all in

In what I guess could become a series about mental errors, reading Lords of Finance has reminded me of another common mental error people make: failing to realize they’re betting. Essentially, baked into every action and decision humans make is a probability assessment of future conditions. Some of these are screamingly obvious, of course; ie, “gravity, ergo, don’t drive off a cliff” or “that’s a rocket – rockets explode!”

But sometimes in our more complex decisions we forget this, which leads to decisions like “hyperinflation of the dollar is imminent, ergo buy gold” when really the analysis should be “if monetary collapse in the United States is imminent, buy bottled water and ammunition.”

The decision from Lords of Finance that really sticks out for me is the Treaty of Versailles, which essentially set out pretty baldly with the aim of vengeance, but made a crucial error to extract part of that vengeance through contentious reparations. When you buy a nation’s bonds you are betting on that nation’s success, but the Allies acquired such vast quantities of German debt it would clearly destabilize and cripple the German economy (not to mention the provisions of territorial loss and other provisions designed towards the aim of collective punishment). From a financial standpoint the Allies made a huge bet on German bonds and immediately went about ensuring those bonds would default. Clearly they didn’t think about the fact that they were essentially rigging the house against them since they allowed their thinking to be clouded by the resentments of the war but that’s what they did.

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