History's Seductive Beliefs - Morgan Housel

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Rowan Oak
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History's Seductive Beliefs - Morgan Housel

Post by Rowan Oak »

A seductive belief that exists in almost every field is that things will keep operating like they always have. It’s an almost necessary belief in a world where you have to base a prediction off something.

But as Stanford professor Scott Sagan says, “things that have never happened before happen all the time.”

All the time.

In fact in most fields – especially business and investing – the most important events that changed everything and determined the majority of future outcomes are things that had never happened until they did.

The most important economic events of the last century are probably the Great Depression, World War II, the 40-year collapse in interest rates, and globalization. And while each had analogous ancestors, anyone predicting what those events eventually did to the world could be brushed aside by those who pointed out that, say, negative interest rates had never happened before. A nationwide housing bubble and bust had never happened before. A weapon like the nuclear bomb that could deter future wars had never happened before.

Then all those things happened. And they totally changed the world.

All history is the study of what’s changed, but it’s often used as a guide to the future. The irony is overlooked because the idea that if we gather enough data and read enough books we’ll acquire a map of the future is so seductive – it’s so simple, and makes you feel great.

That will never change.
History's Seductive Beliefs
Sep 21, 2021 by Morgan Housel

https://www.collaborativefund.com/blog/ ... e-beliefs/
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger
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Re: History's Seductive Beliefs - Morgan Housel

Post by Chip »

Thanks for the link. I sure do like his writing.
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Post by JBTX »

Really insightful and important. There is always the base assumption that the way things are now are likely to be the way they are in the future.
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Re: History's Seductive Beliefs - Morgan Housel

Post by firebirdparts »

I guess so. I am always wary of internet conversations about "oh the other people are oh so dumb compared to my enlightened state." Human nature doesn't change at all; people think they know everything, then in their old age, they realize they were wrong about a lot, and they also realize that nobody will listen to what they've learned. The cycle repeats. In the past, I think, people listened more, because they had to. The wisdom of the ancients was and is mostly about this. You don't really need to read a book to figure this stuff out, I don't think. Just get older and that works too.

There is innovation. Some good, some bad.

I'll never understand, honestly, why 50 cents worth of philosophy seems so brilliant over and over. Just open your eyes and look around. Be brave enough to take what you see at face value. It works well enough.
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Post by secondopinion »

firebirdparts wrote: Wed Sep 22, 2021 10:29 am I guess so. I am always wary of internet conversations about "oh the other people are oh so dumb compared to my enlightened state." Human nature doesn't change at all; people think they know everything, then in their old age, they realize they were wrong about a lot, and they also realize that nobody will listen to what they've learned. The cycle repeats. In the past, I think, people listened more, because they had to. The wisdom of the ancients was and is mostly about this. You don't really need to read a book to figure this stuff out, I don't think. Just get older and that works too.

There is innovation. Some good, some bad.

I'll never understand, honestly, why 50 cents worth of philosophy seems so brilliant over and over. Just open your eyes and look around. Be brave enough to take what you see at face value. It works well enough.
I know a lot because I am aware of what I do not know; I know I can be wrong in my assessment of what I know or do not know; I know that I will probably retract my statement later.

I know the future is not predictable; I know of ways to estimate it; I know that those estimates are likely wrong and sometimes majorly wrong.

My 50 cents of philosophy (probably more like 0.5 cents). :P
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Re: History's Seductive Beliefs - Morgan Housel

Post by vanbogle59 »

JBTX wrote: Wed Sep 22, 2021 10:07 am There is always the base assumption that the way things are now are likely to be the way they are in the future.
Compared to all other assumptions about the future, that one actually scores REALLY well.
Which says more about all the other assumptions, of course. :beer
Last edited by vanbogle59 on Wed Sep 22, 2021 1:00 pm, edited 1 time in total.
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Post by Thesaints »

...but the 4% "rule" has always worked well !!
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Post by BruinBones »

Every once in awhile, someone drops a gem in this forum for the rest of us to read. I believe Morgan Housel’s essay is today’s gem.
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Re: History's Seductive Beliefs - Morgan Housel

Post by bestoftimes »

Chip wrote: Wed Sep 22, 2021 9:42 am Thanks for the link. I sure do like his writing.
+1

