Sucker-punched by history

June 12, 2024


  • Good times become memories, bad times become lessons. This sums up human behaviour.  
  • Knowing a little bit of history can help you become a good investor, because it expands the range of what you believe possible.
  • Europe was peaceful for a century and in a span of 4-5 weeks, WWI began in Europe. The Great War was a stark lesson that things can go horribly wrong very quickly.
  • While catastrophes feel unlikely, one should never discount the possibility that unlikely things will happen.

Some of the most important lessons in life are those that we learn over and over again—it’s weird, isn’t it? 

We all learn that life is unpredictable and can go wrong in horrific ways. Or, at least, we learn this in theory. If you are a trader or an investor, you’ve probably heard this a million times. You’ve probably even learnt this the hard way, by making losses. Still, every time something goes wrong, we’re surprised yet again.

This surprise is understandable. Bad things don’t happen on the overwhelming majority of days. Our financial systems are built to survive. Most people try to avoid any risks that they can clearly see coming. For a real catastrophe to happen, many things have to go wrong in extremely unlikely ways.

That something is unlikely, however, doesn’t mean it’s impossible. History tells us that if you wait long enough, unlikely things happen all the time.

I’m writing this because I’ve been listening to Dan Carlin’s 6-part, 23-hour long series on the First World War (WWI), “Blueprint for Armageddon” — part of his brilliant Hardcore History podcast. One thing the series keeps reminding you about is how things can go horribly wrong in the span of weeks, in ways that nobody imagined possible. 

WWI was a cataclysmic event. Though it started in Europe, it spread across the world, dragging the colonies of European superpowers into the bloodbath. The fallout of WWI was immense. Between 16-40 million soldiers and civilians were killed in the war, while millions more were injured. The war shattered Europe. Boundaries were redrawn across Europe and the Middle East as great empires like Austro-Hungarian Empire, the Ottoman Empire and the Russian Empire collapsed. Its after-effects have continued to play out ever since leaving fingerprints in everything from the outbreak of WWII, to the Cold War, to the continued violence in the Balkans, to the hell on Earth that is the Middle-East. 

What strikes me the most, though, is the sheer absurdity of how the entire world sleep-walked into war. The war started, I kid you not, because a car took a wrong turn. At every step thereafter, there was only a small chance that things would spiral out of control. And yet, in a few years, the whole world was in flames. 

I wonder if our current crop of leaders could handle such a situation any better. The thought gives me a panic attack, to tell you the truth. Here’s something the author Zachary Karabell said on a podcast:  

So I take as an axiom that in any given moment, everything could fall apart in ways that are rapid, breathtakingly destructive, and will be looked back on, assuming there will be people to look back on it, as one of those “Oh my God, how did that happen?” moments. Which is why we’re constantly looking at July of 1914, and we’re constantly trying to find the seeds of destruction in past examples where that happened and transpose them to today and think about, “Okay, is this similar?”

But you know, if you do too much of that, you also miss the fact that history is, in fact, a litany of things that went wrong more than it’s a litany of things that went right.

Back to the markets: a prerequisite for making money is surviving the things that go wrong. For that, you need to build an appreciation for history — not because it tells you what to do, but because it expands the range of what you consider possible. It forces you to be more skeptical and ask more questions. This is important to any trader or investor. 

The world has been relatively peaceful for the last eighty years. Of course, there have been brutal conflicts through this time, but they’ve all been local. We’ve managed to avoid a major global conflict since the Second World War. But don’t let this lull you into believing that one is impossible. WWI is a reminder that the most improbable things can come to pass. Once you learn about its history, you’ll realize how fragile our long peace is. 

The same applies to the markets. After the global financial crisis of 2008, global markets have seen little volatility. They’ve pretty much gone up in a straight line, in fact. This serene environment has given people a false sense of security. But if you look at history, stability always breeds instability. See this bit from the legendary Hyman Minsky: 

[E]conomist Dr. Hyman Minsky points out that stability leads to instability. The more comfortable we get with a given condition or trend, the longer it will persist and then when the trend fails, the more dramatic the correction. The problem with long-term macroeconomic stability is that it tends to produce unstable financial arrangements. If we believe that tomorrow and next year will be the same as last week and last year, we are more willing to add debt or postpone savings in favor of current consumption. Thus, says Minsky, the longer the period of stability, the higher the potential risk for even greater instability when market participants must change their behavior. 

