• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

Why We Underestimate Change Until It Is Right On Top Of Us

Tyler Durden's picture


As human beings, we are remarkably poor at predicting our future selves.  We know that our personalities, preferences and values have certainly changed in the past, but, as ConvergEx's Nick Colas explains, we tend to dramatically underestimate what changes might be in store on these fronts in the future.  That’s the upshot of a recent bit of research by Harvard psychologist Daniel Gilbert, and it helps explain how we process decisions as varied as whether to get a tattoo or how we invest financial capital.  Stasis is our default setting when it comes to considering our futures, and that lack of imagination seems to inform how much we can predict about how other people and systems will change as well.  The most important takeaway: no matter how much you think your life will remain the same, you are almost certainly wrong.  And the same goes for capital markets.
Via ConvergEx's Nick Colas,

“Human beings are works in progress that mistakenly think they’re finished”.  That bit of pithy wisdom comes from Harvard professor of psychology Daniel Gilbert.  He recently did a TED lecture (link below) on a 2013 paper he co-authored entitled “The End of History Illusion.”  Here is a quick summary of his study and its findings:

Gilbert and his team used online surveys to query thousands of people about their perceptions of their own personalities.  The survey questions focused on five traits: conscientiousness, agreeableness, emotional stability, openness to experience, and extroversion.


In a clever twist, the researchers split up the survey group into two components.  The first were asked to judge how much they expected their five characteristics to change in the next 10 years.  The other group got a different baseline: how much had these features of their personality changed over the last decade?


The research team then lined up the two groups’ responses by their ages. The idea here was to compare how much a 20 year old thought they would change and to how much a 30 year old reported having changed over the prior decade.


The dichotomy between expected change looking forward and reported change from the prior decade is dramatic.  At every age, survey respondents underestimated how much they expected their personalities to change versus what someone 10 years older reported as actually having occurred to them.  This happens consistently from 18-64, the entire range of the study.  We simply never learn that our personalities will change with time. 


The title of the paper – “The End of History Illusion” – points to Gilbert and the team’s explanation for this phenomenon.  Essentially, people at any stage of life, from college freshman to middle aged office worker to recent retiree all think they are pretty much done evolving as individuals.  They think they will like the same music in 10 years, have the same best friend as they do now, and enjoy the same types of foods and vacations.  But it rarely works out that way, as the 10-years-older respondents consistently prove.


So how do we get it so wrong?  The paper offers two potential explanations.  First, most adults think they’re pretty nifty just the way they are and feel they are solidly in touch with their own emotions and needs. So why should we think we need to change?  Second, forecasting change is more difficult than just pondering the past.  As the paper puts it, “If people find it difficult to imagine the ways in which their traits, values, or preferences will change in the future, they may assume that such changes are unlikely.  In short, people may confuse the difficulty of imagining personal change with the unlikelihood of change itself.”

It is in that final point where the link to the investment process makes an entrance.  The standard construct of any capital allocation process centers on forecasting.  We predict everything from inflation to corporate earnings to risk tolerances to preferences in the market for growth or value or some blend of the two.  But if we find it hard to predict the thing we should know best – ourselves- what level of hubris do you need to reach to believe you can forecast the actions of other market participants?  Too negative?  I get that a lot - sorry.  Let’s back off a bit and look for another pathway.
Another lesson for investors from “The End of History Illusion” is that we are hard wired to think that the future will be much like the past.  We anchor the self-evaluation of our future selves on the notion that we’ve got a lot of the game of life figured out.  And since markets are nothing more than the collected wisdom of humans, you’d expect to see capital markets behave similarly.  And right now we have that in spades.  A few points here:

If you need any proof that humans still rule the roost when it comes to setting asset prices, and not their co-located high speed algorithmic doppelgangers, just look at the current low volatility, low volume trading environment.   The actual 30-day volatility for the S&P 500 (as measured by the SPY SPDR ETF) is 7%, the lowest reading in a year.  The equivalent reading for U.S. high yield corporate bonds is 3%, very near its one year low.  The highs for actual volatility over the last 12 month for each measure are more than double their current observations: 16% for the S&P and +10% for junk bonds.  It’s Groundhog Day, without the piano lessons or Buddhist underpinnings.


While the U.S. Treasury 10 year note now sports a yield back over 2.5% - 2.64%, to be precise – this is still far lower than just at the beginning of the year.  Follow in the footsteps of your ancestors on their Grand Tours of Europe and you’ll see that the U.S. is actually lagging France (1.75%), Spain (2.63%), Switzerland (0.74%) and Germany (1.4%) in terms of having to pay investors more for their notionally risk-free returns.  The reason?  Slack economies don’t tend to generate inflation without a currency crisis.  And, like the respondents to Gilbert’s surveys, bond investors don’t expect that part of Europe’s economic personality will change in the next 10 years.


