Link - https://www.oaktreecapital.com/docs/default-source/memos/uncertainty.pdf
Tags: forecasting, bias, doubt, intellectual humility, confidence
The challenge lies in trying to be above average in assessing the future. Why is that so hard?
“Anna Karenina principle” coined by Professor Yossi Sheffi at Massachusetts Institute of Technology
"While happy economies are all alike, every unhappy economy is unhappy in its own way."
If you’ve never experienced something before, you can’t say you know how it’s going to turn out. No one can succeed in predicting things that are heavily influenced by randomness and otherwise inconsistent. We use a lot of pattern-driven guesswork as we go about our daily lives or to fill in the gaps in an incomplete narrative.
"We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know." - John Kenneth Galbraith
"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 E. Wilson (former Chairman of GE)
There actually are things we know about the macro future. The trouble is that, mostly, they’re things everyone knows. Most extrapolations aren’t a source of above average returns.
The forecasts that produce great profits are the ones that presciently foresee radical deviations from the past. Thus most forecasts of deviation from trend also aren’t a source of above average returns.
The process through which most of us arrive at our view of the future is highly reflective of our biases. One of the biggest mistakes an investor can make is ignoring or denying his or her biases.
Paul Simon wrote 50 years ago for the song "The Boxer"
“. . . a man hears what he wants to hear and disregards the rest."
News organizations realized decades ago that people would rather consume stories that confirm their views than those that challenge them (or are dully neutral). When all the facts and opinions you hear confirm your own beliefs, mental life is very relaxed but not very enriching.
"It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so." - Mark Twain
"Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom." - David Swensen, Pioneering Portfolio Management
Intellectual humility
Intellectually humble people can have strong beliefs, but recognize their fallibility and are willing to be proven wrong on matters large and small. One conceptualization defines intellectual humility as recognizing that a particular personal belief may be fallible, accompanied by an appropriate attentiveness to limitations in the evidentiary basis of that belief and to one's own limitations in obtaining and evaluating relevant information.
"Intellectual humility is the opposite of intellectual arrogance or conceit. In common parlance, it resembles open-mindedness. Intellectually humble people can have strong beliefs, but recognize their fallibility and are willing to be proven wrong on matters large and small."
https://twitter.com/robertstats/status/1245665871961436160?s=20
The Psychology of Intellectual Humility, Mark Leary, Duke University "Intellectual Humility can be distinguished from uncertainty or low self-confidence by the degree to which people hold their beliefs tentatively specifically because they are aware that the evidence on which those beliefs are based could be limited or flawed, that they might lack relevant information, or that they may not have the expertise or ability to understand and evaluate the evidence."
In addition to an opinion regarding what’s going to happen, people should have a view on the likelihood that their opinion will prove correct. We have to have a realistic view of the probability that we’re right before we choose a course of action and decide how heavily to bet on it. And anyone who’s sure about what’s going to happen in the world, the economy or the markets is probably deceiving himself.
Thinking in Bets by Annie Duke "What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. They understand that they can almost never know exactly how something will turn out. They embrace that uncertainty and, instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the chances that different outcomes will occur."
Justin Kruger and David Dunning have emphasized, our cognitive and metacognitive skills are intertwined. People who lack the cognitive skills required to perform a task typically also lack the metacognitive skills required to assess their performance. Incompetent people are at a double disadvantage since they are not only incompetent but also likely unaware of it [Galbraith’s forecasters “who don’t know they don’t know”!].
“Ignorance more frequently begets confidence than does knowledge.” It goes on to say, “Being a true expert involves not only knowing stuff about the world but also knowing the limits of your knowledge and expertise.” - Charles Darwin