Page 190 - Morgan Housel - The Psychology of Money_ Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

Think about market forecasts. We’re very, very bad at them. I once
calculated that if you just assume that the market goes up every year by its
COBACOBA
historic average, your accuracy is better than if you follow the average

annual forecasts of the top 20 market strategists from large Wall Street
banks. Our ability to predict recessions isn’t much better. And since big
events come out of nowhere, forecasts may do more harm than good, giving
the illusion of predictability in a world where unforeseen events control
most outcomes. Carl Richards writes: “Risk is what’s left over when you
think you’ve thought of everything.”

People know this. I have not met an investor who genuinely thinks market
forecasts as a whole are accurate or useful. But there’s still tremendous

demand for forecasts, in both the media and from financial advisors.

Why?

Psychologist Philip Tetlock once wrote: “We need to believe we live in a
predictable, controllable world, so we turn to authoritative-sounding people
who promise to satisfy that need.”

Satisfying that need is a great way to put it. Wanting to believe we are in
control is an emotional itch that needs to be scratched, rather than an
analytical problem to be calculated and solved. The illusion of control is

more persuasive than the reality of uncertainty. So we cling to stories about
outcomes being in our control.

Part of this has to do with confusing fields of precision with fields of
uncertainty.

NASA’s New Horizons spacecraft passed by Pluto two years ago. It was a
three-billion mile trip that took nine and a half years. According to NASA,
the trip “took about one minute less than predicted when the craft was

launched in January 2006.”⁶⁸

Think about that. In an untested, decade-long journey, NASA’s forecast was
99.99998% accurate. That’s like forecasting a trip from New York to
Boston and being accurate to within four millionths of a second.