But while history does not repeat itself, there is a constant. Maybe this is the constant that gives history its rhythm. The constant is called human nature.

It seems our wisdom is born from our experiences. We acquire behaviour, we acquire our views. When we lived a more simple life, the range of likely experiences was more restricted than it is in the modern age. But today we live in a global village consisting of almost seven billion inter-connected souls. Today, unlike in the past, a new innovation, idea, or perhaps a new virus or disagreement between two cultures, can spread and affect us all at a pace that leaves us breathless. When risk goes wrong, it can turn into a contagion.

Over the time of our existence the nature of risk has changed. Yet we still have to make do with the tool kit nature provided us with as we became human. One of our most common habits is to extrapolate trends and project them into the future. Maybe during our hunter-gatherer days, when the environment changed only slowly and the variety of each tribe’s likely experiences was quite limited, this trait worked to our advantage.

This characteristic is surely the reason why we have bubbles. Bubbles occur when we see a trend and expect it to continue, and our behaviour becomes self-reinforcing until there’s a crash.

History tells us we are not good at spotting our error until it is too late. As a bubble grows, we hear no end of reasons why: ‘This time it is different,’ or ‘Why, it’s a new paradigm now.’

Bubbles can suck the very life-force out of an economy, and in a world of seven billion people where risk is correlated, they could ultimately prove to be our undoing.

And yet, within this Pandora’s box of ills that our hubris can create, we find hope.

For the law of unintended consequences has been the driving force of our social evolution. And just as bubbles may be our undoing, our tendency towards irrational exuberance may be our salvation.

If you wish to buy a cop of Bubbles and Wisdom, go to http://www.bubblesandwisdom.com/

© Investment & Business News 2013

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