I attended the FPA NorCal conference in San Francisco this week. In his talk on behavioral finance Barry Ritholtz talked about “expert forecasters”, the people we see daily who are willing to tell us the direction of stock markets, interest rates, gold, etc. One of his slides stated that expert forecasters’ predictions are no better than random guesses. Additionally, the more famous and more confident the person, the less accurate their predictions were! This does not surprise me as I’ve suspected it for a long time.
What I found the most disturbing was the fact that commentators who acknowledged the future is unknowable were seen as uncertain and therefore less trustworthy. But, the future is uncertain! What this means to me is that we don’t want to hear it. We want certainty. We want someone to tell us what is going to happen…even if it’s wrong. Whoa, a moment of cognitive dissonance!
This brings up a basic human tendency to want to make sense of things. The mind looks for patterns and easy explanations…in black and white. Randomness, probability and uncertainty are not concepts we easily embrace because they are more complicated.
When you go into the process of financial planning you are asking questions that have no certain answer. Will I run out of money? Can I afford to retire? There are so many variables like longevity, return on investments and health.
What can we do with this? Even though we can’t know the future we do our best to make conscious choices and control what we can. We want to maximize our chances for success, however we define it.The process of financial planning helps clarify values and priorities. Determine what success looks like for you and point your boat in that direction!
I have to tell people the future is uncertain all the time. What I am certain and confident in (even if I’m not famous…yet) financial planning can help you spend on what matters most and be more confident in your future well-being!