When we are overwhelmed with false, or potentially false, statements, our brains pretty quickly become so overworked that we stop trying to sift through everything. It’s called cognitive load—our limited cognitive resources are overburdened. It doesn’t matter how implausible the statements are; throw out enough of them, and people will inevitably absorb some. Eventually, without quite realizing it, our brains just give up trying to figure out what is true. – Maria Konnikova* (Politico)
Investors, like today’s citizenry, are constantly beset by all manner of information, whether it be data, anecdotes or forecasts, all of which compete for our limited cognitive resources. It is one reason why I have in the past warned investors off of financial television in part because it is designed to assault your senses with all manner of irrelevant information.
One of the worst things the financial media does is enshrine forecasting at the center of its coverage. The fact is that we live in a world that is more difficult to forecast. Technological and societal changes seem to occur on an increasingly frequent basis. This makes forecasting, as typically done, more than just useless but actually dangerous. Tren Griffin at 25iq explains:
The rise of modern science combined with modern distribution and other processes developed by businesses has resulted in people increasingly encountering nonlinear change. The economist Paul Romer explains one common reaction: “People are reasonably good at estimating how things add up, but for compounding, which involves repeated multiplication, we fail to appreciate how quickly things grow. As a result, we often lose sight of how important even small changes in the average rate of growth can be.” When something is sufficiently nonlinear, a phenomenon can seem almost magical.
Nuance, or an attention to small changes, is not what the modern financial media does well. In fact, the financial media makes its living off of giving a platform to those “analysts” who make the biggest, boldest most confident forecasts. The problem is that a constant stream of this stuff, as mentioned earlier, can and will eventually be absorbed. In short, turning forecasts into facts. Barry Ritholtz at Bloomberg View writes:
2. There are no “facts” regarding most future events: This is an ongoing issue with those who try to anticipate what happens next. This is especially true when it comes to markets and the economy. These are complex nonlinear systems, easily disrupted by events. We exhibit a tendency to extrapolate in a straight line into infinity. Not only do we not know what is going to happen in the future, we often are unaware of the full range of possibilities. This is why extrapolation is a poor substitute for actual thinking.
Another way in which questionable ideas get turned into easily digestible content is via the use of the metaphor. Metaphors are powerful things but when used to either obfuscate or overreach they can be dangerous. Mike Dariano at The Waiter’s Pad writes:
[Howard] Marks writes that people often ask him “what inning are we in?” This metaphor assumes that a lifecycle (market, stock, macro, etc.) is like a baseball game. If you know what point of the game it is then you can take advantage of the moment. It’s a simple way to convey a complicated idea. But as Tversky warns, it’s not the whole picture.
Most things in investing are too complicated to honestly convey in a quip or a metaphor. The proper response to most financial-related questions is “I don’t know.” Or maybe more appropriately, “I don’t know. Nobody does and if they say they do are likely overconfident or charlatans.” As Eric Cinnamond at Absolute Return Investing writes:
Outside of my opportunity set, there are a limited number of companies I’m comfortable commenting on. In fact, I don’t know a lot of things when it comes to investing. I don’t know exactly how or when the current market cycle ends. I don’t know when valuations will matter again. I don’t know when central banks lose control and free markets return. I don’t know the next time I’ll be fully invested. And I certainly don’t know the near-term direction of stock prices. But I get asked about these things frequently. I wish I knew, but I don’t.
Now more than ever we need to husband our limited cognitive resources and not waste them on things that are simply unknowable. In this light, financial forecasts are little more than marketing. If you want entertainment marketing, then you should tune into the forthcoming Super Bowl…for the ads.
*Maria Konnikova is also author of the new(ish) book The Confidence Game: Why We Fall For It…Every Time.