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Our Fascination with Predictions

Our Fascination with Predictions

“Religion is the opium of the people.”  If there’s one Karl Marx quote with which we’re familiar this is it.

Sadly his words are taken out of context and provide a distorted impression of what he had to say about religion.  What did he really say?

“Religious distress is at the same time the expression of real distress and the protest against real distress.  Religion is the sigh of the oppressed creature, the heart of a heartless world, just as it is the spirit of a spiritless situation.  It is the opium of the people.  The abolition of religion as the illusory happiness of the people is required for their real happiness.  The demand to give up the illusion about its condition is the demand to give up a condition which needs illusions.”

What does this have to do with wealth management?  Nothing!  We simply like the “opiate of the masses” term.

In the world of economics and finance we believe the true opiate of the masses is the never-ending desire to predict – and to do so “accurately.”  It’s this unhealthy love of forecasting the future that gives people a false sense of security ultimately resulting in less than optimal outcomes.

Let’s face it – the random and the unknown terrify us.  If we can convince ourselves we know what will happen next week, next month or next year (no matter how truly unknowable) we feel better.

Don’t believe it?  The networks do.  It’s at the core of the pre-commercial tease.  Pundit after pundit “knows” what we should do with our money.  “Coming up next a 5-star fund manager gives tells us if now is the time to buy Japan.”  Preying on our fears and capitalizing on a human tragedy – all in the relentless zeal for ratings.  Shame on them.  But we digress…

Not only do we look forward to feel better but we use revisionism to explain the past.  We apply today’s solutions to yesterday’s problems as if they had been obvious at the time.  In turn we extrapolate the past into the future.  It’s a vicious cycle.

If we can’t break this cycle then recency bias will negatively impact us.  Human behavior is to estimate future probabilities not on long-term events but on a handful of recent ones.  We believe the most recent events provide the highest probability of future outcomes.  We believe that the good times or the bad times we’re currently living in will go on forever.  It’s why we were happy to buy negative earning “dot-coms” in 2000 and why we were willing to dump everything in March of 2009.  It’s why we suffered the consequences if we gave into our recency bias.

So what if we’re right?  What if THEY’RE right?  What if the pundits tell us where the world is headed and get it right?  We say follow Jennie’s advice to Forrest:  RUN!  A singular event does not a trend make.  Anyone heard from Elaine Garzarelli lately?  She correctly “predicted” the stock market crash of 1987.  We sure hope she’s had a good idea since because waiting 24 years for another round of “good advice” is a lot longer than many of us are willing to wait in our quick fix, fast food, always on society.

We don’t wish to pick on anyone and we don’t wish to give anyone a hard time.  As always what we wish to do is provide perspective.  Uncertainty isn’t always a bad thing.  It isn’t to be feared or ignored.  It’s a reality of life.  If we accept this then it’s powerless over us.  It kills recency bias and lessens our desire to hang on every one of Jim Cramer’s words.  All that’s left is shtick or a pretty face.  In Jim’s case the former is tiring and the latter is non-existent.

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