PREDICTION ADDICTION
Market forecasts will fill your ears and not your wallet. Just think about the damage to your wallet since 2009 if you had listened to so-called market experts from highly sources in business media.
Jason Zweig explains the constant human urge to predict in his book Your Money and Your Brain: "Just as nature abhors a vacuum, people have randomness. The human compulsion to make predictions about the unpredictable originated in the dopamine center of the reflexive brain. I call this human tendency 'prediction addiction'. This tendency is driven by a pleasurable chemical in our brain called dopamine, the release of which gives us a natural high to make the next prediction, and the next one, and the next one. Predication addiction, as Zweig explains, is the compulsive desire to try to make sense out of just about everything in the world, including things that are impossible to predict, like future stock prices. Legendary investment banker JP Morgan, when asked what the markets would do, used to say, "They will fluctuate".
None of us can even predict our future. Still, we fall prey to the illusion of control and try to predict macros, markets, currencies, and commodity prices. Investment writer Dan Solin once wrote that this addiction is a particularly bad one. Not only are our brains hardwired to believe we can predict the future and make sense out of random acts, but they also reward us for doing so. The brain of someone engaged in this activity experiences the same kind of pleasure that drug addicts get from cocaine or gamblers experience when they enter a casino. Prediction addictions are to the investors what a drug dealer is to the addict or the casino is to the gambler.
Try this fun exercise: check the Google results of past predictions by any market expert on any macro topic over any randomly chosen period for a few years. You'll never take any of those people seriously again. Predictions just grab the eyeballs and achieve nothing else. It is often said that bull markets climb a wall of worry. Since March 2009, numerous worrisome headlines have driven many investors to sell out of fear and exit the markets completely. With rare exceptions, most of the miracles of humankind are long-term, constructed events. Progress comes bit by bit. The silent miracle of humanity's march is this: step by step, year by year, the world is improving. Not on every single year or every single measure, but as a rule. We have cut the number of people living in extreme poverty worldwide by half over the past twenty years, but "Poverty rates drop incrementally" has never dominated news headlines. The combination of negative dispositions and availability bias results in pessimism about the world. In reality, however, we are living in one of the most promising times in the history of humankind.
The world has experienced an incredible amount of progress on many important parameters over almost any long-term time horizon you look at. It's just that bad news is an event or headline, and good news is a process. Remember, the pessimist sounds good, but it's the optimist who earns money. In his 1994 letter to shareholders, Buffet wrote something that summarizes this blog.
"We will continue to ignore the political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price control, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasuries trading between 2 and 17%. But surprise, surprise, none of these blockbuster events made the slightest dent in Ben Graham's investment style. Nor did they render unsold the negotiated purchases of fine businesses at sensible prices. Fear is the foe of the faddist but a friend of the fundamentalist."
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