Why Everything You Know About Predictions Is Wrong
Have you ever been in argument with someone that defended their position until they were blue in the face? That’s from their desire to be right and what Charlie Munger calls the “Doubt Avoidance Tendency”. In other words we were programmed over millions of years to eliminate doubt from our mind or else we would be eaten by a predator. This translates into the way we make decisions today. When we stop thinking this way though the world can be very different and you can assess the investing choices you make.
If you watch financial TV, or read investing news, you will almost never hear someone say there’s a 55% chance of a recession this year. They say there is going to be a recession this year. Rarely does an analyst say there’s a 60% chance of a bear market this year. They say there is going to be a bear market this year. There’s no room for error. There are no probabilities. People want exact answers, and pundits are happy to oblige.
Next time you hear someone say “the stock market will crash this year” you need to know they are speaking in certainty. There is a probability behind the market crashing this year because nothing is 100% certain. By listening to analysts who said the market was going to crash for the last three years I lost out on thousands of dollars in profits. One of my stock picks even tripled in value but I didn’t buy it because I wasn’t thinking in probabilities. If you can determine there is a 51% an investment will make a return then you should probably make the investment. Probabilities are how big corporatio0ns value projects and investments. Keep in mind to set your own risk tolerance for the probability of a return. For example maybe you need to calculate an investment has a 60% chance of making a profit instead of 51% before you invest.
Learn why you should start thinking in probabilities instead of eliminating doubt.
About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.