2.4 Dramatic Change to Normal Group Behavior

We have all heard the expression “life is full of surprises”. This expression is more sarcasm than wisdom. Life is actually full of a lot of the same, with very few surprises. These “surprises”, as referred to in the expression, are actually just a unlikely but possible outcomes.

If we play the lottery and win, are we actually surprised? Winning was always a possible outcome although rare. So winning is not really an unexpected outcome, just an extraordinary one. We play the lottery to win, so it should be no surprise to win. If we lose, we will still probably continue to play the lottery.

If we won the lottery and the agency said they were bankrupt and unable to pay, this would be a surprise. This surprise would probably stop us from playing the lottery again.

Real “surprises” are outcomes that we could not have anticipated. These unique and unimaginable outcomes force change.
The stock market going up or down 5%, 10%, 20% or 90% is a possible outcome and should be no surprise. Our stock broker running a Ponzi scheme and stealing our money is a surprise. In “Fortune’s Formula” written by William Poundstone, he described Kelly’s Criteria for betting that if we continue to bet where zero is one of the possible outcomes, then eventually we will end up with zero. If all of our money is invested in stocks, then it should be no surprise if our account becomes worthless one day, since that is a possible outcome of stocks (bankruptcy). We diversify to avoid this zero outcome.

On August 8, 1904 the Dow Jones Industrial Average closed at 53. 25 years later on August 26, 1929 the Dow Jones Industrial average had risen nearly 7 fold to close at 380.33. On July 8, 1932 the Dow closed at 41.22. If the stock market is just a meter to the willingness to accept risk, was the stock market collapse the “surprise” or was it the unthinkable banking system collapse that occurred at the same time. People had less money to put into banks and defaulted on debt which created a high demand on the dollar which led to less lending. This series of events started the deflationary spiral which pushed unemployment in America to record levels. The stock market went down because people stopped playing the lottery.

It took the Dow 25 years to get back to even. In November 1954 the Dow Jones Industrial Average finally reached the 1929 levels. After another 25 years, in 1979, the Dow Jones Industrial Average reached the low 800’s. So, it would have taken a lifetime to double the Dow Jones Industrial Average from August 26, 1929.

Real “surprises” take a long time to forget. It typically takes a generation to forget these life changing events. The market nearly went up 12 fold 25 years later. In November 2004, the Dow reached 10,500. The Great Depression appears to have taken a generation to forget.

The Great Depression has occurred in other countries and other times over and over again. No real surprises can change the human condition. Risk is an instinct and not a choice.

3.0 Why We Do What We Do

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