History’s Limits

I’m a big fan of studying market history. But the reason it interests me is not so I can predict how history will repeat, but rather to empathize with the difficulties market participants dealt with in different market regimes. Whether those difficulties lie in trying to stay optimistic in a bear market, or figuring out why multiples can increase in a bull market without any commensurate pickup in fundamentals. Peter Bernstein nails this when he discusses the danger of using market history as a road map. History can repeat, but the market’s reaction might not be the same as it was last time. Emphasis mine.

Game theory teaches us that human beings create a complex jumble of uncertainties for one another. It is not enough to say that human nature never changes and let it go at that. Human beings learn from experience and learn from technology. Evolution, in one form or another, is always at work. Yesterday’s response to a given set of circumstances is only a hint of what tomorrow’s response to that set of circumstances will be- and in any case Leibniz reminds us that today’s circumstances will reappear tomorrow, not precisely, but only for the most part.

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