The Seer-Sucker Illusion

“Imagine you pick 1 million random people from around the world every day,” said Toby McDade, chief investment officer of Momentum Fee Capital Management.

“Some days, 51% would be in a good mood, 49% in a bad mood.  The next day, maybe it’s the opposite.  Other days, random chance could mean 8% of people are really pissed off for no real reason.  This is basically what the stock-market is on a day-to-day basis.”

Asked what his clients thought of this view, Mr. McDade laughed. “Oh my God, you think I could tell my clients that?  How could I justify my salary?”

Instead, clients were told, “Monday’s gain was caused by a mix of reversing geopolitical instability, shifting uncertainty patterns, a risk-on atmosphere, and a perfect storm of beta meeting sigma”.

But, of course, none knew what those words meant.

The above is a perfect example of over-reliance on expert advice.  We call in the “experts” to make forecasts, despite that they don’t have a greater or even a realistic chance of predicting an outcomethan the rest of the populationin this unpredictable world.

In other words, “For every seer, there is a sucker”.

seer-sucker illusion

my kind of guru – just don’t know for what yet

Regardless of the evidence that seers don’t exist, suckers will continue to pay for the existence of seers, often much more than they are aware of.

There are few other industries in which people are paid so much to be consistently wrong, and where clients return for more without demanding any change.

One reason for this is due to the avoidance of responsibility on the part of the suckers (eg through biases like Herding, Gullibility, Ad Verecundiam).

But what is worse is that we somehow believe these “experts” and often react violently to having our forecast illusions and our beliefs  shattered.  It’s as though we can’t mature and face the real world: it seems that fairies, dragons, Harry Potter and the Lord of the Rings are so much more attractive than the grim reality of credit card payments and the non-existence of “get-rich-quick-schemes”.

This is the open truth–we find tales more pleasant than facts.

Markets are driven less by fundamentals and more by tales of courageous action, and forecasters are story-tellers, not prophets of the future.  So, like all authors of fiction, we should enjoy them for what they are, though we shouldn’t confuse their narratives with proper investing.

 “A bird doesn’t sing because it has an answer, it sings because it has a song.” – Maya Angelou

In a world where everyone predicts everythingoccasionallysomeone’s going to be right, but there is no way of knowing who that someone might be beforehand.

So, we really should stop following our (2, 10, 50, or even 100 (you’ve got that much time?)) gurus—and trying to obtain genuine unbiased investing advice from them—unless we are happy with under-performing the market.

By the way, I do see the DOW Jones Index above 20,000 points at the end of a year …I am just not so sure which year that would be.

 

“The finance industry is 5% rational people and 95% shamans and faith healers.” — Charlie Munger

“For the most part, a true picture emerges from lots of investors erring independently.  Since each individual is a small part of a greater whole; asking an individual to explain the whole is folly.  Once you recognize that point, you’ll realize the talking heads on television satisfy a human need for an expert, without providing the value of an expert.” — Michael Mauboussin

Some statistics from the past: Can Stock Market Forecasters Forecast?

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