I want to start this chapter by saying that everything I've stated so far regarding our inability to predict applies to the stock market. I'll say it again. Everything I have stated so far regarding our inability to predict applies to the stock market. I could repeat that sentence a hundred times. But most people would forget it the minute they closed this book. Why?

Because people believe that a different set of rules applies to the stock market — that making forecasts is a rational activity.

I'll give you an example. If you had a friend who constantly walked around making predictions about anything and everything that was going to happen in the world, you'd think he was pretty crazy. On the upside, he'd be easy to buy for at Christmas — a set of tarot cards or a ouija board would be just the thing. Let's think of some tags we might give him: psychic, supernatural, psychogenic, telepathic, clairvoyant, occult, palm-reader, crystal-gazer, whacko.

In the world of finance they'd call him an economist.

Let's wind the clock back to March 2009. The world's financial markets were in turmoil, had been for months. The mayhem was triggered by the fallout from the US subprime crisis. For years US financial houses had been packaging billions of dollars of dodgy mortgages and flogging them to banks, hedge funds, insurance companies and municipalities around the world. The problem with these mortgage-backed securities was that they were based on loans granted ...

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