Via Howard Marks in The Most Important Thing:
Many times over the course of my career, I’ve been amazed by how easy it is for people to engage in willing suspension of disbelief. Thus, the third factor I want to discuss is people’s tendency to dismiss logic, history and time- honored norms. This tendency makes people accept unlikely propositions that have the potential to make them rich . . . if only they held water. Charlie Munger gave me a great quotation on this subject, from Demosthenes: “Nothing is easier than self- deceit. For what each man wishes, that he also believes to be true.” Th e belief that some fundamental limiter is no longer valid— and thus historic notions of fair value no longer matter— is invariably at the core of every bubble and consequent crash.
In fiction, willing suspension of disbelief adds to our enjoyment. When we watch Peter Pan, we don’t want to hear the person sitting next to us say, “I can see the wires” (even though we know they’re there). While we know boys can’t fl y, we don’t care; we’re just there for fun.
But our purpose in investing is serious, not fun, and we must constantly be on the lookout for things that can’t work in real life. In short, the process of investing requires a strong dose of disbelief. . . . Inadequate skepticism contributes to investment losses. Time and time again, the postmortems of financial debacles include two classic phrases: “It was too good to be true” and“What were they thinking?”