(I just realized I've spent the last two hours reading his entries in the blog!)
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Post by JBTX »

vanbogle59 wrote: Wed Sep 22, 2021 12:46 pm
JBTX wrote: Wed Sep 22, 2021 10:07 am There is always the base assumption that the way things are now are likely to be the way they are in the future.
Compared to all other assumptions about the future, that one actually scores REALLY well.
Which says more about all the other assumptions, of course. :beer
That is probably true. But the answer is not to make any specific assumption, but be willing to assess reasonable probabilities to different scenarios and be prepared for them.
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Post by vanbogle59 »

JBTX wrote: Wed Sep 22, 2021 1:13 pm
vanbogle59 wrote: Wed Sep 22, 2021 12:46 pm
JBTX wrote: Wed Sep 22, 2021 10:07 am There is always the base assumption that the way things are now are likely to be the way they are in the future.
Compared to all other assumptions about the future, that one actually scores REALLY well.
Which says more about all the other assumptions, of course. :beer
That is probably true. But the answer is not to make any specific assumption, but be willing to assess reasonable probabilities to different scenarios and be prepared for them.
Hmmm.... Not sure I would call that "the answer".
There has actually been a good deal of serious, empirical work done on this topic.
To choose one example:
https://en.wikipedia.org/wiki/Superfore ... Prediction
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Post by nisiprius »

JBTX wrote: Wed Sep 22, 2021 10:07 am There is always the base assumption that the way things are now are likely to be the way they are in the future.
It might be a good base assumption.

All predictions need to be compared to "the persistence prediction."

Source

Image

It is impressive that the seven-day forecasts are 71% accurate until you notice the "persistence forecast"--the weather seven days from today will be the same as today-- is 62% accurate.
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Post by vanbogle59 »

nisiprius wrote: Wed Sep 22, 2021 1:42 pm
JBTX wrote: Wed Sep 22, 2021 10:07 am There is always the base assumption that the way things are now are likely to be the way they are in the future.
It might be a good base assumption.

All predictions need to be compared to "the persistence prediction."

Source

Image

It is impressive that the seven-day forecasts are 71% accurate until you notice the "persistence forecast"--the weather seven days from today will be the same as today-- is 62% accurate.
Agreed. But I gotta throw in some props for the poor weather forecasters. :D

Everybody's always picking on them. But they are genuine wizards!
This is the weather we are talking about. Absolute random (or at least chaotic for the nitpickers); ill-defined causality; open and complex system. I'm actually not convinced they do it all with computers. There must be some entrail removal involved.

Take any similar field where random chance is 62%, find someone who can deliver 71%.
Those people get burned at the stake!

I live in FL. Who but the witches knows a week in advance that Zeus has decided to wipe out Homestead, but Tampa should be just fine?

And DW's phone goes off 10 min before it starts raining at our house. I don't have official stats, but I think it's actually near 100%.
Find me a stock ticker like that, and I will re-open my Etrade account.
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Post by Thesaints »

The difference is that if a weather forecast tells me that tomorrow is going to be sunny because it was sunny last Thursday and then it rains, I get wet.
If "an expert" tells me that I can withdraw 4% of my capital and not run out of money before I die because that has been the case in the past and they are wrong, consequences will be a lot more material.
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Post by vanbogle59 »

Thesaints wrote: Wed Sep 22, 2021 6:00 pm The difference is that if a weather forecast tells me that tomorrow is going to be sunny because it was sunny last Thursday and then it rains, I get wet.
If "an expert" tells me that I can withdraw 4% of my capital and not run out of money before I die because that has been the case in the past and they are wrong, consequences will be a lot more material.
The point I was trying to make was not whether or not forecasting the weather was important (although, it is, really is).
I was just trying to point out that this (weather forecasting) is one arena where we actually are good at predicting the future.
And that makes it different from most other forecasting, which is very frequently cr@p. :beer
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Post by willthrill81 »

While it's true that unprecedented events happen with seemingly surprising regularity, it doesn't mean that we cannot or should not plan.

"Plans are nothing, but planning is everything."
- Dwight D. Eisenhower

We must have some type of expectation of the future in order to determine our saving rate, investment plan, withdrawal rate, etc. Building slack into our plans and being as flexible as possible seem to be the best defenses against an unknown future.

