Financial Amnesia

The FT has a nice article on financial amnesia, which talks about the desire of the CFA UK discipline to incorporate some financial history into their curriculum, ostensibly to implant enough of a sense of deja vu in budding financial managers when they encounter potential disaster scenarios that they may avoid repeating them.

I think this is a great idea – the only problem is that it probably wont have any sort of meaningful impact other than provide some fascinating course material for CFA students. The problem with an industry that makes its living from markets that essentially operate on two gears – fear and greed – is that despite all of the prior knowledge in the world, we will willingly impose a state of amnesia upon ourselves if we can convince ourselves that what is happening now is in some way different, or just different enough from whatever disasters happened before. The Internet bubble, tulip-mania, and the various property boom and busts that we have seen over the last decade share at their core a common set of characteristics, but they are different (or “new”) enough that we were able to live in a state of denial. The “fear and greed” mentality also means that even if you know you are operating in a bubble that will eventually burst, you carry on regardless, as you plan to be out of the game before it all goes bad (The Greater Fool theory).

Incidentally, if you want to read a beautifully written and entertaining account of financial bubbles by one of the greatest writers on this topic, you should read this book (“A Short History of Financial Euphoria” by J.K. Galbraith). It packs a huge amount of wit and insight into its relatively small page count.

NOTE: Galbraith also wrote the definitive account on the Great Crash of 1929, which rapidly became required reading around three years ago…it’s also excellent. Galbraith has a beautiful turn of phrase.