Why Explaining the Past is as Difficult as Predicting the Future

Most of us will admit that it can be quite difficult to predict the future. No one really knows how events will play out. But determining what happened in the past can be equally challenging. It appears that we are overly confident in explaining an event that has already occurred. The reason is that people, including historians, are subject to bias and impose false order upon random events.

 Michael Lewis makes these points in his wonderful new book "The Undoing Project." Lewis weaves a fascinating tale about the founders of Behavioral Economics, Israeli psychologists Amos Tversky and Daniel Kahneman. Don't be intimidated by the subject. Lewis has a remarkable knack for making these concepts easy to understand.

What causes us to misread the past? It turns out that we're very good at detecting patterns in random data. Mr. X does something peculiar. We quickly develop an explanation of Mr. X's behavior. We love stories. So much so that after developing a hypothesis for Mr. X's actions, we filter out those facts that don't support our position and, instead, seek out those that corroborate our point of view. As Tversky puts it: "Once we have  adopted a particular hypothesis or interpretation, we grossly exaggerate the likelihood of that hypothesis, and find it very difficult to see things any other way." 

We're biased. We don't critically challenge our initial reading of a situation. Instead, we have "the tendency to take whatever facts [we] observed (neglecting the many facts that [we] did not or could not observe) and make them fit neatly into a confident-sounding story." 

All of this leads to "creeping determinism." "This 'ability' to explain that which we cannot predict...represents an important, though subtle, flaw in our reasoning. It leads us to believe that there is a less uncertain world than there actually is...For if we can explain tomorrow what we cannot predict today, without any added information except the knowledge of the actual outcome, then this outcome must have been determined in advance and we should have been able to predict it. The fact that we couldn't is taken as an indication of our limited intelligence rather than the uncertainty that is the world." 

Life is complicated. It's rarely clear how politicians and business leaders will act, how the economy will respond, or how the markets will behave. Nor is it clear after the fact why events unfolded as they did. There's a compelling desire to say: "I should have known it all along." One may wish to avoid uttering this phrase hastily. 

Words of Wisdom

Still, a man hears what he wants to hear and disregards the rest. --Paul Simon (from the "The Boxer")