The Rational Investor #037: Why We Believe We Can Predict the Future
Happy Saturday to you,
Welcome to the 37th edition of The Rational Investor Newsletter.
Before I get to this week’s quote, I’m sorry that I went M.I.A. for the last few weeks. I’m in the midst of a HUGE and exciting project as we speak, so I had to press pause on everything that wasn’t mandatory for business. Everything settles down for me at month’s end, but I hope to stay consistent from here moving forward. I truly enjoy sharing these quotes and thoughts with you, so thank you for being a part of this!
Today’s quote comes from Michael Lewis’s book, The Undoing Project, which focuses on the relationship and research between the two psychology greats: Amos Tversky and Daniel Kahneman. The quote below describes a unique psychological defect in our reasoning. I’d be curious for your opinion, but I’m not sure there is a way around this defect other than the sheer awareness that this flaw exists.
I also share a related quote from Howard Marks’ 1996 memo, The Value of Predictions II (Or, “Give That Man a Cigar”).
Onto the main event…
Here’s Michael Lewis on Why We Believe We Can Predict the Future:
“All too often, we find ourselves unable to predict what will happen; yet after the fact we explain what did happen with a great deal of confidence.
This "ability" to explain that which we cannot predict, even in the absence of any additional information, represents an important, though subtle, flaw in our reasoning. It leads us to believe that there is a less uncertain world than there actually is, and that we are less bright than we actually might be.
For if we can explain tomorrow what we cannot predict today, without any added information except the knowledge of the actual outcome, then this outcome must have been determined in advance and we should have been able to predict it.
The fact that we couldn't is taken as an indication of our limited intelligence rather than of the uncertainty that is in the world.
All too often, we feel like kicking ourselves for failing to foresee that which later appears inevitable. For all we know, the handwriting might have been on the wall all along. The question is: was the ink visible?”
Now, from Howard Marks,
In general, we can say with certainty that these forecasters were much better at telling us where things stood than where they were going. This bears out the old adage that "it's difficult to make accurate predictions, especially with regard to the future." The corollary is also true: predicting the past is a snap.
How often has something happened in the market, or with a particular stock, or whatever, and you said to yourself, “I knew that would happen.”? I don’t know about you, but it happens to me more than I’d like to admit.
I readily admit that, despite being someone who fully embraces the fact that the future is a complete mystery.
Intuitively, I understand that even if I knew exactly what would happen next—which is absolutely impossible, but let’s just say that I could—I’m still likely to be wrong about how the market will react to said news.
The world and the markets have nearly infinite variables, so the idea that we might know what will happen next is beyond preposterous when you think deeply about how complex the world is.
Unfortunately, that impossibility doesn’t (and never will) stop all the talking heads from sharing their utterly useless predictions for what the future holds. We’d be smart to always keep the wise words of John Kenneth Galbraith close at hand,
“There are only two types of forecasters: Those who don’t know and those who don’t know they don’t know.”
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
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