Once Lehman went bust, none of us could remember how surprised we were when we first heard that it might. As Princeton University psychologist Daniel Kahneman says, "Hindsight bias makes surprises vanish." And therein lies its extreme danger for investors. By retroactively fooling us into thinking that we knew how the past would unfold, hindsight bias tricks us into thinking we know how the future will unfold. But if the past took you by surprise, why should you believe you can decipher the future?
So?
Question authority. If the financial world really were coming to an end, nobody would know it -- least of all the pundits who are currently crying doom. In 1929, experts ranging from the legendary trader Jesse Livermore to John D. Rockefeller and Treasury Secretary Andrew Mellon all declared that falling stock prices were nothing to worry about. They were wrong. The lesson is not that it's a mistake to be an optimist in falling markets, but rather that it's a mistake to trust the consensus view of the experts. With the mood on Wall Street now as dark as a mushroom farm, optimists are much more likely than pessimists to be proven right in the end.