I attended the CISI Financial Planning Conference this year and heard from many speakers on a range of different topics. One that resonated with me was a presentation from Caspar Berry. Caspar is a former professional poker player, and his presentation was an interesting insight into the uncertainty of risk and the art of predicting results.
The flap of wings…
At the start of his presentation he talked about the butterfly effect, i.e. the concept that tiny changes (the flap of a butterfly’s wings) can have large effects (change the weather). This was used to illustrate that in order to make a prediction in this world, the person making the prediction would have to know (and foresee) every single event that has happened and will happen, right down to the precise flap of a butterfly’s wings. This is impossible, so there is uncertainty in everything. In fact, Caspar argued that every single little choice made impacts, not only on our future, but the rest of the world (when extrapolated out).
What about good judgement…
To further illustrate the uncertainty principle he then used Philip Tetlock’s ‘Good Judgement Project’ as proof. Back in 1984 Mr Tetlock asked 284 experts in various fields (including government officials, professors, journalists, and others, with many opinions, from Marxists to free-marketeers) to make a series of predictions about the future of various events, as well as how confident they were in their predictions. This led to roughly 28,000 predictions about the future. The purpose of this research was to establish what kind of link there was between knowledge, confidence and accuracy of judgement. The findings were that there was no correlation between accuracy of judgement and confidence. In fact, the less sure someone was (i.e. the more of a guess the forecast was) the more chance they had of being correct.
The best chance of success…
How does this relate to financial planning? Every day I see ‘predictions’ from ‘experts’ as to which way markets will go, which stocks will do well and when to buy and sell various assets. This presentation just backs up my thoughts that there is no crystal ball. All of the ‘experts’ who profess to knowing where the stockmarket is going are just as likely to be wrong as correct. All the skill and knowledge they have does not make them any better placed to predict the future. The best way to succeed is to embrace the concept that risk and reward are linked and invest in line with your long-term goals.
If you would like a second opinion on building an investment strategy that is based on more robust evidence, please do get in contact.
Production
