Things stay the same until they don’t…
Last week, I shared the hypothetical about Bobby, the High School student with a history of poor grades. I asked if you would bet money that he would get an A next semester. I then I offered a few counterfactuals to see if your answer changed.
We hear this a lot, “past performance is no indicator of future success.” It’s usually something we take as a given. What more is there?
On a psychological level, our experience is the only way we understand reality. However, our experience is always, by definition, in the past. Every moment that exists quickly goes into our past.
This is the conundrum. If the past is the only source of your understanding of reality, yet past history is “unrelated” to future success, then what is the relationship of our experience to our future success? Are we just doomed to try things out blindly?
Believe it or not, the financial world offers some insight into this dynamic. If Bobby in High School was a company with expected quarterly results, we can see a parallel. Still, every single investment gives the warning of “Past performance is no indicator of future success.” However, we still invest in things that have done historically well, whether it leads to success or ruin. Is there a better way?
If there is a solid business that has a clear and reliable revenue source and a clear path towards a defined income, then we can imagine that the value of that company will be relatively stable (given a stable economy). We use the past to extrapolate the future.
However, if this solid business suddenly runs into trouble, then we reassess everything.
This “suddenly runs into trouble” is known as a “catalyst”. Catalysts exist to change things up. It exists in business and traders use catalysts to anticipate major moves in companies that would have done the same thing over and over again.
Bobby’s grades were stable in that they were bad and there was no indicator of a catalyst. But when I offered new scenarios, I was introducing catalysts.
By extension, true change in past performance requires catalysts. Without it, expect the same. This is true for yourself, co-workers, friends, romantic relationships. If we bias our understanding of the future to our experience in the past, we prevent ourselves from analyzing the catalysts that can change everything. Understanding catalysts helps understand the relationship between the past and the future.
Some major catalysts are religious in origin. But that’s probably a discussion for another day.