#20 The Folly of Forecasting

Human beings have an innate desire to peer into the future, to unravel the mysteries that lie ahead. The fascination with predicting the future can be seen throughout history, from ancient divination practices to modern-day weather forecasts and financial predictions. However, when it comes to accurately foresee what lies ahead, human beings often fall short. The reasons for this fallibility are complex and multifaceted, rooted in imperfect incentives and a lack of accountability. In this article, we will delve into the challenges of predicting the future, examine the disparities in forecasting abilities between different professions, explore the role of feedback in improving accuracy, and discuss the implications of accountability in the world of predictions.

The Imperfect Nature of Predictions

Despite our best efforts, predictions are inherently imperfect. The incentives for accurate predictions are often inadequate, leading to a lack of motivation to invest the necessary time and resources in refining forecasting abilities. Additionally, the consequences of making bad predictions are often minimal or nonexistent, further diminishing the drive to improve forecasting accuracy. As a result, the situation is unlikely to change, and human beings will continue to face challenges in accurately predicting the future.

Weather Forecasters vs. Doctors

A stark contrast can be observed in the forecasting abilities of weather forecasters and doctors. Weather forecasters are acutely aware of the limitations of their predictions. They understand the complexity of atmospheric dynamics and the multitude of factors that can influence weather patterns. In response to these uncertainties, weather forecasters provide forecasts with wide confidence intervals, encompassing a range of possible outcomes. This approach allows them to account for the inherent unpredictability of weather systems.

In contrast, doctors often lack comprehensive feedback on the accuracy of their diagnoses and treatment outcomes. While they make predictions and decisions that can significantly impact lives, the feedback loop is often incomplete or delayed. Furthermore, human beings tend to equate confidence with competence, leading patients to trust doctors' judgments even when uncertainty or errors may be present. This confluence of factors contributes to a disparity in forecasting abilities between weather forecasters and doctors.

Importance of Feedback in Improving Forecasting Accuracy

One crucial factor that influences forecasting accuracy is the presence or absence of feedback. Weather forecasters benefit from immediate feedback on the accuracy of their predictions. They can compare their forecasts with actual weather conditions, identify any deviations, and adjust their forecasting methods accordingly. This iterative process allows weather forecasters to learn from their mistakes and continually refine their techniques.

On the other hand, doctors may not receive timely feedback on the effectiveness of their diagnoses and treatments. The long-term outcomes of medical interventions are often complex and influenced by numerous factors. As a result, doctors may not have a clear understanding of the accuracy of their predictions, hindering their ability to improve their diagnostic skills over time. The importance of comprehensive and timely feedback cannot be overstated when it comes to enhancing forecasting abilities in various fields, including medicine.

The Problem of Inaccurate Predictions and Lack of Accountability Among Experts

Inaccurate predictions are not limited to weather forecasts and medical diagnoses. Experts in various fields, such as economists, financial pundits, and geopolitical analysts, also make predictions that often miss the mark. The lack of accountability in the prediction-making process further exacerbates the problem. In many cases, when predictions turn out to be false, there is no strong incentive for the predictor to acknowledge their errors or face consequences.

This absence of accountability leads to the proliferation of wild predictions. Those who make wildly unexpected predictions that happen to come true often take pride in their success and are quick to remind others of their foresight. However, there is rarely anyone on the other side of the transaction who benefits from exposing false predictions. The result is an environment where bold and attention-grabbing predictions thrive, while the consequences of inaccurate forecasts go largely unnoticed.

Proposed Solution: Publishing Pundits' "Batting Average"

To address the issue of accountability in predictions, a rather ingenious solution has been proposed. It suggests that financial pundits and experts should have their "batting average" published alongside each article or prediction they make. This batting average would represent their past success rate in making accurate predictions. By providing readers with this information, they would have a better understanding of the track record and reliability of the author's predictions.

Publishing the batting average would introduce transparency and accountability into the prediction-making process. It would allow readers to make more informed decisions about which predictions to trust and which to approach with healthy scepticism. However, it is important to note that the implementation of such a system faces challenges and obstacles. The publishing industry may be reluctant to adopt this approach, and there may be resistance from pundits who prefer to maintain their air of infallibility.

While the proposal may face hurdles, it is an important step towards fostering a more accountable prediction-making culture. It encourages a critical evaluation of predictions and provides readers with the necessary tools to assess the reliability of forecasters. Nonetheless, it remains to be seen whether this proposal will be embraced and put into practice.

Maintaining a Long-Term, Evidence-Based Perspective in Market Volatility

In addition to the challenges of accurate prediction-making, there is a need for individuals to maintain a long-term, evidence-based perspective, especially in the realm of financial markets. The Mather Group, a financial advisory firm, emphasizes the importance of rational decision-making during periods of market volatility.

The Mather Group advises clients against succumbing to emotional selling and incurring permanent losses during turbulent times. They emphasize that bear markets and market pullbacks are normal occurrences in the investment journey, despite being unpleasant. Historical data reveals that while market downturns can be longer than expected, subsequent bull markets tend to last even longer and generate significant wealth for those who stay invested.

Pitfalls of Emotional Decision-Making and Market Psychology

One of the biggest pitfalls in navigating market volatility is succumbing to emotions and engaging in irrational decision-making. Greed during upward markets and recency bias can lead investors to take on excessive risk, chasing quick gains and disregarding long-term strategies. The Mather Group focuses on guiding clients away from such short-sighted decisions.

They advocate for strategies such as portfolio rebalancing, tax loss harvesting, and appropriate investment approaches like Roth conversions. These proactive measures allow investors to respond to market conditions while adhering to a disciplined and rational investment approach.

Limitations of Predictions and the Unpredictable Nature of the Future

It is crucial to acknowledge the limitations of predictions and the unpredictable nature of the future. Even experts, such as the Federal Reserve and Wall Street strategists, have a poor track record in accurately predicting future market movements. The authors caution against relying too heavily on predictions and emphasize the need for a long-term perspective.

The Mather Group believes in adhering to time-tested methods and helping clients navigate market fluctuations with prudence. They advocate for focusing on fundamental investment principles and avoiding knee-jerk reactions based on short-term market volatility.

In conclusion, human beings have a deep-rooted fascination with predicting the future, but they often fall short in their abilities. The imperfect nature of predictions, combined with a lack of accountability and feedback, contributes to inaccurate forecasts across various fields. However, there are potential solutions to enhance accuracy and accountability, such as publishing experts' past success rates. Additionally, maintaining a long-term, evidence-based perspective and avoiding emotional decision-making is vital in navigating market volatility. Ultimately, a measured and rational approach, coupled with a recognition of the unpredictable nature of the future, can lead to better decision-making and improved forecasting abilities.

And here is a "must-listen" podcast recommendation:

https://freakonomics.com/podcast/how-to-be-less-terrible-at-predicting-the-future/