Marc Cooper Shares When Making Financial Predictions, Proceed With Caution
When Making Financial Predictions, Proceed With Caution
by CEO Marc S. Cooper
Scanning the horizon and contemplating the future are uniquely human traits. Our long-term survival and prosperity depend to a certain degree on how accurately we imagine risks and opportunities that loom ahead. Unfortunately, our crystal balls sometimes fail us.
Consider how much of the conventional wisdom turned out to be widely off the mark in 2022. Ukraine didn’t collapse in a matter of days after Russia invaded, triggering Europe’s biggest land war since World War II. Some oil analysts also assumed Russia’s petro power would trigger a global oil shock. That hasn’t happened either.
Among the other dogs that didn’t bite: The U.S. job market remains tight despite rapid-fire interest rate hikes by an inflation-fighting Federal Reserve.
Why are we so bad at this? For one thing, our human minds aren’t particularly adept at sizing up long-term, probabilistic risk or analyzing shape-shifting trends, in which subtle and random variables can alter outcomes in profound and unforeseen ways.
Then there’s our tendency to “wishcast,” rather than dispassionately forecast. We’re burdened by an array of cognitive glitches, or biases, that often can result in predictions that are heavily influenced by what we personally hope will happen, rather than the cold facts on the ground. Strongly held ideological beliefs about politics, religion, social norms and economic policy often prevent us from making accurate calls about where events may be heading.
Even highly credentialed financial experts, employing sophisticated methodologies, struggle to predict the future. Economists don’t have a brilliant track record anticipating the timing of recessions. Year in and year out, the majority of market pundits fail to forecast where the S&P 500 will be 12 months out.
The stock and bond markets are often powered more by broad shifts in investor sentiment, rather than specific financial data points. Market participants don’t necessarily act with pure rationality, and gaining predictive insight into how the investing herd will behave in aggregate is exceedingly difficult. Small wonder, then, that the preponderance of active money managers picking individual stocks often underperform the broad market indexes. That reality helps explain why passive investing strategies that blindly mirror stock market indexes are so popular.
None of this means we shouldn’t plan ahead when it comes to our personal lives, careers and retirements. True, the exact contours of the future may be unknowable to a large extent. Yet, it’s still advantageous to think about the possible scenarios tomorrow may bring, and prepare accordingly.
Well-managed companies do business contingency planning for the biggest risks they confront and assess possible impacts to strategies and budgets. Military strategists war game potential confrontations with adversaries to probe weaknesses and refine strategy. The old adage about “hoping for the best, but preparing for the worst” contains a great deal of wisdom, in my view.
Research suggests that companies that cultivate diverse voices and entertain multiple points of view outperform others financially. Analytical blind spots and groupthink are less likely when forecasts are stress-tested by a diverse group of managers encouraged to speak their minds.
Above all, it pays to remember that the world is a complex place, and predictions about the future should be handled with care. Don’t reflexively believe what you read, and stay open-minded when it comes to counter-arguments, especially those that challenge your most closely held beliefs.
Look, my prognostic powers have failed me in the past, and I’ll doubtlessly be surprised again in 2023 and beyond. In fact, that’s one prediction I’m pretty sure about.
This article originally appeared on Forbes.com.