The Perils of Forecasting

The Perils of Forecasting

We are often taken in by false cases of predictions. The ancient Romans used to sacrifice animals and then have their intestines examined. The state of the intestines was supposed to tell the future. We no longer look at the insides of animals, but superstitions are found everywhere in our attempts to predict the future. Astrology, numerology, and the interpretation of dreams are still prevalent as attempts to know, in advance, about tomorrow. 

One of the tactics used by forecasters is to wait for the outcome of an event and then say, “But I told you this was going to happen”! Fred Hoyle, a famous humanist, and astronomer commented that a precise prediction must be made before a golfer hits the ball. It is misleading, Hoyle said, to predict after the golfer hits the ball and the golf ball falls on one of the millions of available tufts of grass. After the fact – all predictions are 100% correct!

Another strategy used to try and mislead people is to give a vague and fuzzy prediction. Such forecasts are not precise and can fit almost any eventuality. Such statements are of no use, yet millions of humans succumb to such trickery.

Stock Markets and Pattern Seeking

Warren Buffet is dismissive about trying to find out the level of the stock market. He said, “I make no attempt to forecast the general market. A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.” Buffet thinks predicting the future level of the stock market is a fool’s game. 

Despite this sage advice from Buffet, we are surrounded and often sent hundreds of “research” papers, each confidently predicting where the stock market will be in a month and a year from today. 

One of the reasons we read and believe in these false guesses is that we tend to look for patterns – even when there are none. This behavior has a unique name – Apophenia. Apophenia occurs when we see a pattern or connection between entirely unrelated things.

In the Long Term…  

Some forecasters say that their predictions, especially about the stock market, should not be tested soon but in the long term. There are three reasons to be cautious about this approach as well.

  1. It depends on what one means by long term. Suppose a prediction was made in 2016 about the stock market level in five years’ time – would anyone have predicted the record levels we see today? Even if such a prediction was made, consider the opposite case – a prediction in 2003 about the stock market in five years’ time. In 2008, faced with the US subprime crises, stock markets were are multi-year lows. So different answers are obtained, almost randomly depending on when you start and end your prediction.
  1. The investing guru Nassim Taleb has shown that “black swan” events are quite common. 2008/9 saw the subprime crisis. 2020 saw panic selling due to the Covid crisis. Such black swan events make “long term” predictions risky
  1. Replying to these longer-term predictions – the economist John Maynard Keynes wrote, “In the long run, we are all dead.”  

So what do we do?

President Eisenhower wrote, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.” Faces with an uncertain future where forecasting is difficult, if not impossible, the best strategy might be to follow President Eisenhower’s advice – to be prepared for a wide range of scenarios. Then when whatever future arrives, we are ready to face events head-on, with a clear mind and a strong heart.

© Kaikhushru Taraporevala

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