"Invest we must."
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Post by Thesaints »

vanbogle59 wrote: Wed Sep 22, 2021 6:51 pm
Thesaints wrote: Wed Sep 22, 2021 6:00 pm The difference is that if a weather forecast tells me that tomorrow is going to be sunny because it was sunny last Thursday and then it rains, I get wet.
If "an expert" tells me that I can withdraw 4% of my capital and not run out of money before I die because that has been the case in the past and they are wrong, consequences will be a lot more material.
The point I was trying to make was not whether or not forecasting the weather was important (although, it is, really is).
I was just trying to point out that this (weather forecasting) is one arena where we actually are good at predicting the future.
And that makes it different from most other forecasting, which is very frequently cr@p. :beer
I agree. My point, cryptically made, is that in weather forecast there is always another day, while as retirement is concerned people only get to forecast once.
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Post by vanbogle59 »

Thesaints wrote: Wed Sep 22, 2021 6:56 pm
vanbogle59 wrote: Wed Sep 22, 2021 6:51 pm
Thesaints wrote: Wed Sep 22, 2021 6:00 pm The difference is that if a weather forecast tells me that tomorrow is going to be sunny because it was sunny last Thursday and then it rains, I get wet.
If "an expert" tells me that I can withdraw 4% of my capital and not run out of money before I die because that has been the case in the past and they are wrong, consequences will be a lot more material.
The point I was trying to make was not whether or not forecasting the weather was important (although, it is, really is).
I was just trying to point out that this (weather forecasting) is one arena where we actually are good at predicting the future.
And that makes it different from most other forecasting, which is very frequently cr@p. :beer
I agree. My point, cryptically made, is that in weather forecast there is always another day, while as retirement is concerned people only get to forecast once.
Ah. Yes. Agreed.
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Post by vanbogle59 »

willthrill81 wrote: Wed Sep 22, 2021 6:56 pm While it's true that unprecedented events happen with seemingly surprising regularity
I don't think it's irrational to ask if "surprising" should be replaced by "increasing". :?:
Taleb would say we are becoming more "fragile."
It is unarguable that we are becoming more networked, interconnected,....

But I don't know what to do with those ideas, even when I think they ring true.
So I just have a big-a$$ portion of my AA in fixed income, hoping that is sufficient to ride out any storms.
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Post by andypanda »

I enjoy looking at this chart from time to time.

www.visualcapitalist.com/700-year-decli ... rest-rates
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Post by MarkRoulo »

Rowan Oak wrote: Wed Sep 22, 2021 9:29 am
...

The most important economic events of the last century are probably the Great Depression, World War II, the 40-year collapse in interest rates, and globalization. And while each had analogous ancestors, anyone predicting what those events eventually did to the world could be brushed aside by those who pointed out that, say, negative interest rates had never happened before. A nationwide housing bubble and bust had never happened before. A weapon like the nuclear bomb that could deter future wars had never happened before.
History's Seductive Beliefs
Sep 21, 2021 by Morgan Housel

https://www.collaborativefund.com/blog/ ... e-beliefs/
  • Great Depression: In the US see the "Long Depression" from 1873 - 1879. Which was followed up by another bad depression from 1882-1885
  • World War II: See World War 1 for a precursor. Further back the thirty years war (1618-1648) killed off 33% - 50% of the German population (and Germany wasn't really a participant. Germany was just where the participants chose to fight ...)
  • 40-year collapse in interest rates: These are a bit unusual historically. But fiat money tends to work differently than money tied to something that the government can't manipulate. And wild interest rates (often up!) aren't terribly new.
Switzerland had negative interest rates in the 1970s, at least for a bit.

The US *has* had housing collapses (Florida in the 1920s and Texas in the 1980s). The *nationwide* housing collapse in 2008 was new, but banking used to be regional, too. And folks who were paying attention would know that loaning money out to people who couldn't pay back the loans has OFTEN resulted in losses.

Europe didn't have nuclear weapons from 1815 to 1914, but major wars didn't happen in Europe for those 100 years. It was quite a peaceful time for Europeans compared to the previous centuries. Then 1914 happened, of course ...

My take is that folks tend to not take the lessons of history seriously rather than that "it has never happened before." Most of these things HAVE happened before in some form. People just don't want to take those events seriously ("it is different this time!"). Taking these things seriously might mean having to make tough(er) decisions.
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MarkRoulo wrote: Wed Sep 22, 2021 7:59 pm
My take is that folks tend to not take the lessons of history seriously rather than that "it has never happened before." Most of these things HAVE happened before in some form. People just don't want to take those events seriously ("it is different this time!"). Taking these things seriously might mean having to make tough(er) decisions.
I don't think that's quite right. History isn't ignored, it is invoked constantly, earnestly, and badly. Perhaps the most misused catchphrase regarding history is "the lessons of history." Lots of regular people, economists, and presidents mine the past for a particular lesson that confirms their bias and fall prey to the didactic fallacy--the idea that we can pluck particular lessons from events decades ago and drop them context free into a current issue. [OT comments removed by admin LadyGeek]
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Post by sschullo »

