Change, as I wrote last week, is something that investors always need to be on their guard against. Those backing blue-sky companies that promise to change the world often find themselves disappointed – share prices climb quickly as the new technology promises to change the world, only to fall back hard and flounder as the commercial reality of monetising an innovation hits. Getting rich quick in one year is a lot harder than getting rich in 10. Conversely, companies that have dominated their industry seemingly forever without changing course can find themselves caught off guard – both management and investors anchoring to past successes and underestimating the changes creeping up on them.
Indeed, our attitude towards this process is another example of just how susceptible we are to the effects of cognitive bias – anchoring and overoptimism among them. As Mr Ridley notes, it is not an uncommonly held view that the future will be worse than the past, even though centuries of raising living standards through innovation shows that this is untrue.