I am always in search of free online resources regarding diverse outlooks on risk. Recently I stumbled upon a great source of risk related concepts after listening to an episode of The Knowledge Project podcast which featured a guest, I was unfamiliar with. This guest, some sort of investment expert, started catching my attention with his superb outlook on economic systems and the decision-making processes associated with them. The guest turned out to be none other than Howard Marks, a well-known investor, author, savant of distressed securities, and most notably co-founder of Oak Tree Capital.
Beyond publishing a few books on investing including The Most Important Thing: Uncommon Sense for the Thoughtful Investor and Mastering the Market Cycle: Getting the Odds on Your Side, Howard is also admired for his memos which he has been writing since the early 1990s on economics and investment strategies. Warren Buffet is counted among his many avid readers and his memos are available on Oak Tree Capital’s website if you need some good reading to fill your day. Marks is also a Wharton graduate and I am an admirer of any opinions that come from this great institution, especially when they utter anything concerning “risk”.
As I read through his years of memos a common trend emerged. A theme he discusses often which is no matter how great the mind, no one and I mean no one can predict the future in any consistent manner. This is quite important in the risk discipline as we spend our lives trying to predict the future to react to obstacles before they have a chance to derail our pursuit of objectives. I wanted to highlight some of his thoughts on blindly trusting those who claim to be able to predict future outcomes in their respective fields whether it be medicine, economics, consumer trends, or even the weather. Hopefully, after reading this article you will be able to see expert opinions in a new light, approaching them as none other than subjective opinions from intellectual minds, nothing more and nothing less.
The Texas Weatherman
If you are an avid watcher of any TV news program you have most likely seen the term “expert” scrolled under an individual’s name which automatically makes you believe this person is more knowledgeable than you on the subject matter being discussed. These so-called “experts” make bold predictions on how the future will unfold on a myriad of topics including the stock market, political decisions, global pandemics, climate change, and even the local weather. I live in North Texas where it can snow and be 100 degrees in a single 24-hour period (ok I exaggerate a tad but not too far off). We Texans tend to take every weather experts forecast with a grain of salt as our weather patterns change frequently and without warning. Word of advice, if traveling to Texas be wary of scheduling your golf game around the local meteorologist’s outlook. Instead, flip a coin and you may be just as good on predicting your chances of living out a famous scene from Caddyshack involving a goober groundskeeper and a priest.
Howard Marks explains in a January 2017 memo that there are no “facts” regarding most future events, just opinions. He states experts – most notably those who are paid to be experts often pass off their opinions as facts, but this by no way means they are bound to come true. A world of randomness and uncertainty will not allow for any human to be a prophet holding a crystal ball. The famous Thomas Hobbes once uttered the best prophets are usually the best guessers. Guessing is simply what it is called when any human tries with any considerable effort to predict what is going to happen next with any sense of accuracy. It is simply impossible to predict future events consistently for an extensive period of time. You may be able to predict a coin flip consecutive times but each flip you only possess the same 50/50 chance of being right or wrong as the prior flip, a mutually exclusive conundrum experts deal with each time they attempt future predictions. Unfortunately, like a coin flip, a prediction on the future will either be a win or a loss, nothing more and nothing less.
Philip Tetlock, a Wharton professor and best-selling author, conducted a study where he asked 284 individuals, so-called political and economic “experts”, to offer their judgmental predictions on global world events such as, “Would Gorbachev be ousted by a coup?” His study collected 82,361 responses and the findings were quite stunning. He found that the expert predictions were no better than if a group of chimps was throwing darts at a board littered with predictions. Similar studies have also been done on stock market expert predictions with no better results. It has been proven that so-called “experts” are no better at predicting the future than you, me, or even a room full of “dart-throwing chimps”. But why is this? If we know experts are inherently flawed why do we continue to take their opinions as facts about what will happen in the days, weeks, and months ahead? As individuals, we must look past impressive resumes and popular figures to see that simply no person can predict what the future holds.
