Predictions vs probabilities
Posted by Robin Powell on April 20, 2017
What a year it’s been. Revolution in the investing industry, Trump, the Brexit negotiations and now — how can we possibly afford the time? — a pending general election! No wonder my reading list has been been building up of late.
One article I meant to share before now is this from Charlie Bilello: The difference between a prediction and a probability. For me, it’s this distinction that defines the whole debate going on about the rôle of the financial adviser — or, in the institutional space, the investment consultant.
Until now, pride of place has gone to predictions. People love making predictions or, when it comes to investing, asking people make to predictions for them: What are the markets going to to do? Which sectors are due for a resurgence? Who are the managers most likely to outperform?
We really should know this already, but successfully predicting the future with any degree of consistency is all but impossible. It’s far more sensible, then, for investors and their advisers not to make predictions and to think instead in terms of probabilities.
As Charlie puts it:
“The difference between a prediction and a probability is the difference between a pundit and a professional. One makes concentrated bets on the belief that they can predict the future and the other diversifies with the understanding that they cannot.”
Of course, we’re naturally attracted to pundits — to advisers who tells us they can successfully predict whether Mrs May is heading for an increased majority or roughly where the FTSE 100 or the S&P 500 are going to end the year. We like to be told that, if only we put our trust in this asset class, that country or that up-and-coming fund manager, we might beat the market.
We prefer, in short, reassuring lies to the inconvenient truth that no one actually knows — and that includes your adviser.
This related post by Charlie Bilello is also well worth reading: