Many investors have fallen into a trap I call "mistaking historians for prophets": in a field driven by innovation and change, they rely too heavily on historical data to predict the future.

We can't blame investors for this. If you view investing as a hard science, then history should be a perfect guide to the future. Geologists build models of Earth's processes using a billion years of historical data, meteorologists do the same, and so do doctors—the way our kidneys work today is no different from how they worked 1,000 years ago.

But investing is not a hard science. At its core, investing is the act of a vast number of people making imperfect decisions based on limited information about things that will significantly impact their life satisfaction, and this can make even the smartest people nervous, greedy, and paranoid.