Even commodity prices have a touch of “The End of History Illusion” about them.  Over the past 2 days we’ve seen some startling headlines out of Iraq, with al-Qaeda affiliates taking over key northern cities and seemingly on the path to Baghdad.  Mosul is in the supposedly safer Kurdish north of the country.  And it is an oil producing region in its own right.  Iraq as a whole produces 3.6 million barrels of oil/day, so it is not as large a player as Saudi Arabia or Russia.  But price happens at the margin, and the recent and largely unforeseen unrest in the country barely moved oil prices today.  West Texas Intermediate is only $104.50 and Brent is just below $110.  We don’t hear anyone really talking about oil prices yet, but that’s likely a blind spot caused by the “Same as it ever was” wiring of our predicting selves.

The ultimate point here is not to be negative on risk assets like stocks, but rather to provide a fresh construct to understand why we underestimate change until it is right on top of us.  As the Gilbert research shows, predicting how we ourselves will change is a very large blind spot in our psychological makeup.  Yes, perhaps when we look outside ourselves some of our biases fall away and we can do better.  But not a lot better, if current market dynamics are any guide.

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 06/12/2014 - 18:31 | 4850540 TeamDepends
TeamDepends's picture

Because Obama?

Thu, 06/12/2014 - 18:56 | 4850645 Occident Mortal
Occident Mortal's picture

I think people overestimate changes in the far away future, and underestimate changes in the near future.

For example...

When will we have flying cars?

Thu, 06/12/2014 - 19:03 | 4850667 NoDebt
NoDebt's picture

We already tried that in 1982.  It was called the General Lee.  It was fun for a while but the novelty wore off rather quickly.  They tried one more time in 1991 (Thelma and Louise) but much to the surprise of the flying car manufacturers, it drove demand even lower.  Their stocks were severely depressed and most of them went out of business by the mid 90s.

Thu, 06/12/2014 - 19:22 | 4850739 kaiserhoff
kaiserhoff's picture

As Conrad put it, "the unexpected always happens."

Just so.  We just don't know what crap will hit us up the side of the head, or when.

On the other hand, there is an ordered entropy bias in the universe, a strong tendency for things to remain, more or less as they are, or no life would be possible.

Another way to look at that, is that it takes an ungodly amount of time for old, obsolete, useless institutions to die.

Thu, 06/12/2014 - 19:31 | 4850760 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

As a person who often strugged during my 20's I was forced to change. Not only was I forced, but I also wanted change. It is hard for me to image things being static as this prof. says most people believe. It would be nice to be in a situation where non-change is good.

-Change is a constant

"Only the paranoid survive" -Andrew Grove, cofounder Intel

Fri, 06/13/2014 - 01:18 | 4851642 Bindar Dundat
Bindar Dundat's picture

One day the door opens and the future walks in.   

Fri, 06/13/2014 - 05:24 | 4851853 Headbanger
Headbanger's picture

It's "the premature arrival of the future"  as Alvin Toffler said in  "Future Shock" back in 1970


Here's the movie based on the book:


Thu, 06/12/2014 - 20:09 | 4850874 Harbanger
Harbanger's picture

We already have flying cars, but Helis are too expensive and too dangerous for most.  But now that we have the technology for cheap self flying aircraft like Amazons delivery drones, it's possible.

Thu, 06/12/2014 - 19:10 | 4850694 logicalman
logicalman's picture

There are plenty of people who struggle to efficiently pilot a metal box in 2 dimensions.

That is, I think, one of the best reasons to hope they never become common.

If they ever do, I'm going to dig a hole and hide in it.

Thu, 06/12/2014 - 22:24 | 4851249 NidStyles
NidStyles's picture

1 dimension. Cars do not move sideways, only forwards and backwards. 

Fri, 06/13/2014 - 04:51 | 4851836 maxblockm
maxblockm's picture

Then how do "t-bone" accidents (side impact) happen?  ;-) 

Fri, 06/13/2014 - 06:19 | 4851879 doctor10
doctor10's picture

Not fer Bo and Luke.

Thu, 06/12/2014 - 18:59 | 4850649 CH1
CH1's picture

The sad thing is that ZHers know that change is coming, but can't be bothered to stop obeying their overlords.