“No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future.” – Ian Wilson
Swinging for the Fences
Ty Cobb, a 1936 baseball hall of fame inductee, holds the highest batting average in Major League Baseball history at 3.66. This is astonishing seeing that Cobb played in the early 1900s and this record still stands to this day over 100 years later. Batting average is historically one of the best quantitative measures of evaluating a batter’s performance at the plate. It is a simple formula taking the total at-bat attempts divided by total batter hits, a total being between 0 and 1.000. No player has ever batted 1,000 in baseball history and the same when it comes to experts and their predictions on the future. When judging experts on their overall knowledge of future events coming to fruition, we must ask about an expert’s batting average when it comes to predictions. Are they truly batting 1,000 or do they hit on only 10% of all predictions?
Most likely it would be quite difficult to find any subject matter expert who is willing to share their past failures in predicting future outcomes, this would tarnish their reputations and strip away their “expert” badge they wear proudly at social events and on media outlets. One major problem with expert predictions is sometimes they are motivated more by fame than the truth. An expert who predicts a black swan event, for example, will most likely enjoy a life where they are frequent guests on all forms of media from cable news to radio. As Howard Marks said, “Extreme predictions are rarely right, but they’re the ones that make you big money (or fame).”
Those made famous in the movie The Big Short who accurately bet on the downfall of the mortgage industry in the late 2000s are now seen as geniuses and economic profits who saw the future before it unfolded. But for even this educated group how many future economic events would they bet the farm on and come out on top as they did before? An educated assumption would be they would surely strike out at some point, sooner or later as in Russian Roulette the gun is going to go off. Howard Marks always says that in life, “nobody ever bats 1,000”. The Ty Cobb example above should prove this point quite clearly. It is not possible for a human to throw out correct predictions on the future with any consistency or perfection, history just proves otherwise again and again.
Now, one can always generalize predictions about the future with better than average results (e.g. a recession will come in the next 10-15 years) but this does little to get the fame some experts yearn for. An alternative and most effective way to weigh the prediction skills of an expert is to look at their batting average, how many predictions have they made to date, and how many of these have been accurate? If the Texas weatherman is only correct 6 out of 10 times on when the next rainstorm is coming, they are right barely more than they are wrong. Is this an individual you want to guide your future weekend plans around or simply take their reporting as what it is, an opinion not fact. Remember that a group of chimps playing darts would give most expert predictions a run for their money.
“Forecasts create the mirage that the future is knowable.” – Peter Bernstein
A Turkey’s Bad Day
Howard Marks in his April 2020 memo wrote of a Harvard epidemiologist by the name of Marc Lipsitch who had three observation types regarding the future (1) facts (2) informed extrapolations from analogies to other related events and (3) opinions or speculations. Now Lipsitch was referring to the COVID-19 virus but Marks used this observation outlook to apply to his world of investing. He concluded that the vast majority of our theorizing about the future consists of extrapolating from past patterns or events. We as humans do this in everyday life.
We approach a decision about a future event and try to strategize using similar experiences or data we have from past events or patterns. Now, this is inherently flawed as it does not take into consideration the randomness of the future, a topic Nassim Taleb covers greatly in his books Fooled by Randomness and The Black Swan. The dangers of basing future predictions on what has occurred in the past can be well-described by a story of a turkey, a tale Taleb writes about in Black Swan and is further examined in Pawel Motyl’s Labyrinth: The Art of Decision Making (another risk management gem I would recommend to anyone).
The story briefly goes something like this. There once was a turkey on a beautiful green farm where he was fed until he was fat and happy every day. As the days go on the turkey experiences the same euphoria as the day before, on day 100, 150, 200. The turkey has no reason to believe that the next day will be any different, it is like he is living in his own cinematic rendition of Groundhog Day. Little does the turkey know that day 365 is Thanksgiving and his life of culinary indulgence and gluttony comes to an end. This story is also referred to as “turkey syndrome”, where we simply believe that whatever is occurring in the past and present will continue on the same trajectory into the future. We are blind to the world of randomness and uncertainty surrounding us.
