When evaluating the future, we too often tend to overestimate one’s ability to know what will happen next.
"After things happen, everyone can predict them!"
It is a psychological ritual to which, often, we have all undergone a bit and which is ancestral, anthropological. Cicero also said: "The Trojans are wise men who are always late".
In the field of finance, however, "hindsight" translates into the belief, necessary to make predictions, that, when examining the past, we can see in the facts, trends presented as expression of systematic phenomena.
What then happens when, as has been happening in recent times due to the umpteenth banking crisis, those forecasts are wrong?
Events that the best-informed "experts" (and who have therefore carefully examined the past) have not been able to foresee, become almost inevitable after they have occurred.
The financial gurus provide an endless series of examples. Every day, an hour after the markets close, you hear the “experts” in the media explaining with great confidence why the markets behaved as they did.
A listener, a normal saver, poorly informed and aware of the dynamics of those markets, could easily make the incorrect deduction that the behavior of the markets is reasonable to the point that what happened could have been predicted earlier, during the course of the day.
In fact, if you ask analysts and financial advisors who had made predictions about an index or the price of a security, after the future deadline has already passed, what their evaluation had been, it almost always turns out that their evaluation falls flat on what actually happened.
This error of cognitive nature consists in the subsequent modification of what was our previous subjective estimate so as to bring it closer to how things actually went.
In other words, even if events have belied their forecasts of the past, analysts and financial advisors - who obviously cannot change the past - revise, in some cases even unconsciously, the forecasts made at the time.
The moral is that when things have already happened they are presented less surprising than they seemed before.
This is essentially due to an overconfidence in their forecasting ability (overconfidence): in future assessments they tend to overestimate their ability to estimate what will happen. This is a motivational mistake (a euphemism for presumptuousness): they feel confident in their ability to evaluate things. While effective forecasts are based on the analysis (and transparent communication) of uncertainties.
In short, they think the future is more predictable than it actually is. Then (in hindsight), they delude themselves and convince themselves that they have foreseen the future state of things much better than they were actually capable of. How many times have you heard the phrase "I knew it" repeated despite hearing a completely different prediction? It is a sort of placebo effect that calms down.
We shouldn’t be so regretful though, because there are few professional categories in which becoming an expert in forecasting implies reducing overconfidence: these are those cases in which one is severely punished by the consequences of this mechanism.
Think of the surgeons who, continuously subjected (experience) to cost-benefit analyzes of the attempts made and the successes obtained, learn in a short time to be perfectly calibrated. In those cases human life is often involved.
This is why analysts and financial advisors are not afraid to make predictions wrong, even though they often ruin people’s lives anyway.
Original article published on Money.it Italy 2023-04-19 07:54:59. Original title: L’overconfidence dei consulenti finanziari è sempre impunito: per questo sbagliano serenamente le previsioni
