UNSUSTAINABLE THINGS CAN LAST LONGER THAN WE ANTICIPATE

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There’s a long history of military leaders following a logic that goes like this:

“The enemy is outnumbered. They are out-gunned. We are gaining ground each day. Their morale will soon break and, accepting reality, they will surrender.”
And then that outnumbered, out-gunned enemy keeps fighting, and fighting, and fighting. Sometimes to the last man.

A rational person might look at this and say, “Why are they still fighting? It’s unsustainable, and they have to know it.”
But wars often aren’t governed by spreadsheets and clean reasoning.

During the Vietnam War, Ho Chi Minh put it bluntly to the US: “You will kill ten of us, and we will kill one of you, but it is you who will tire first.”
Identifying that something is unsustainable does not provide much information on when that thing will stop.

Unsustainable things can sustain for a long time.

There are two reasons why.

One is INCENTIVES. The other is STORYTELLING.
U.S. housing market in 2003 “Prices were too high. Growth was fueled by low interest rates that would rise soon. This was 100% unsustainable,” right.?

But the housing market kept rising for another four years. Bankers kept lending, buyers kept buying.
Put yourself in the shoes of a subprime mortgage broker in 2003. Your job was to make loans. Feeding your family relied on you making loans.

If u didn’t make those loans, someone else would,so quitting in protest just lowers your pay and hurts u more than it hurts anyone else.
The more unsustainable an industry gets, the more it relies on inexperienced workers pulled from less prosperous industries to expand. Exposed to pay they couldn’t dream of before, those workers become more susceptible to looking the other way as their industries go off the rails
A lot of people screwed up during the financial crisis.

But an unpopular view I have is that most of us underestimate the extent to which we’d act similarly if we wandered into the same incentive pool.
This goes up the food chain, from the broker to the CEO, the investors, the real estate appraiser, THE POLITICIAN, the central banker...

Incentives lean heavily towards not rocking the boat.

So everyone keeps paddling long after the market becomes unsustainable.
Then there’s the STORYTELLING.

If enough people believe something is true, unsustainable ideas can gain durable life support.

Stories are more powerful than statistics because they take less effort for your brain to contextualize complex issues.
Stories are more persuasive because the gap between what works in a spreadsheet and what’s practical in real life can be a mile wide.

This usually isn’t because we don’t know the statistics.

It’s because spreadsheets are cold and rational.
On paper, or to outside observers, decisions should be made with facts.

In reality, to those in the field, they’re made with facts contextualized with things like social signaling, time horizon, office politics, government politics, making up for past mistakes, and so on.
There are so many moving parts that the easiest way to answer the question “What should I do?” is to be guided by a story that makes sense to you.

Not a statistic, and not a fact. A good tale.

That’s not ideal. But it’s realistic and reasonable.
Storytelling helps explain why people keep doing things long after they’re factually unsustainable.

The solution is knowing the difference between expectations and forecasts. The former are good, the latter should be used sparingly.
The difference between “That looks unsustainable so I don’t want to be a part of it,” and “That looks unsustainable so I’m going to bet that it will end by Q1 2020” is enormous.

End of thread.

Thank you for reading.
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