Financial Advisors

Why Predictions Are More Dangerous Than Guesses

I was always terrible at those “guess how many tootsie rolls are in the jar” games as a kid. My complete lack of skill never deterred me from participating, though. What kid was going to pass up the opportunity for a windfall like that? Plus, it was just a guess. None of my classmates were going to be able to give me a hard time about my shot-in-the-dark when theirs was just as random.

This randomness is what distinguishes a guess from a prediction. A guess is made without ego and with a hope for good luck. A prediction (something we see plenty of in the financial services industry) is connected to reputation, pride, trust, and dare we say – compensation.

An example of the trust factor shows up every time we turn to our local TV station,, or a preferred app to get the forecast rather than ask Google if the cows lied down today or if Punxsutawney Phil saw his shadow.

It’s the same in financial services. Investors turn to well-known firms and respected pundits for guidance because they trust that these sources know more than the general masses.

Therein lies the rub: Investors turn to the “experts” for their predictions about the future and may base financial decisions on those statements; yet analysts and economists actually have no idea what’s going to happen because the future is unknowable.

In my words: Predictions can be dangerous. In Warren Buffett’s words: “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

Sizzle Sells

The financial services industry is incentivized to perpetuate the cycle. A firm’s top analyst isn’t going to be invited back for another interview on Cheddar if he tells Baker Machado, “That’s a great question. But we’re just like every other human being out there, so we don’t know exactly how the future will play out. Wish I could tell you.”

Also, the firms making bold, confident calls about the market often grab more attention and short-term inflows than a competitor who’s offering plain ol’ vanilla (even if it’s the best vanilla in the game). Human nature usually draws investors’ attention toward “sizzle” and shiny objects.

Fine. I Was Sort of Wrong. But So Was Everyone Else!

Here’s another thing about human nature: We aren’t wired to be humble when our ideas are challenged, or especially when our statements are proven wrong.

There’s a lot of ego and pride associated with making a call. As a result, you hear plenty of excuses when reality challenges a prediction. We’ve all heard them before, from, “You see, this has just never happened before,” to, “This time is different because…” or my personal favorite, “The market is just acting irrational right now, but reversion to the mean is coming.”

I think the point about ego is also why you also see a lot of “herding” around ideas. There’s comfort in being part of the crowd. If everyone associated with Wall Street shares the same data, reads the same reports, and offers outlooks with predictions that are in a tight range around the mean, then even if you missed the mark, so did everyone else.

Another way Wall Street insiders protect themselves from scrutiny is with overly vague “predictions.” Saying something like, “The dollar will weaken,” gives an appearance of expertise, but it’s a statement that offers direction without any precision.

An Alternative Way to Remove Fear of Uncertainty

Psychologists who study fear have found that one of the most powerful influences is uncertainty. Predictions persist because of the human desire to feel control over our fate by reducing fears about what lies ahead.

While predictions may make investors feel more certain in the moment, the danger comes from the foretelling of a reality that never materializes, or that comes to fruition on a dramatically different timeline than the investor expected.

At Blueprint, we emphasize PROCESS as the alternative to predictions. A systematic investing process follows pre-determined rules when defined events transpire. It dictates which assets to buy and sell, when to enter and exit, and how much to execute. When an investor has confidence in the process that’s making decisions for their portfolio without bias or emotion, it offers a sense of control that can dampen fears of uncertainty, and they’re able to recognize the worthlessness of predictions.

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Jon Robinson

Jon Robinson is CEO and Co-Founder of Blueprint Investment Partners, a leader in the creation of systematic, process-driven investment strategies for financial advisors and institutions.

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