The annual prediction season has just started. Last week, I was sent my first report from the soothsayers at Saxo Bank, entitled Outrageous Predictions 2022: Revolution. Pretty much every bank, investment house and management consultancy worth their salt will publish their own version in the next few weeks, either in the run up to the festive season, or shortly after the New Year has started.
Why is this? Who reads them? Given that almost by definition (and experience), most of the predictions will be wrong, is there any value to be gained in paying them any attention?
The first annual predictions I ever came across were shortly after I started my prior career at Morgan Stanley in New York. The then "market-moving" Chief US investment strategist, Byron Wien, would publish his "Top Ten Surprises" for the coming year. Byron, now 88 years young, a Vice-Chairman at Blackstone and still active in the markets, has always been a canny operator. He has been publishing his top ten "surprises" every January for 36 years. His definition of a "surprise" is an event that the average investor would only assign a one out of three chance of taking place but which he believes is “probable,” i.e., having a better than 50% likelihood of happening. To his credit, Byron, unlike most "predictors", has always reviewed his success rate from the previous year, as he published for the next. If you take a look at his January 2021 "Surprises", what would you give him, maybe a B+?
"Prediction is difficult, especially about the future", maybe one of the best known and most often quoted quotes about forecasting. Usually attributed to Danish physicist, Niels Bohr, he highlights the enormous difficulty of reading the runes and foretelling what is to come. Despite the obvious challenges, thousands (if not tens of thousands) seek to make a professional living this way and millions (if not hundreds of millions) read their work. So why do we continue to make and read predictions?
1. We like certainty. We like to feel in control. Especially in times of great uncertainty and volatility, there is a very human need to feel in charge. If we accept that knowledge is power, thinking we have a sense of what is to come is indeed empowering and therefore reassuring.
2. We still need to make decisions today, about an uncertain tomorrow. In my experience, no decision is a decision, but rarely the right one. I have written previously about the dangers of using linear / single point predictions to aid decision-making vs. a more robust scenario-based approach. Making assumptions explicit and challenging the collective wisdom (the “official future”), is key.
3. We seek reassurance that our own views are correct. “Confirmation bias” is one of the most common cognitive decision-making traps that we can all fall into. Seeking “facts” and opinions that match our own, is a very powerful driving force.
While there maybe real psychological benefits to making and taking predictions and forecasts to heart, there are also many pitfalls. As one of the founding fathers of the use of Scenario planning at Shell, Pierre Wack observed, “Forecasts are not always wrong; more often than not, they can be reasonably accurate. And that is what makes them so dangerous…sooner or later forecasts will fail when they are needed most: in anticipating major shifts in the business environment that make whole strategies obsolete.”
It is all too easy to fall into the trap of making what you believe is an informed prediction. I have done so myself. Back in May 2016, when sitting on a “Future of Real Estate” panel I was asked about the outcome of the forthcoming Brexit referendum, due a few weeks later. “It will be close,” I affirmed with great confidence, “but the Remainers will prevail”. Why did I break my golden rule and why did I get this so wrong? Partly confirmation bias and wishful thinking (at the risk of exposing my own politics) and partly, I suspect, “affinity bias”. I live and work in London, most of the so called “city elites” I interact with, thought this way too.
Lesson learnt.
Many of the smartest decision-makers and investors I know do indeed pay attention to the predictors and forecasters (and typically a range of them). However, they are not seeking “the answer” but rather trying to understand the assumptions and underlying logic of those predictions, before developing their own point of view. While not fool-proof, I would argue they have better odds of developing a more robust view of the future and therefore improving the quality of their decisions.
So, go ahead and enjoy the festive season of prediction ("outrageous" or not), just don’t take them too literally. If you need a further reminder not to do so, just look up the myriad of famous quotes from forecasters who got it horribly wrong. Here are a couple of reminders:
“Who the hell wants to hear actors talk?” — H. M. Warner, Warner Bros., 1927
"There is no reason for any individual to have a computer in their home."
— Ken Olsen, Founder of Digital Equipment Corporation (DEC), 1977
“There’s no chance that the iPhone is going to get any significant market share.” — Steve Ballmer, Microsoft CEO, 2007
Do you have some favourites of your own? Feel free to add in the comments below.