Eight decades ago, economist John Maynard Keynes reputedly remarked: “When the facts change, I change my mind; what do you do sir?” Investors might do well to consider that question as, looking back at the past five years, it is clear some of the “facts” of global finance have been overturned.
Unsurprisingly, that has produced some visible shifts in most investors’ views. Nobody assumes subprime mortgage bonds are safe, for example, or blithely trusts triple-A credit ratings. Nor do they presume that big banks cannot collapse, or that western central banks cannot keep rates at zero.
But while these visible shifts of view are striking, what is perhaps even more interesting is how our minds have slowly changed in subtle ways too. Most of the time, investors do not ponder the nature of conventional wisdom, or their unstated assumptions; after all, nobody wants to admit they are a creature of their cognitive environment.