Thu, 06/12/2014 - 18:59 | 4850657 NOTaREALmerican
NOTaREALmerican's picture

Many are waitin' fer the right time.   

The rest are waiting for sports season to end.

Thu, 06/12/2014 - 19:02 | 4850664 CH1
CH1's picture

Many are waitin' fer the right time.   

I no longer believe that. The right time has been here for a long time, and they are doing precisely nothing.

The rest are waiting for sports season to end.

No argument there!

Thu, 06/12/2014 - 19:16 | 4850721 logicalman
logicalman's picture

All life is a compromise.

You can't do much to fight against anything without a place to live and food on the table.

That's why things have lasted so long.

I've been doing my bit to fight government for a long time.

First time I was dragged out of Downing Street by the cops was the Oz trials.


Still doing my bit, but in different ways.

Thu, 06/12/2014 - 19:59 | 4850845 CH1
CH1's picture

Still doing my bit, but in different ways.

I respect that. I really don't care how people act, but I care very much that they DO act.

Objects at rest tend to stay at rest. And when long-sitting humans must go against their previous choices in order to start moving (that is, to admit that they were wrong), few of them do.

Thu, 06/12/2014 - 18:33 | 4850547 disabledvet
disabledvet's picture

Modern War is everywhere and always a phsiological attack on the mind. Call it "psychology" if you wish but the fact that the body moves in spite of a mind long lost is not some "abstraction."

This is the "point" of the matter actually. So sure..."keep the blah blee blah" and "we'll just call it all in good health" but as the real thunder starts to claim "false material construct" professor.

Your phucking eardrums are bleeding for a reason...and it ain't because you are dead.


Thu, 06/12/2014 - 18:36 | 4850566 NOTaREALmerican
NOTaREALmerican's picture

It's totally different now.

(Good article).

Thu, 06/12/2014 - 18:37 | 4850568 Son of Captain Nemo
Son of Captain Nemo's picture

Here's to "Hope and Change"

After all it's well deserved! 

For those that voted for him twice you can move to the front of the line for the 'hollow point" gift you already paid for along with his salary!

Thu, 06/12/2014 - 19:07 | 4850681 graneros
graneros's picture

Twice? Anybody who voted for this asshole at any time including his IL Senator run is a brain dead idiot. God I hate listening to folks exclaim "well I voted for him the first time but..."  Sorry your not excused.  If your that incredibly stupid you shouldn't even be voting. You shouldn't even be breathing for fuck's sake.

Thu, 06/12/2014 - 19:55 | 4850815 Son of Captain Nemo
Son of Captain Nemo's picture


I smelled the "other son of Barbara Bush" a mile away when he won the nod for the nomination and prostrated himself before the tribal elite in Miami for his official christening telling the World that Jerusalem was capital of Israel!

Now we're hearing they have another "Capital" in mind and that Judea may not in fact be the Holy Land after 68 years after all... Oop!... Burp!!!

Best part of all is the source of this new un-revelation!  Good luck to Shlomo and Sadie in that part of the World after what they and U.S. have done in that neighborhood the last 4 months!

If there was a way to nuke the motherfucks to a crisp and preserve Palestine and it's people without a scratch!!!!

When you read stories like this and you know it's the God Damn truth you know you are living in Hell.

Thu, 06/12/2014 - 18:39 | 4850573 Frank N. Beans
Frank N. Beans's picture

we've been predicting economic collapse here on ZH since ZH started.  We won't be surprised when it happens.  If anything, we've OVERestimated this change. 


Thu, 06/12/2014 - 18:54 | 4850636 NOTaREALmerican
NOTaREALmerican's picture

Well, there's pathological optimism and pathological pessimism too.

Thu, 06/12/2014 - 19:01 | 4850662 Son of Captain Nemo
Son of Captain Nemo's picture

Yeah but unfortunately FN'B says it like it is


Thu, 06/12/2014 - 18:39 | 4850575 q99x2
q99x2's picture

When I was born, I was born a leader. And I'm still a leader. M'Fers.

Thu, 06/12/2014 - 18:47 | 4850600 Bear
Bear's picture

Da leader of da Pack

Thu, 06/12/2014 - 19:03 | 4850669 lasvegaspersona
lasvegaspersona's picture

At a high school concert one of the Shangralas bumped up against me..still have that boner...

Thu, 06/12/2014 - 19:14 | 4850716 graneros
graneros's picture

"As he drove away on that rainy night
I begged him to go slow
But whether he heard, I'll never know

Look out! Look out! Look out! Look out!"