Here’s a hundred-thousand foot view of how improbable it was for WWI to become a reality — a reminder of how wrong things can go.

Backdrop: Europe in the 1900s

To understand why Europe went to war, you need to understand power relations in Europe before the war began. 

Between the years 1800 and 1815, the French emperor Napoleon Bonaparte went on a rampage that engulfed Europe in conflict and killed millions of people. Horrified by this period of bloodshed, European leaders entered into a series of agreements to prevent another war. The agreements brought relative peace to Europe over the next century. While the continent saw localised conflicts, these didn’t drag the other major powers into war. 

With peace came prosperity. Through the 1800s, Europe saw rapid material and scientific progress. By the early 1900s, Europe had reached the peak of its affluence. 

Over this century of peace, however, many animosities had accumulated between the great powers. Earlier, these played out in a competition for overseas colonies. But now that there were few colonies left for the taking, direct rivalries became more intense. Meanwhile, empires like the Ottomans and Austro-Hungarians were in decline. The threat of oblivion, combined with intense imperial great power rivalries, led to a series of interlocking alliances among all the great powers of the era.

On one side were Germany, Austria-Hungary, and Italy (which later got out of the alliance). Later on, the Ottomans supported the Germans as well.  On the other side were France and Russia. Britain, too, was assumed to be on their side, though it didn’t have a formal alliance with France and Russia. The United States would eventually join them as well. These were not just alliances of friendship. These were defensive alliances that required one country to come to another’s aid if they were attacked. 

So, at this point, Europe had at least 5 first-rate military powers: the British, the Germans, the Austro-Hungarians, the Russians and the French. While no single empire was powerful enough to conquer everyone else, each could cause significant damage to the other. 

Act I: Scene I

In June 1914, Archduke Franz Ferdinand, the heir apparent to the Austro-Hungarian throne, visits Sarajevo, the capital of Bosnia and Herzegovina, to inspect the imperial armed forces.  

It’s an uneasy time. Austria-Hungary had annexed Bosnia in 1908 from the Ottoman Empire. This has caused deep resentment among the Serbians, who dream of a unified Serbia, which includes Bosnia. The annexation has also angered Bosnian Serbs, leading to the rise of virulent Serbian nationalist movements within Bosnia, opposed to the Austro-Hungarian empire. 

The Archduke is a complicated person with complex views — some liberal, some illiberal. Compared to his father, he has a relatively pragmatic view of the empire. He’s well aware of the dangers posed by Serbian nationalism, and advocates for more autonomy for different nationalities. In a way, he is the best friend the Serbs can hope for. 

The date of his visit is June 28th. It is his wedding anniversary. His wife, Sophie, has come along. The Archduke couldn’t have picked a worse date for the visit, however. It holds significant importance for the Serbs. It is the day they commemorate the historic Battle of Kosovo, when a Serbian army faced the Ottomans, and managed to kill the Ottoman Sultan. 

On the fateful day, the Archduke, along with Sophie, makes his way through central Sarajevo in an open-top car, along with his convoy. An ultranationalist organisation, Mlada Bosna (Young Bosnia), wants to take advantage of the visit. They plan to assassinate the Archduke. The group is armed and supported by another ultra-nationalist group — Black Hand, which has deep ties to the Serbian military and intelligence. 

Between 6 to 20 assassins line up to take their shot. None succeed. As the convoy makes its way, one of the assassins flings a hand grenade. Historians can’t agree on what happened next, though there are many theories. The driver supposedly sees the grenade coming and hits the accelerator, causing the grenade to bounce off the Archduke’s car and explode under the car behind them. Alternatively, the Archduke sees the grenade and swats it away. Either way, except for a few scratches, both the Archduke and the Duchess come out unharmed. 

For now, it seems, the danger has been averted. Something terrible could well have happened, but for now, everyone’s safe. Eventually, perhaps, the Serbs will realise that the Archduke is a natural ally. 

Act I: Scene II

The Archduke continues his trip. He visits the town hall with his wife, makes a speech and wraps up some official business. And history takes a cruel turn. The Archduke could’ve cut his visit short and gone home. But as fate would have it, he decides to go to the hospital, to visit the soldiers who were injured by the bomb meant for him.

