How To Think About the Future

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I'm back after a short hiatus, and happy to say that I (probably) survived grad school! It serves as a great segway to the start of today's post...

I’m graduating from the University of Michigan this Saturday. The ceremony is happening at the Big House, rain or shine. It's April and the weather is notoriously unpredictable this time of year — we could have a hot and sunny day, or a freezing and snowy one.

As humans we've kind of accepted this idea that predicting the state of the atmosphere in a hyperlocal time and place is a tall task. Sure, we have satellites that offer us more data than ever before, but at the end of the day, forecasting the weather is about communicating uncertainty rather than making predictions. At least not in the way most people think of predictions.

You will never read a forecast that says, “It’s going to rain on Saturday”. Instead, Saturday's forecast reads: 58 degrees and a 30% chance of rain.

Ideally you want to know for sure if it will rain at an outdoor graduation, but most people are cool with only a basic sense because meteorologists have gotten good at communicating uncertainty.

Weather forecasts are shown as probabilities and they're updated as new information arrives. You can react and adjust however you see fit. Maybe you wear different shoes or rock a poncho in the stands.

Probabilities are an effective way of thinking about the future, but we struggle to accept them in so many areas of life.

Most people intuitively understand that something can be probable and not happen, or improbable and still happen. It’s just how luck works — the best team doesn’t always win and the flu shot doesn't always stop the flu.

Here's how we usually judge success: If your decision pans out, it was a good one. Otherwise, it wasn't. It's too messy to think about good decisions having bad outcomes. Certainty is comfortable.

If you've ever watched or read financial news, you know what I'm talking about. Instead of saying there's a 60% chance a stock is a good investment, analysts will indicate their consensus with "Buy".

A headline might read, “Apple draws a 'Buy' rating and $199 price target from Goldman Sachs.” What it could say is, “Analysts have 95% confidence that Apple’s stock price will be between $160 and $238.” or something like that. If the price turns out to be, say, $165, investors will declare that the bank was wrong — even though the analysts knew there was some likelihood of that occurring.

It’s not enough to say there’s a 60% chance you’ll make money. Investors want certainties, and that's where pundits come in.

Research shows that people prefer forecasters who are confident over those who are accurate. We are more likely to listen to someone (Jim Cramer) who insists they know the future.

 It's what investors want to hear - certainties, not probabilities.

Much of financial media exists to quell the painful reality that no one knows where the market is headed. Saying there’s a 60% chance you’ll make money doesn’t exactly inspire confidence. But when someone says, “This stock is a must-buy. RUN TO YOUR BROKER AND LOAD UP ON SHARES NOW!”, it offers a piece of hope that you can latch onto and steer your future through.

When you realize that comforting people has stronger incentives than being realistic, you start to see why probabilities are used less frequently. Investors want someone to turn to, and forecasters want to make a living. These two things are usually at odds with each other. And you can probably guess who ends up disappointed.

The world works in probabilities, and we want certainties. It’s why market downturns cause panic, why price targets are wrong, and why companies go bankrupt.

Instead of trying to be right all the time, try to be less wrong. The former has a tendency to be more about protecting your beliefs rather than actually progressing. Shooting for 'less wrong' prompts questions and learning experiences.

Your judgment is simply a product of the information it's based on. We need a tentative humility that allows us to see new data and new perspectives. The world is too complex to not.

The range of outcomes is vast, and probabilities help you see it. You’ll acknowledge risks you once ignored, listen to more people you disagreed with, and be less shaken when plans deviate.

Thinking in probabilities makes you better at managing the future – which is the entire point of forecasting.

Go Blue.

Sam

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