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Why Are We Such Suckers For Prediction?

It is tough to make predictions, especially about the future. - YOGI BERRA 

I keep CNBC on all day while I work. Perhaps I think I will miss something, or maybe it’s the background noise that’s appealing. In any event, what I always find amazing is the parade of experts making one prediction after another. I think I would fall out of my chair if I heard one of them say “Well, to tell you the truth Mark, I have no idea”.  

What’s most surprising is the arrogance in which these forecasts are made. The forecaster always seems convinced he is right. I think the world is far more complicated than we think, yet we always seem to place way more value in what we know over what we don’t know. If you are an auto mechanic, you most likely know more about fixing cars than you don’t know about fixing cars. Also, errors are easily rectified. In this light, a good mechanic is an expert. 

If you are a psychologist or an economist, I don’t think so. In fact, it’s practically impossible that your knowledge of the human condition would exceed your lack of knowledge of the human condition. Not to mention that mistakes can be catastrophic in these “big system” type professions. Plumbers don’t kill people but doctors do. Mistakes when predicting the weather, the economy, or the financial markets can and do ruin our lives. Nothing is as potentially dangerous as a rational prediction in an irrational world. So, are there really experts in these professions or are they just the one-eyed men in the land of the blind? I Guess Yogi Berra, the great baseball player/coach had it nailed when he said “It is tough to make predictions, especially about the future.”  

I think we love predictions because if we make predictions, and/or concoct explanations for those events we predicted wrong, then we won’t feel like victims of randomness. We feel more in control. But are we more in control or just intoxicated by some illusion of control?  

In his book “The Black Swan” Nassim Taleb says, “We have seen how good we are at narrating backwards, at inventing stories that convince us we understand the past. In spite of the empirical record we continue to project into the future as if we were good at it, using tools and methods that exclude the rare events.” Funny isn’t it, since the big, rare, unpredictable events are precisely what shape the world. Events like the automobile and the World Wars, the internet and the Beatles.  

I think it’s ironic that by accepting we have little control over most things, actually gives us greater control over what might happen. By realizing our lack of control we may be able to minimize the more negative events. If we realize anything can happen when trading commodities, then we are more likely to actively manage our exposures to big loss and potential ruin.
 

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Charles Maley
www.viewpointsofacommoditytrader.com