by Hilary Martin, MBA, CFP®
It’s the third week of January and by now we’ve all read our share of predictions, sometimes cleverly disguised as “outlooks”, for housing, the economy, the presidential election, the stock market and any and everything else for 2012. We all love to believe that there is an elite group of folks who possess the uncanny ability to do the impossible: predict the future.
Of course, most predictions will be wrong simply because they predict mutually exclusive outcomes. For example, it seems every candidate in the presidential bid has had someone predict their ultimate triumph, and they can’t all win.
Similarly, I’ve read that the S&P index will remain flat and I’ve read that it will end the year up 12% (gee, thanks for being so specific!).
One author indicated that housing will have its turnaround this year, and another was quite certain that the housing market will remain lifeless until unemployment drops to 5% (we’ll be waiting a long time for that one!).
I have even read that stocks will go up this month because they go up every January, due to consumer optimism. This one is sheer factual untruth. Stocks do not go up every January, although the January Effect states that small cap stocks, over the long run, average a positive return for the last days of December and the first days of January.
Whether market movement is due to consumer optimism (versus expectations of surprising company results, for example) is something we cannot know.
Needless to say, for every article making a prediction, one can find a counter-prediction, and why is it that at the end of the year I never see a rash of articles reminding me that all of the author’s January predictions were spot on?
The answer is because they almost never are, and when they are, it’s only because the author got lucky.
Not only that, but when we need them to be right, they are more wrong than ever.
For example, if ever I needed a decent prognosticator, it was in January of 2008, right? If only someone had told me about the economic meltdown barreling our way, I certainly would have been able to save people from the hardships many suffered. Heck, if even the majority of pundits and experts had been right on the direction of the market, I’d have been grateful for the heads up that we were headed down. But no, it turns out the most well-respected and highly compensated experts had no idea what was in store.
I know some of you are thinking, “Dr. Doom (Nouriel Roubini) knew.” Yes, that’s right, Professor Roubini is now revered as the man who predicted the financial and economic meltdown of 2008.
Look, for every potential outcome there is always going to have been someone who predicted it, and sometimes we grow to revere these individuals as modern day Nostradamuses.
There are lots of things that are easy to predict, like population growth and other things like it that are usually governed by inertia, which makes people more receptive to predictions, even though these easy things are not what people are really interested in.
And to feed that appetite, there are plenty of people willing to make public predictions about things that are unpredictable, and most of them are wrong, and the ones that turn out to be right are served by a cognitive bias called Hindsight Bias.
Hindsight Bias says that human brain sees everything in hindsight very clearly—behavioral scientists know that human beings look back at a chain of events and we determine that we see causation. However, after-the-fact certainty leads to revisionist thinking and masks the true chaos of the world around us.
Professor Roubini did predict what happened, and thousands predicted something else. Fact is, Roubini doesn’t have any special powers, and he won’t be able to predict the next big catastrophe, because, in a dark sort of way, he just got lucky.
If you and I were sharing a Martini on Friday afternoon, and I asked you if you thought there was a human being who was, in fact, publicly distributing accurate predictions of the future, I pray that your logical mind would respond this way:
If someone really could predict the future, they wouldn’t bother publishing their predictions. No way! They’d just find a way to bet on it, leverage their bet to the sky, wait for their outcome to occur and then cash their big fat check and move toTahiti. Right? So why do people still make and publish predictions? Maybe a better question is why we still read them.
With all of this in mind, my recommendation, as always, is to be very, very careful which pundits you are reading, and even more careful when you start to believe them.
Here are some predictions for 2012 that you can put money on:
- A man will be elected President of the United States.
- The markets will end the year either up or down. But we will wish them up.
- A baby will be born in 5.. 4.. 3.. 2.. 1!
- If you are a client of FWCG, we will ask you to come in for a review of your planning and investments. If the market is up, or you think it is, you will be more likely to come see us than you will if it is down. If you don’t come see us, we will miss you!
- You will hear from me again by blog.
This is us, your fee-only financial planners, reminding you to be smart about your money!