On the way to the hospital, the convoy decides to take a different route. Alas, the Archduke’s driver is Czech, and no one has given him instructions in Czech. He only realises that he has made a wrong turn when someone screams at him. He stops to reverse, and this is where history happens. As fate would have it, he stops right before Gavrilo Princip, one of the assassins. Princip steps forward and fires two shots, killing both the Archduke and his wife. 

Think of the sheer improbability of what has happened. The first bomb misses the Archduke: in itself is a low-probability event. But on top of that, he decides to continue on his trip. And then, he takes a wrong turn that lands him right in front of an assassin. How many assassination attempts can you think of where the assassin gets a do-over? 

Because of this improbable series of events, however, one of Europe’s first-rate military powers now wants war. 

Act II: Scene I

Austria-Hungary is livid — its heir apparent has been murdered. It blames the Serbians. It wants revenge. But it can’t act unilaterally. If Austria-Hungary decides to go to war against Serbia, it risks bringing the Russians, who support Serbia, into the war. The evidence suggests that the Austro-Hungarians wanted a limited war with Serbia to put an end to the nationalist menace, but didn’t want a war with Russia. 

If Russia does enter the war, however, the Austro-Hungarians will need more support. They go to their ally, the Germans, to ask for help. There’s a lot of debate on what happens next, but essentially, the Germans give the Austrians a “blank check” to deal with Serbia however they see fit, and promise to support them in whatever they do. Some historians argue that the Germans didn’t expect that this blank check to be encashed.   

On 23 July 1914, Austria sends an ultimatum to Serbia, demanding they bring the perpetrators to justice. One of their conditions is that Austro-Hungarian officials be allowed into Serbian territory to ‘suppress subversive movements’. Serbia deems this egregious. Some historians argue the ultimatum was meant to be rejected. In its response, Serbia agrees to almost all demands, but does not agree to Austro-Hungarian officials entering its territory. Austria-Hungary is unhappy, and declares war on Serbia on July 28, 1914. It immediately begins bombing Belgrade. Russia begins the pre-mobilisation of its army the next day. 

Three of Europe’s five military titans are suddenly on the verge of being sucked into war. But even at this last moment, there’s a chance they can avoid war. See, the German Kaiser Wilhelm and the Russian Tsar Nicholas II are cousins. They send each other a flurry of telegrams, desperately seeking some way to avoid war. The Tsar knows the catastrophe that war could be, and writes to the Kaiser, asking him to think about the bloodshed they might cause. Evidence shows that the Kaiser also hopes to find a diplomatic solution. But fate has other ideas. 

Act II: Scene II

Although both cousins want to avoid war, they can’t bring it to a stop. Misunderstandings start creeping in. Political pressure builds up on both sides for war. Their plan — of a mediation led by the great powers — falls apart. 

The Tsar orders a full mobilisation of his armies the next day, July 30th. On 31 July, Germany sends an ultimatum to Russia, asking that it stops its mobilisation of troops. Russia doesn’t respond. Germany declares war on Russia the next day, August 1st. France is Russia’s ally, and is obligated to come to its aid. And so, Germany declares war on France on August 3rd. Neither Russia nor France had declared war on Germany or were even keen to. 

Just three weeks ago, Europe was peaceful. Now, four great powers were at war with each other. After a century without war, Europe was on the verge of entering a world war. 

Act III: Scene I

The only actor left on the side-lines is arguably the most powerful: Britain. But its neutrality shall not last for long.

Britain is one of the great superpowers of the era which also boasts the world’s best navy. Some historians argue that it cultivated a policy of “splendid isolation,” avoiding any hard alliances. And so, while it’s on good terms with the Russians and the French, it is not bound to enter the war that is now brewing. 

While Germany isn’t afraid of Britain, it wants to keep it out of the war. On the other hand, the French are sweating, trying to figure out where Britain stands. Till August 3rd, Britain manages to stay on the sidelines, taking the position that they have no horse in this quarrel. 

But once again, fate has other ideas in store. 

Act III: Scene II

Two powerful enemies encircle Germany from both sides. On one side, it has a border with Russia, and on the other, with France. Germans have always feared a two-front war with France and Russia. And so, Germany already has a plan to deal with one, if it ever has to fight France and Russia at the same time. 

