Broker Check

The Uselessness of Prognostication . . .

March 01, 2024

I have regurgitated throughout my client writings how useless prognostication is for investors.  Yet, it often comes up in conversations, where clients will invariably ask me to comment on a talking head predicting a market crash.

Sometimes, hearing from someone different regarding various subjects can be helpful, and prognostication is no different.  I recently came across a quote from the book The Zurich Axioms (which I have not read yet) by Max Gunther, which gives a unique perspective on the uselessness of prognostication: 

The fact is, nobody has the faintest idea of what is going to happen next year, next week, or even tomorrow.... It is of the utmost importance that you never take economists, market advisers, or other financial oracles seriously.

Of course, they are right sometimes, and that is what makes them dangerous. Each of them, after being in the prophecy business for a few years, can point proudly to a few guesses that turned out right. “Amazing!” everybody says. What never appears in the prophet’s publicity is a reminder of all the times when he or she was wrong.

“It’s easy to be a prophet,” the noted economist Dr. Theodore Levitt once told Business Week. “You Make twenty-five predictions and the ones that come true are the ones you talk about.” Not many seers are that frank, but all would privately agree with Dr. Levitt’s formula for success. Economists, market advisers, political oracles, and clairvoyants all know the basic rule by heart: If you can’t forecast right, forecast often….

Not all oracles have been able to organize the annual forecast-revising dance of the economists, but all are followers of the basic rule. They all forecast often and hope nobody scrutinizes the results too carefully….

It is easy to get dazzled by a successful prophet, for there is a hypnotic allure in the supposed ability to look into the future. This is especially true in the world of money. A seer who enjoys a few years of frequently right guesses will attract an enormous following….

One of the traps money-world prophets fall into is that they forget they are dealing with human behavior. They talk as though things like the inflation rate or the ups and downs of the Dow are physical events of some kind. Looking at such a phenomenon as a physical event, an oracle can understandably succumb to the illusion that it will be amendable to forecasting. The fact is, of course, that all money phenomena are manifestations of human behavior….

…An oracle can always cry “unforeseeable events” in explanation of a forecast that turns out wrong. But that is just the trouble. Every forecast has the possibility of unforeseeable events ahead of it. No forecast about human behavior can ever be compounded of 100 percent foreseeable events. Every prediction is chancy. None can ever be trusted…

…Disregard all prognostications. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word. Nobody….

…Money seems cool, rational, amendable to reasoned analysis and manipulation. If you want to get rich, it would seem that you need only find a sound rational approach. A Formula.

Everybody is looking for this Formula. Unfortunately, there isn’t one.

The truth is that the world of money is a world of patternless disorder, utter chaos. Patterns seem to appear in it from time to time, as do patterns in a cloudy sky or in the froth at the edge of the ocean. But they are ephemeral. They are not a sound basis on which to base one’s plans….

…It is surprising how many smart people allow themselves to be fooled by the Gambler’s Fallacy….Toss a coin enough times, and sooner or later you are going to have a long run of heads. But there is nothing orderly about this run. You cannot know in advance when it will start. And when it has started, you cannot know how long it will continue. And so it is with roulette, the horses, the art market, or any other game in which you put money at risk. If you play long enough, you will enjoy winning streaks—perhaps some memorable ones….But there is no orderly way in which you can cash in on these streaks. You can’t see them coming, and you can’t predict their duration. They are merely one more part of the chaos… 

I couldn’t have said it any better.  The utter uselessness of listening to prognostications, much less making investment policy from, remains undefeated. 

Stay the course, my friends.