Americans are increasingly addicted to forecasts and predictions. There are experts in every imaginable field predicting every detail of our future experience: weather, politics, sports, finances, farming, global climates, etc. Nothing is lacking a forecast today.
I see this first hand every day in the Financial Services industry. There is an illusion that we are getting better at predicting financial and economic events. However, the law of large numbers can explain the illusion. With so many self-proclaimed prophets predicting every possible outcome there is always someone that can claim they accurately forecasted every event. Consider a coin toss. One person flipping ten heads in a row is very unlikely. However, if 10,000 people all flip coins it is a statistical certainty that one of them will flip ten heads in a row. Problem remains, predict in advance which one will be able to do it. Successful financial predictions are not evidence of a good prophet but rather a product of the number of prophets predicting.
Why this growing dependence on predictions? Are we better forecasters of the economy now than in the past? NO! Statistics show that even in the most important financial predictions the experts are no better than a random guess. Nonetheless, we keep turning to proven failures for another guess about tomorrow’s outcomes today.
This addiction to prediction is growing due to our increasing need to be able to control our experiences. There is a strong sense that a surprise means we did something wrong; we missed a piece of data, let our guard down, or forgot to do something. We expect our car to start when we turn the key, the room temperature to be just right, no long waits at the checkout line, and our investments to earn a healthy, steady, positive rate of return – or something failed. Failure creates uncertainty and anxiety. Our expectations for predictable outcomes seem so reasonable that we begin to demand certain outcomes. Financial institutions have heard our demand and are working overtime to satisfy us with an overload of new predictions. This guessing game feeds on our willingness to continue to pay for worthless advice. It is time to STOP! We need to stop giving our savings away to prediction junkies!
The real solution is not easy but it is very simple. It starts with knowing the truth. With all the changes in the financial markets there are some things that never change, they are always true. Our financial Peace of Mind comes from knowing and holding on to the things that are always true.
An example: The Free Markets reward risk. The truth is, you cannot remove all risk and expect to get a market return over time. The truth is, diversified risk is good, it allows for long term returns on invested assets.
The truth is, the markets are random and you and I can have Peace of Mind in our investments. No forecasting necessary!