Thanks for the link.
I agree with Housel's thinking about reality, history, and even consciousness and that reality is not what we think it is. I would think Taleb would agree with much of Housel's thinking about the limitations and delusions of much of the tools used to observe, calculate, understand our world. But Taleb in the work that I have read so far, to my knowledge, has not mentioned Housel, or visa versa.
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Post by vanbogle59 »

Tdubs wrote: Wed Sep 22, 2021 8:37 pm
MarkRoulo wrote: Wed Sep 22, 2021 7:59 pm
My take is that folks tend to not take the lessons of history seriously rather than that "it has never happened before." Most of these things HAVE happened before in some form. People just don't want to take those events seriously ("it is different this time!"). Taking these things seriously might mean having to make tough(er) decisions.
I don't think that's quite right. History isn't ignored, it is invoked constantly, earnestly, and badly. Perhaps the most misused catchphrase regarding history is "the lessons of history." Lots of regular people, economists, and presidents mine the past for a particular lesson that confirms their bias and fall prey to the didactic fallacy--the idea that we can pluck particular lessons from events decades ago and drop them context free into a current issue. [OT comments removed by admin LadyGeek]
I had the same reaction, but you put it better than I could have.

Imagine a president has 3 advisors: Chief Engineer, Chief Historian, Chief Poet.
If the president asks, "Should we build a bridge here?" what lessons will he take from their replies?
From the engineer, he will have a concrete, verifiable set of opinions.
From the poet, a he will have a metaphor; which may be even more valuable, but certainly less concrete or verifiable.
From historian? IDK. Something in between?

BTW, Housel would seem to agree:
"My deepest forecasting belief is that you can better understand the future if you focus on the behaviors that never change instead of the events that might. And those behaviors have a common denominator: They follow the path of least resistance of people trying to simplify a complex world into a few stories that make sense and make them feel good about themselves"

So, he doesn't even talk about predicting the future, just understanding it (whatever that means: how can you understand what hasn't happened?).
Maybe he's just using an academic historian's vocabulary to express our favorite saying: "Nobody knows nothing"
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Post by Tdubs »

vanbogle59 wrote: Wed Sep 22, 2021 9:59 pm
From historian? IDK. Something in between?
Yes, this is why historians make for lousy pundits.
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Post by andypanda »

"From historian? IDK. Something in between?"

Or maybe the historian will remind them that there have been 4 bridges built in that spot during the past 100 years and floods have swept them all away.

But of course nobody wants to hear it. This time it will be different, blah, blah, blah, we're the best and the brightest, etc. :)
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I removed an off-topic comment and reply. The discussion was delving into (historical) politics beyond a factual discussion. As a reminder, see: Politics and Religion
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Post by Portfolio7 »

Rowan Oak wrote: Wed Sep 22, 2021 9:29 am
A seductive belief that exists in almost every field is that things will keep operating like they always have. It’s an almost necessary belief in a world where you have to base a prediction off something.

But as Stanford professor Scott Sagan says, “things that have never happened before happen all the time.”

All the time.

In fact in most fields – especially business and investing – the most important events that changed everything and determined the majority of future outcomes are things that had never happened until they did.

The most important economic events of the last century are probably the Great Depression, World War II, the 40-year collapse in interest rates, and globalization. And while each had analogous ancestors, anyone predicting what those events eventually did to the world could be brushed aside by those who pointed out that, say, negative interest rates had never happened before. A nationwide housing bubble and bust had never happened before. A weapon like the nuclear bomb that could deter future wars had never happened before.

Then all those things happened. And they totally changed the world.

All history is the study of what’s changed, but it’s often used as a guide to the future. The irony is overlooked because the idea that if we gather enough data and read enough books we’ll acquire a map of the future is so seductive – it’s so simple, and makes you feel great.

That will never change.
History's Seductive Beliefs
Sep 21, 2021 by Morgan Housel

https://www.collaborativefund.com/blog/ ... e-beliefs/
True as this is, most things do stay the same, or they change but pretty slowly. This is less true today than it has been for all of human history, but still mostly true. As a heuristic, you're going to be right more often than wrong if you make this assumption. Like the Univ of Mi study showing that the best predictor of the price of oil next year is not futures, not investment banks, not trade publications... it's the current price of oil.

