Helicopters. GPS. Digital photography. Microwave ovens. Synthetic rubber.
Are militaries home to the greatest technical visionaries? The most talented engineers? Perhaps. But more importantly, they’re home to Really Big Problems That Need to Be Solved Right Now. Innovation is driven by incentives, which come in many forms. On one hand there’s “If I don’t figure this out I might get fired.” That will get your brain in gear. Then there’s “If I figure this out I might help people and make a lot of money.” That will produce creative sparks. Then there’s what militaries have dealt with: “If we don’t figure this out right now we’re all going to die and Adolf Hitler might
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The same people with the same intelligence have wildly different potential under different circumstances. And the circumstances that tend to produce the biggest innovations are those that cause people to be worried, scared, and eager to move quickly because their future depends on it.
Stress focuses your attention in ways good times can’t. It kills procrastination and indecision, taking what you need to get done and shoving it so close to your face that you have no choice but to pursue it, right now and to the best of your ability.
Big, fast changes happen only when they’re forced by necessity.
There’s an obvious limit to stress-induced innovation. There’s a delicate balance between helpful stress and crippling disaster. The latter prevents innovation as resources are sapped and people turn their attention from getting out of a crisis to merely surviving it. And perhaps just as important is what happens when we have the opposite. When everything is great—when wealth is flush, when the outlook is bright, when responsibility is low, and threats appear gone—you get some of the worst, dumbest, least-productive human behavior. President Richard Nixon once observed: The unhappiest people
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Entrepreneur Andrew Wilkinson echoed the same when he said, “Most successful people are just a walking anxiety disorder harnessed for productivity.”
The fear, the pain, the struggle are motivators that positive feelings can never match. That’s a big takeaway from history, and it leads to a realization that will always be true: Be careful what you wish for.
A carefree and stress-free life sounds wonderful only until you recognize the motivation and progress it prevents. No one cheers for hardship—nor should they—but we should recognize that it’s the most potent fuel of problem-solving, serving as both the root of what we enjoy today and the seed of opportunity for what we’ll enjoy tomorrow.
Good news comes from compounding, which always takes time, but bad news comes from a loss in confidence or a catastrophic error that can occur in a blink of an eye.
An important fact that explains a lot of things is that good news takes time but bad news tends to occur instantly. Warren Buffett says it takes twenty years to build a reputation and five minutes to destroy one. A lot of things work just like that.
We do it all the time. The most important things come from compounding. But compounding takes awhile, so it’s easy to ignore.
Americans over age fifty have seen real GDP per person at least double since they were born. But people don’t remember the world when they were born. They remember the last few months, when progress is always invisible.
But bad news? It’s not shy or subtle. It comes instantly, so fast that it overwhelms your attention and you can’t look away. Pearl Harbor and September 11 are probably the two biggest news events of the last hundred years. Both took about an hour to play out, start to finish. It took less than thirty days for most people to go from never having heard of COVID-19 to it upending their life.
Things that thrived for decades can be ruined in minutes. There is no equivalent in the other direction. There’s a good reason why. Growth always fights against competition that slows its rise. New ideas fight for attention, business models fight incumbents, skyscrapers fight gravity. There’s always a headwind. But everyone gets out of the way of decline. Some might try to step in and slow the fall, but it doesn’t attract masses of outsiders who rush in to push back in the other direction the way progress does.
Making a human: incomprehensibly complex. The death of a human: really simple. On a similar note, author Yuval Noah Harari writes: “To enjoy peace, we need almost everyone to make good choices. By contrast, a poor choice by just one side can lead to war.”
The irony is that growth and progress are way more powerful than setbacks. But setbacks will always get more attention because of how fast they occur. So slow progress amid a drumbeat of bad news is the normal state of affairs. It’s not an easy thing to get used to, but it’ll always be with us.
A lot of progress and good news concerns things that didn’t happen, whereas virtually all bad news is about what did occur.
It is so easy to discount how much progress is achievable.
When little things compound into extraordinary things.