The plan involves sending a massive number of troops to France, knocking them out quickly, and then running back to fight Russia. The plan relies on the fact that Russia has a massive geography, an inferior military and a poor transportation network, buying Germany some time. 

But there’s a problem. Germany can’t directly attack France through the border, because France has built numerous forts along the border, making it one of the most heavily fortified places on the planet.  It’s not that Germany can’t destroy the forts, but that would take time, and time is the one thing Germany doesn’t have. If it gets bogged down near the French border, the Russians will soon reach Berlin and the strategy will fail.

And so, Germany comes up with an alternate plan: attack France by going through Belgium. 

Act III: Finale

While Britain has avoided getting drawn into alliances so far, it still has a few entanglements. One of these is with Belgium. In 1839, Britain had signed a treaty which guaranteed the neutrality of tiny Belgium, which had then just become an independent country. 

On August 2nd, Germany delivers an ultimatum to Belgium, demanding passage for German troops on their way to France. The Germans expect the tiny country to stand aside. But the Belgians decide to fight. On August 4th, German troops enter Belgium, violating its neutrality. Britain issues an ultimatum asking Germany to get out of Belgium. But to Germany, this simply isn’t an option. So, on the same day, Britain declares war on Germany.  

And with this, all the major powers on the continent are at war. Britain shall pay a heavy price for entering the war: it would soon lose its place as the preeminent global hegemon. Meanwhile, the war won’t stay limited to Europe. It will spread to Asia and Africa, leading to unimaginable bloodshed across continents.  

Why did Europe go to war?

This is a million-dollar question. It’s been over 100 years since WWI, and thousands of books have been written on it. But nobody agrees on anything. I’ve heard over 7-8 historians on the topic, and none of them concur on even the broad details, forget the minutiae. Everybody has a different take on how the war erupted. Some historians argue the war was inevitable, others the opposite. Some blame Germany, some Russia, some France, while others say “it was complicated and everybody is to blame bro.” 

WWI was a complex event. As tempting as it is to look for simple causes, there are none. The war was the result of a mix of deliberate choices and unfortunate coincidences. Along the way, of course, some leaders and generals deliberately sought war. But the conflict was also the result of half-considered, contingent choices made in the fog of war. 

All of this makes WWI a spectacular example of how things can go wrong in sudden and horrific ways. As I learned about its history, I couldn’t help but think about its parallels with today’s world. During the early 1900s, Britain was the world’s preeminent superpower. But it was now in a slow decline. In a loose sense, it resembles the United States of today. Germany, on the other hand, was a rising power, like the China of today. Today’s Middle-East, with its endless conflicts, resembles the Balkans of WWI. Then there’s also Ukraine, the NATO alliance system and the US security blanket on which much of the world depends on. I’m not the first one to draw this analogy [1,2,3,4].   

Sure, you could argue these are not just naive inferences but also spurious ones. If a trained historian were to read this, I’m sure they’d lock me in a makeshift prison and then lecture me in great and tortured detail about how stupid I am. But there’s something to the saying that history doesn’t repeat but rhyme. 

To me, the point of paying attention to history is not the specific details of certain events, which are always random and never repeat; it’s the big-picture behaviors that reoccur in different eras, generations, and societies. People were dealing with greed and fear 100 years ago the same way they’re dealing with now and will be 100 years in the future. The more you see a behavior throughout history, the more you realize how ingrained it is in human behavior, which makes you more confident that it’ll be part of our future. It’s the only way to forecast with accuracy. 

Morgan Housel
Financial analyst and researcher at Zerodha

Post a comment

  1. Raghvendra says:

    Beautifully presented.

  2. Santanu says:

    Indeed a fine read about a Black Swan.

    Perhaps, in the long run, everything that could go wrong will inevitably go wrong.

  3. Kusum Rai says:

    Mere putra Tushar rudra prakash rai ka zerodha account se Bank account me fund credit nahi ho raha hai kya karu please help me 🙏🙏

  4. AP says:

    Enjoyed reading this article on a Sunday afternoon.

  5. Mn says:

    Exquisitely described

  6. Sindu Priya says:

    Looks like Zerodha is expecting a WW3 soon 😛