And the Award for Confirmation Bias goes to…2020!Submitted by Dorval & Chorne on January 20th, 2021
By Dan Dorval | January 20, 2021
On my way to work today, I heard a radio ad where a well-known media figure was promoting a 30-minute webinar where you can learn everything you need to know about the new administration and what you should be doing right now with your investments! Find out how markets have performed under different presidential administrations over the last 48 years. Apparently reviewing what happened under President Reagan is now a predictor of what will happen under President Biden? Of course, this same media personality was promoting a different webinar back in October talking about how to change your investment strategy as a result of the election…like your strategy should be in a constant state of flux based on things completely outside your control. Really!?
A new year inevitably brings an onslaught of ads, posts, and emails filled with forecasts and predictions. Human beings have a desperate need to find certainty in the uncertain. Predictions fascinate us! This is what makes “experts” so valuable. Experts have the arrogance to confidently tell us what is going to happen and when. Predictive “models” were all the rage in 2020.
How do those predictions usually work out when it comes to the economy and investments? A prominent researcher has tracked “Sure Thing” predictions from financial media over the last 11 years and found the results to be dismal.
*Table from Larry Swedroe, chief research officer for Buckingham Strategic Wealth.
Keep in mind these were considered market and economic forecasts with a strong consensus view that were sure to happen…no doubts in anyone’s mind! The “experts” were wrong on 5 of 9 predictions in 2020. You might argue 2020 is not the best year to review because it was such a crazy year with a global pandemic, an historically bizarre election season, etc. That is entirely reasonable, yet our esteemed forecasters were actually right more often in 2020 than they had been over the previous 10 years! You would have been better off flipping a coin.
The point is there will always be a market for crystal balls. People will always want to know what is going to happen so we can be prepared. The problem with predictions is we usually crave them from the perspective of a behavioral tendency called Confirmation Bias. The American Psychological Association defines Confirmation Bias as the tendency to look for information that supports, rather than rejects, one’s preconceptions, typically by interpreting evidence to confirm existing beliefs while rejecting or ignoring any conflicting data. Sound familiar?
It would have been entirely appropriate to crown 2020 as the Year of Confirmation Bias! Coronavirus, the election, and the stock market were ripe with wildly varying predictions to suit whatever preconceived notions you hold dear. It was not hard to find “evidence” to support whatever belief you felt strongly about. The results were awful!
If it is futile to rely on experts to predict an uncertain future, how do we make difficult financial decisions? How do we pick investments? Plan for retirement? Ask our Magic 8 Ball? Guess?!
We at D&C do not pretend to know the future, but we do have an answer in the context of financial planning and advice. Our approach is time tested and will be appropriate regardless of whatever encore presentation 2021 might have in mind after the calamity that was 2020. We call it purpose driven investing. What is the purpose? Quality of life! A definition of quality of life is: the standard of health, comfort, and happiness experienced by an individual. Quality of life is personal, fulfilling, and profoundly powerful as a positive motivator to take control of your future. Personal quality of life takes precedence over presidential elections or other worldly events, even a pandemic!
I will continue this idea in my next blog post where I will get into more detail of how we help our clients implement purpose driven investing…but if your advisor is promoting predictions as their value, please contact us and experience the difference Quality of Life Planning™ provides.