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Help create the future? Yes! But don’t try to predict it.
By R.Kevin O'Keefe, CIMA®, AIF®

It’s important for citizens to be involved in creating the future we want. Of course, we don’t all want the same future, which makes for a struggle among partisans. The good news for those who strive for the greater collective good and social justice is that “the arc of history bends toward justice.”

But it is difficult to devote oneself to a cause—to believe in it, to work for it, to invest in it—while simultaneously accepting that the future is essentially unknowable.

An investment example illustrates this point: As fiduciaries, we know that it is not prudent for employees of a company to invest their entire 401(k) in the stock of the company for which they work. And yet some people do. Why? They may believe they know their company well enough to justify taking such risk. They probably don’t perceive how risky this strategy is. In many such cases, they are confusing desire for a positive outcome with what a rational expectation should be.

We like knowing what to expect.

Humans have a need for a high level of certainty. We are neurologically hard-wired in such a way that we need to predict the future. Consider that in many areas of our daily lives, we predict the immediate future very well. When I get up in the morning, I expect there will be two newspapers in my driveway, and I am rarely disappointed. I expect the coffeemaker to work when I flip the switch, and for water to come out of the showerhead when I turn the faucet. I expect the garage door to open when I press the button, and I expect the car to start when I turn the key. The point is that for many of us, the immediate future unfolds in most ways exactly as we expect it to—and we like it that way.

But with investing, the markets often fail to meet our expectations. When that happens repeatedly, it is natural to seek to understand why this is so, and to fix it.  And so we look to experts to explain what happened and to tell us what the future holds.  (Notice how easily those two parts go together: and therein lies the trap.) 

The first part— a satisfying explanation for what happened —sets us up.  By establishing credibility, when the so-called expert shifts from explaining the past to predicting the future, nervous investors have been set up by means of a cognitive “bait-and-switch” to give credence to the forecast.

Which experts do we seek out when we want to know what to expect? It is a well-known phenomenon that we gravitate toward those who express views that we prefer and avoid those with opposing views. But to make matters worse, when our emotions are running high, we are especially selective about whom we choose to listen to. Emotions cause us to be less rational; so rather than seeking objective information, we seek confirmation for our biases.

Isn’t the future somewhat predictable?

Next week, for most people, the world will probably look very much like it does today. Of course, on any given day, certain individuals’ lives will change significantly for reasons that cannot be predicted. But rarely do such disruptions at the individual level have any lasting significance on the world at large.

On the other hand, it is virtually certain that over the next decade, unforeseeable “black swan” events will occur which will have a lasting impact on our world. In 2021, the world will almost certainly look similar to today’s world in many ways, and very different in other ways. How exactly will it be different? We don’t know. That will depend on how current trends play out and what new trends develop. Our view into the future is like weather forecasting: we can predict tomorrow reasonably well, but no matter how many supercomputers we throw at a meteorological task, we will never be able to forecast the weather very far into the future, because weather is far too complex and dynamic.

So, what to do…?

Where the financial markets are concerned, it is important to remember that experts are only guessing—no matter how smart they are, no matter how compelling their arguments.  What you believe about any experts’ ability to predict the future may affect your ability to make sound decisions. And each investor’s behavior is the single most important determinant of long-term investment results.

We encourage investors to talk with their advisors about the risks you and they perceive. But be mindful of your emotions and try to recognize the influence of biases and hopes. Remember that there are many possible futures, none of which are certain. And know that First Affirmative is prepared to help you implement appropriate strategies for your investment objectives.

Posted: June 3, 2011