Lessons from History

Came across this blog post and find it very intriguing.

Lesson #2: Reversion to the mean occurs because people persuasive enough to make something grow don’t have the kind of personalities that allow them to stop before pushing too far.

What kind of person makes their way to the top of a successful company, or a big country?

Someone who is determined, optimistic, doesn’t take “no” for an answer, and is relentlessly confident in their own abilities.

What kind of person is likely to go overboard, bite off more than they can chew, and discount risks that are blindingly obvious to others?

Someone who is determined, optimistic, doesn’t take “no” for an answer, and is relentlessly confident in their own abilities.

Reversion to the mean is one of the most common stories in history. It’s the main character in economies, markets, countries, companies, careers – everything.

Part of the reason it happens is because the same personality traits that push people to the top also increase the odds of pushing them over the edge.

This is true for countries, particularly empires. A country determined to expand by acquiring more land is unlikely to be run a person capable of saying, “OK, that’s enough. Let’s be thankful for what we have and stop invading other countries.” They’ll keep pushing until they meet their match (usually Russia).

It’s true for companies. The kind of corporate culture that lets companies dominate an industry is not friendly to people who say, “I think we’ve grown too fast. Maybe we should scale back.” They’ll keep pushing until they’re forced to make painful cuts.

It’s true for investors. The kind of personality willing to take enough risks to earn outsized returns is generally not compatible with the kind of personality willing to shift everything into muni bonds once they’ve made enough money. They’ll keep taking risks until those risks backfire. It’s why the Forbes list of billionaires has 60% turnover per decade.

Long-term success in any endeavor requires two tasks: Getting something, and keeping it. Getting rich and staying rich. Getting market share and keeping market share.

These things are not only separate tasks, but often require contradictory skills. Getting something often requires risk-taking and confidence. Keeping it often requires room for error and paranoia. Sometimes a person masters both skills – Warren Buffett is a good example. But it’s rare. Far more common is big success occurring because a person had a set of traits that also come at the direct cost of keeping their success. Which is why downside reversion to the mean is such a repeating theme in history.