Thu, 06/12/2014 - 20:36 | 4850939 lotsoffun
lotsoffun's picture

jfk junior.  ego kills.  and takes down your 'loved ones' with you.


Thu, 06/12/2014 - 18:46 | 4850595 fonzannoon
fonzannoon's picture

translation: I said a bunch of shit but whatever you do don't short this bitch

Thu, 06/12/2014 - 18:56 | 4850648 Pareto
Pareto's picture

that there fonz.....is some funny shit. +1

Thu, 06/12/2014 - 19:03 | 4850670 CrashisOptimistic
CrashisOptimistic's picture


You want to see panic?  When the SPR bazooka fires in the next week or so, and oil goes to $120, then you'll see panic.

Because abundance.

Thu, 06/12/2014 - 19:09 | 4850692 disabledvet
disabledvet's picture

Ummmm. "Dirty bomb goes off in Chicago."

Then maybe we'll all start getting are heads in the game.

Then again...

Thu, 06/12/2014 - 18:46 | 4850598 Bear
Bear's picture

Why would we be excited about change and the future when we know ... "On a long enough timeline the survival rate for everyone drops to zero"

Thu, 06/12/2014 - 18:47 | 4850603 Flakmeister
Flakmeister's picture

Wait until Global Warming really smacks us upside the head....

The ensuing panic will be epic...

Thu, 06/12/2014 - 19:16 | 4850720 withglee
withglee's picture

Global warming is a fake picture. Read the emails.

Thu, 06/12/2014 - 19:35 | 4850768 Flakmeister
Flakmeister's picture

Give it a rest troll...

Thu, 06/12/2014 - 20:00 | 4850849 CH1
CH1's picture

Global warming is a scam. Period.

Thu, 06/12/2014 - 20:09 | 4850873 Flakmeister
Flakmeister's picture


You really have to do better than that...

Fri, 06/13/2014 - 12:48 | 4853614 detached.amusement
detached.amusement's picture

with you, not really, because you simply deny your position can in any way shape or form be incorrect.  might as well go argue with ISIS about whether they think they're right or not.

Fri, 06/13/2014 - 16:36 | 4854766 Flakmeister
Flakmeister's picture

When someone comes up with a valid argument then we will be on to something...

Jeez, if it wasn't real you would think that between XOM and the Kochs that they could find competent scientists to show as such as opposed to shelling out cash to known shills without a leg of credibility to stand on...

The game has been played before, just look at leaded gasoline, tobacco, asbestos etc....

Thu, 06/12/2014 - 18:52 | 4850628 NOZZLE
NOZZLE's picture

If the USA were a corporation, the directors would have declared an end to the effeminate affirmative action experiment,  had security toss him and his shit in the street,  taken away his phone, limo, plane, corporate housing and credit cards and fired the people who hired him.

Thu, 06/12/2014 - 20:03 | 4850859 CH1
CH1's picture

the effeminate affirmative action experiment

The problem is not that it's effeminate, it's that it is unjust. "Can't have this job because of your skin color" is wrong, no matter which color is being punished.

Thu, 06/12/2014 - 18:56 | 4850639 NOTaREALmerican
NOTaREALmerican's picture

Re:  If the USA were a corporation, the directors

would have run off with all the loot.   Oh,  wait, they have.

Thu, 06/12/2014 - 19:29 | 4850756 NOZZLE
NOZZLE's picture

Ok, a corporation cir. 1950.

Thu, 06/12/2014 - 18:56 | 4850642 Yen Cross
Yen Cross's picture


"Gilbert and his team used online surveys to query thousands of people about their perceptions of their own personalities".

 It must be accurate and true if I got the info off the interwebs from a bunch of unemployed basement dwellers.

Thu, 06/12/2014 - 19:11 | 4850697 CrashisOptimistic
CrashisOptimistic's picture

You know what?

Find some retired guy and ask him if he knows more of what's going on now than when he was working.

When working, you think about work and hear the MSM headlines on the way to work.  And that's it.

Thu, 06/12/2014 - 19:18 | 4850730 Yen Cross
Yen Cross's picture

   Something tells me their demographic wasn't the AARP.

Thu, 06/12/2014 - 19:14 | 4850712 withglee
withglee's picture

Common sense tells you, if you keep putting straws on a camel's back, eventually it will break. We've been putting straws on this camel's back for a very very long time. We have been so surprised that it didn't collapse already that we begin to question our original sensibility. It's even more problematic when we come to learn that the camel collapsed a long time ago and they've been feeding us fake pictures.

Why did WTC7 fall down?

Do NOT follow this link or you will be banned from the site!