However, as Housel notes, there is also a really good chance you will be really wrong about something. I agree. This highlights the importance of flexibility when our assumptions are challenged.

Also, I take issue with the idea that the study of history is about trying to directly predict the future. I think it's more accurate to say we're trying to avoid the mistakes of the past. Our constitution is in the form of a Democratic Republic in part because the founders were trying to avoid the lack of stability in city/state democracies in ancient Greece, as well as the decline of the Roman Republic.

I think Bogleheads have done the same thing with the distilled Boglehead principles. These principles help us avoid the mistakes we've seen so many people make in the past. We're not trying to predict the future... in fact we are explicitly avoiding predictions except for the most necessary assumptions, and we do that because of what we've learned from the past.
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Post by andypanda »

Speaking of mistakes, the history of regional real estate bubbles can be entertaining and sobering.

www.forbes.com/sites/johnwake/2019/06/0 ... cd378a48aa

"One of the conclusions of the paper is that some busts trigger financial crises but others don’t."

"Fortunately, in both the Chicago and Los Angeles examples, their long-term underlying economies were skyrocketing so just a couple of decades after those bubbles, the crazy high peak real estate bubble prices didn’t look so crazy."

That's good, recovery only took "just a couple of decades."
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Post by Mr. Rumples »

The Structure of Scientific Revolutions by Kuhn is a history of science by the philosopher Thomas Kuhn. Its thesis, that science is paradigm driven and not necessarily rational, is just as applicable to fields as history and even investing. Bogle, for example, changed the paradigm for investing. Like others who changed the paradigm for their fields, Bogle was ridiculed.
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Re: History's Seductive Beliefs - Morgan Housel

Post by Somethingwitty92912 »

Okay super tired of this sort of doomer nonsense. I read this article an many like this. First thing they do is lay on the fear. Let’s pepper in some quotes by famous and influential people you know…. who actually did something.

After all that, let’s add in some cookie cutter wisdom like “you don’t know something till you know it!”

An boom! You’ve got yourself a bunch of clicks. I think the mods should address advertisements like this. They should be on their own subsection of the forum.

You notice the one thing this article does not provide? An antidote, a solution, anything at all actionable, or helpful.

Be warned! Whooooooo that’s what this is. Feartainment at its finest.
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Re: History's Seductive Beliefs - Morgan Housel

Post by Fallible »

Housel writes:
The biggest takeaway from history is that the characters change but their behaviors don’t. The technologies, trends, tragedies and winners – the events that take place – are always in flux and can be nearly impossible to predict. But the behaviors that drive people into action, influence their thoughts and guide their beliefs, are stable. They’re the same today as they were 100 years ago and will be 100 years from now.

Markets change, but greed and fear never do.

Industries change, but ambition and complacency don’t.

Laws change, but the tribal instincts of politics don’t.
I happen to be halfway through a new book about the current pandemic and the deep, maybe even revolutionary, changes it has led to worldwide that would seem to be examples of what Housel is saying. The book is Shutdown: How Covid Shook the World's Economy, by Adam Tooze.
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Re: History's Seductive Beliefs - Morgan Housel

Post by nedsaid »

I have wrestled with these issues myself. What concepts are more or less eternal and what is subject to change? It isn't easy to tell the difference.

Mostly, I am a stay the course type of individual but I also believe that the markets and the economy are dynamic and that we can't assume that the assumptions that underlie our investment strategies won't change. I think that investors should re-examine everything from time to time and even perform the exercise of thinking the unthinkable. The $64,000 question is how much should investors change their investment approach to adjust to a dynamic economy and financial markets?

I had this discussion in another thread. If we have a continuing trend of rising inflation over time instead of disinflation, it would seem to me that one of the underlying assumptions that shape the way we invest has changed. The question is should an investor make changes in his/her portfolio in response, if so then how much. The answer from another poster that the market has already accounted for all of this seemed unsatisfactory but yet I am not sure if or how much an investor should respond to the possible change in inflationary expectations. What I would say is that the market itself is operating with a set of assumptions, all of which might not be valid in the future.

This approach to re-evaluating everything would seem applicable to many other discussions as well.
A fool and his money are good for business.
wrongfunds
Posts: 3187
Joined: Tue Dec 21, 2010 2:55 pm

Re: History's Seductive Beliefs - Morgan Housel

Post by wrongfunds »

JBTX wrote: Wed Sep 22, 2021 10:07 am Really insightful and important. There is always the base assumption that the way things are now are likely to be the way they are in the future.
Great article! Very eye opening.
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