Why Financial Predictions Are So Alluring Yet Usually Wrong
All of us are bundles of emotions, and our emotions crave certainty. One way many investors try to generate certainty is by relying on predictions. The problem is, the world is now, and has always been, uncertain.
The famed economist Ludwig von Mises wrote, “The future is hidden. If man knew the future, he would not have to choose and would not act.” Your choices and the actions that follow are what matter most to your financial future.
Are You Predicting or Hoping?
Do you find yourself believing predictions because the outcome is what you want to happen? If you’re truthful, the likely answer is yes. Oftentimes, predictions that you pay attention to are just mimicking what you want to hear.
Just like political polls, the fact that predictions are notoriously unreliable doesn’t mean they will go away. Predictions and forecasts of all varieties continue because someone, somewhere, is paying attention. The poor track record of predictions hasn’t stopped people from trying to predict the future.
Predictions usually contain some reference to history in order to give the prediction more credibility. However, history is made up of many surprising events that were unexpected and unforeseen. History contains lots of outliers.
Grappling With the Uncertainty
The world is today, and has always been, difficult to anticipate. The late Daniel Kahneman opined that “The correct lesson of history to learn from surprises, is that the world is surprising.”
The primary reason forecasting and predicting is so hard isn’t because of the data. It’s because predicting the behavior of people, those like you and those different from you, is virtually impossible.
You probably think that you approach various financial decisions rationally. Someone else, however, looking at your choices from afar, might think differently. It’s a matter of perspective.
Behavioral economics informs us that rationality is mostly in the eyes of the beholder. Human behavior is governed by emotions and these emotions are sometimes random and unpredictable.
When Should You Invest in the Market?
Within the realm of investing, forecasters opine about when you should be invested in the markets, and when you should be on the “sidelines.” Yet, not being invested in the financial markets and waiting for the “perfect time” to invest creates another set of risks.
Remember, the primary reason you invest in the first instance is to maintain the purchasing power of your capital. You need to outpace inflation over time. That’s tough to accomplish while being out of the market.
There are literally hundreds of different surveys and statistics that can be used to formulate market predictions. They all have one thing in common; there’s very little relationship between most of these statistics and future market returns. Just because the overall sentiment is bullish or bearish at a given point in time means very little.
One of the first choices you make as an investor is to either accept the unknowability of the future or alternatively to follow the never ending array of predictions about the future. Choose wisely. Your financial future depends on it. Start there. Ready for a real conversation?
Disclosure
Apollon Wealth Management, LLC dba J.E. Wilson (Apollon) is an investment advisor registered with the SEC. This document is intended for the exclusive use of clients or prospective clients of Apollon. Any dissemination or distribution is strictly prohibited. Information provided in this document is for informational and/or educational purposes only and is not, in any way, to be considered investment advice nor a recommendation of any investment product or service. Advice may only be provided after entering into an engagement agreement and providing Apollon with all requested background and account information. Please visit our website https://apollonwealthmanagement.com for other important disclosures.