Guessing isn’t the same as knowing. Yet the distinction seems to get lost on us. And it creates major problems.
I see it all the time. For the past four years I’ve spent a considerable amount of time educating myself on investing. I’ve even taken over my own investments from paid professionals. Infrequent are the days I don’t connect with news or analysis I think are essential to being an informed, successful investor.
The finance and investment worlds are full of incredibly smart people, principally because there are large amounts of money to be made there. Consequently, each year many of our best and brightest college graduates head to Wall Street. Warren Buffett wannabes abound. Everyone wants to be rich!
But one thing I’ve observed over the past several years is that many of these incredibly smart people forget one essential fact: they can’t predict the future. And when we forget this, really smart people start acting really dumb.
Many in the investment world act as though they know what’s going to happen. Indeed, many understand history and current events so well (albeit perhaps not as well as they think) that they have extreme confidence in their ability to forecast the future.
There is money to be made in such forecasting. It’s one of the ways you attract other people’s money, which is a major way of making money for yourself. It’s also a way of attracting viewers (ala Jim Cramer). Indeed, proclaiming what’s going to happen in the future can be a highly lucrative business.
But most fail miserably at this prediction game. Sometimes they’re lucky, and they and others interpret that luck as wisdom. However, over time, it becomes apparent to the critical eye that it was luck — perhaps not ignorant luck, perhaps informed luck, but luck nonetheless. It becomes apparent that that which passes for prescience is actually speculation.
But I’ve also noticed not everyone plays this game. Some very smart, successful people are modest and humble and reticent to comment on events or price movements they foresee. They don’t deal in the world of forecasting; rather, they deal in probabilities and risk management.
They look for broader trends or inflection points as a way of increasing their odds, but don’t claim to be able to portend the future. They look for bubbles and excesses, but don’t claim to know tomorrow’s price movements. They have a longer term perspective than the speculators.
These people tend not to be on CNBC as much as the others. After all, viewers like to watch and listen to people who boldly proclaim what’s going to happen and what stocks will rise or fall. They aren’t attracted nearly as much to people of nuance and people who hedge their bets due to the uncertainty they see in the world. Or to people who remind us that it’s impossible to know what’s going to happen when.
Brash predictions sell. People love it. The fact that it’s nearly 100 percent bullshit doesn’t seem to bother many people.
This phenomenon isn’t restricted to the investment world though. You see it in politics, too.
So many of us act like we know what public policy is best not only in the short term but also in the long term. Of course, we don’t know as much as we think we do. We can’t. We simply can’t foresee future events and how they will interact and play out in what is an incredibly complex and interdependent world.
Nor are we very good at anticipating and compensating for the law of unintended consequences. It happens to the best of us. We didn’t foresee x action triggering y. Life is complex, yet often we act as though it’s simple, lacking in the interconnectedness and codependency that permeates our world. Not surprisingly, then, stuff happens and catches us by surprise, no matter how thorough our planning.
In sum, forecasting and predicting lure us into a false sense of security, which is fraught with risk.
So what is one to do? If we aren’t very good at forecasting and predicting the future, how do we make sound decisions today — decisions for the future?
Here is what I’ve learned over the years, Vera: We can’t predict the future. But we can sometimes spot major trends. And we can manage risks and the unknown to a certain degree by assessing and acting upon probabilities based on a thorough knowledge of past and current facts and trends. And we can become more comfortable with ambiguity and uncertainty.
By way of example, when I was interviewed by the Defense Department for a top-secret position in 1978 (for which I was hired, so I guess the interview went O.K.), I was asked about the Soviet Union (the USSR), that nuclear-armed, totalitarian Cold War nemesis to the U.S. that was headquartered in Moscow. I didn’t know how the future would unfold, of course. No one did or could. But I could see trends. And I could see how certain forces (not the military kind) could be kept at bay for only so long. And, so, I thought (vs. knew) that the Russians would have a hard time holding their empire together during my lifetime. I thought it was unsustainable. That’s how I answered the interviewer’s question (with a more expansive discussion of my reasons than presented here).
I wasn’t wrong. The USSR doesn’t exist today, having fallen 13 years after my interview. But, still, my prediction was nothing more than a guess. And I couldn’t begin to predict when or exactly how events would unfold.
I also predicted the rise of a figure such as our current president-elect, Donald Trump. I thought (vs. knew) there would be a backlash against the culture (and supporting public policies) of greed and extreme individualism that had fostered gross economic inequity unlike anything we’ve seen since the days leading up to the Great Depression. Technology and globalization were exacerbating the situation. Pressure was building. Eventually, it would be released.
But I didn’t know when or how the pressure would be released. I didn’t predict it would be Trump or 2016. I just knew (thought) something would give, sometime in the relatively near future. My hope was that it would be peaceful and non-cataclysmic from a financial standpoint.
Vera, do you see what I’ve done here?
I’ve told you only about my (mainly) right calls. I haven’t mentioned the ones I got wrong. And I mentioned but didn’t stress the all-important factor that I didn’t (and couldn’t) predict: the when. Timing can be everything, and timing is impossible to predict.
Therein lies part of the problem: we remember and recount what we got right (even then minimizing the holes in our predictions); we suppress and ignore that which we missed or got wrong. And so we end up thinking we know more than we do; we think we are better at predicting the future than we really are.
To make matters worse, we rationalize. When things happen we didn’t foresee, we act like no one could have foreseen them, which strangely has the effect of making us feel even smarter and more complacent.
Former President George W. Bush was good at this. He and his vice president made this point often: no one could have foreseen terrorists flying a commercial airplane into a building. The only problem was, some people did. But the president–as well as most of us–conveniently chose to ignore that fact. Perhaps acknowledging our failure would have been too troubling: It would have reminded us all that we see and foresee so much less than we think we do — indeed, that we’re not as smart as we think we are.
Now, no one can foresee much less assess all the risks and possibilities. But we can endeavor not to miss that which is discernible and to account for that which is not.
Frankly, we don’t have a choice but to manage an uncertain future as best we can. I think it’s adequately–albeit never entirely–manageable assuming we don’t forget the limits of our knowledge and start placing bets that could end up blowing up our world (our financial world or our political or physical worlds).
Vera, I suppose the takeaway here is, when you hear someone spouting off like they know the future (whether it concerns investments, economics, politics, religion or whatever), run. The other way.
But if you hear a really smart, insightful person assessing the situation from the standpoint of probabilities and risks, with a deep understanding of the past and present, listen — carefully, especially if their track record reveals better-than-average decision making.
And learn. Read. Reflect. Never stop learning. Hone your abilities and insights. Test your hypotheses. Challenge your assumptions and preconceptions. Check your biases. Keep an open mind. Seek out interpretations and opinions different from your own. Resist the comfort of living in a thought bubble. Endeavor to become a wiser person.
I’ve also learned that our inability to know or predict the future is no excuse for ignorance. Hubris is fraught with risk, but so is willful ignorance. In fact, it’s the most inexcusable kind of stupidity.
But never forget: no one knows the future. All we can do is make our best guesses. Never forget that’s all they are: guesses.
Try to make them as informed as practicable. Try to root them in honest insights and not self-serving biases, inherited preconceptions or flawed assumptions. Or, worse yet, in irrational fear, hatred or anger.
And don’t forget about virtue either, Vera. Try to root your choices in time-proven values you hold dear. Try to do the right thing, while humbly acknowledging the ambiguity and uncertainty that surrounds the very concepts of rightness and wrongness — indeed, our human limitations in discerning Truth.
Finally, never forget that, no matter how we try, when it comes to seeing what’s over the horizon or around the corner, our best guess is the best we can do.