This story is a great example of why passing off past events and patterns as facts about how the future will play out is inherently flawed, setting us up for future disaster. There is nothing wrong with using the past or present as a guide to decisions about the future, however, there is an issue when experts use blind faith to bring relevance to past or present patterns. Dan Gilbert, author of Future Babble, a book on why predictions fail has a great quote on the fallacies involved in using the past solely as a window into the future.
He states, “Predicting the future by projecting the present is like driving with no hands. It works while you are on a long stretch of straight road but even a gentle curve is trouble, and a sharp turn always ends in a flaming wreck.” This is a great quote, to sum up, how dangerous it is to digest expert opinions on future trends or events as facts when the basis for such opinions is simply a continuation of the status quo. Uncertainty is always waiting to derail such predictions and make a fool of these individuals. Therefore, the next time you see an expert on TV looking like a turkey before Thanksgiving, make sure to take their opinions as an experienced point of view, nothing more and nothing less.
“A good forecaster is not smarter than everyone else, he merely has his ignorance better organized.” – Anonymous
A Crowd Full of Wisdom
There are many reasons why experts can miss the mark on predicting future outcomes, but it is not all doom and gloom when it comes to believing their predictions. One concept that is proven to increase the accuracy of expert opinions is to apply the “wisdom of the crowd” method. This concept was first outlined in James Surowiecki’s book, The Wisdom of the Crowds, a book focusing on how collective decisions made by homogeneous groups are predominantly better than those made by individuals of the same group. His book highlights a study by Francis Galton in 1907 published in Nature, a British scientific journal that started in 1869. Under the title Vox Populi (beliefs of the majority) Galton describes a scenario at a county fair where around 800 tickets were issued to attendees to guess the weight of a butchered ox.
Upon the ticket, each individual was to write their name, address, and prediction on the weight of the ox in exchange for the chance to win a small monetary prize. The prize was strategic as it nudged the crowd to give their best effort to predicting the ox’s weight which in turn would provide a better sample to study. The crowd itself was diverse, made up of farmers and butchers who would be seen as more experts in guessing the weight of a butchered ox, as well as normal fair goers whose guesses were based more on random selections in strictly subjective manners.
Once all tickets were received Galton collected the weights and created a distribution diagram to display the results of the experiment. His findings were quite remarkable, the average prediction of the ox’s butchered weight was 1,207 lbs., only 9 lbs. over the actual weight of 1,198 lbs., so within 1% of the actual weight. This is quite impressive as 25% of the crowd overestimated by more than 45 lbs. and another 25% underestimated by more than 29 lbs. Galton’s county fair study found it is better to listen to the democratic judgment of many than the opinion of one regardless of their level of expertise on the subject at hand.
We can all learn from the wisdom of the crowd mindset in how we interpret and digest predictions about the future. Instead of taking the talking head on TVs outlook on a stock, a global pandemic, or even the weather, take the time to research other’s opinions on the same topic to see if an average opinion can be calculated. From here we have a better foundation to make decisions about the future which is rife with randomness. A diverse group of opinions on the future can help us see new paths of how the future might play out and give us a better indication of what could occur by taking the average of a number of predictions instead of one singular opinion.
Wrapping Up
No single person on this planet is an expert when it comes to predicting the future. They may be an expert in their field but projecting this knowledge into the future can be quite troublesome. Accepting the certainty that no guru, authority, wizard, or genius can predict the six inches in front of their own face we are armed with the realization that we must create our own predictions of the future through inquisitive processes to develop the best quality decisions to drive positive outcomes. So next time you lean on the words of modern-day prophets remember they are simply guessers of the intellectual type, nothing more and nothing less.
