“The future is dark; the present is burdensome; only the past, dead and finished, bears contemplation.” Geoffrey Elton, historian

“The illusion that we understand the past fosters overconfidence in our ability to predict the future.” Daniel Kahneman, psychologist

Hi! Thanks for your attention, I really hope I do it justice.

Investment analysts try to model/predict the future – and are often very well paid for it – for at least the following reasons:

1. they (and their clients) think they have to
2. they believe in big data, and the forecasting power that arises from analysis of it
3. they believe in progress (technological and scientific), which helpfully creates the delusion (and associated peace of mind) that the latest forecasts will succeed where previous ones failed, and
4. a variety of psychological factors make forecasting big business.

Let’s consider a couple of these psychological factors.  The first one, which has been a part of my working life, is an understandable reluctance to take responsibility, a tendency – endemic in the business world – to “pass the buck”.

The concept of reliance

Consultants like me who have made a livelihood from making forecasts are often required by banks and other lenders to provide “reliance” on them.  This is a weird notion, as most of us are very careful to say things like “investments may go down as well as up”, “the accuracy of projections cannot be guaranteed”, and other such warnings to our clients that they should not place too much faith in the results of our analysis.  It took me a long time to understand what reliance means.

Initially, I thought the concept of reliance was about doing the best job one can – and being able to demonstrate later on that one has done the best job one can – given the state of knowledge and circumstances at the time one does it.  We might not know for sure what will happen in the future, but we can give ourselves the best chance of making an accurate prediction by carefully examining available data and the success or otherwise of past predictions.  This is where ‘big data’ comes in: the more data we can analyse, surely the better we will do?

But that doesn’t really explain the motivation of reliance, or its contractual significance in the world of business.  The bigger issue is devolvement of responsibility – this is the key underlying motive that explains the importance of reliance in business, whereas “making sure these guys do the best job they can” is the ostensible justification.

Few of us really enjoy taking responsibility.  Most who claim they do are pretty confident in the robustness of their positions, so they don’t feel much risk is involved: their shoulders are broad, they might say, without adding they’re not as broad as those they are standing on.  Some people really do enjoy the risk associated with claiming responsibility, but for each of these genuine risk-takers there are several individuals who are just relying on their self-perceived status.

In consequence, the world of business is to a remarkable extent structured in accordance with the desire to pass the buck; corporate structures allow blame to pass up the chain or down the chain, between business units, and between corporate entities.  In my line of work, buck passing goes between developers – who commit to a project on the basis of my forecasts – and insurers – who ultimately pay out when things go badly wrong – in the following sequence.

First, developers are wary of committing too much of their own money, so they limit the liability of their company and bring in debt providers such as banks to finance a large proportion of the project.  Second, the debt providers seek to justify their recommendations to credit committees by engaging “experts” like me and getting us to provide “reliance” on our reports.  Third, the experts carefully limit the terms of this “reliance” and bring in insurance companies to protect us against the limited terms that remain in place.

If projections turn out to be wrong, and a project goes badly and a loan cannot be repaid, the debt providers can blame the experts that forecast otherwise, and if things go very badly they can attempt to sue.  Credit committees blame the bank analysts for bad recommendations, the bank analysts blame the experts they employed on a reliance basis, and the experts point out the thin meaning of reliance in the first place and turn to insurance in extremis.  Financial losses are spread amongst myriad savers and investors and/or diluted through insurance premia.  It is a complex world of devolved responsibility in which everyone and no-one picks up the pieces of misjudgement or incompetence.

Fear of uncertainty

A second psychological factor is perhaps even more fascinating.  It is our fear of uncertainty.

When we tell ourselves that analysis of big data will make our future predictions better, it is because deep down we want to believe in an explicable world, the certainties of which will become apparent with enough number crunching.  When we pretend that we understand past events, we become confident in our ability to tame the darkness of their recurrence.  When we tell ourselves rich stories – scenarios, in the more exalted jargon – we become convinced that we can predict a brighter future.

It is a revealing characteristic that most scenario projections for whatever it is that we are predicting – economic indicators, commodity prices, long-run stock prices – are much smoother than the turbulent fluctuations we have seen historically.  This is sometimes excused on the basis that we cannot predict random events or cyclical behaviour.  But the truth is we want to believe the future will be more serene than the past.

Fear of uncertainty is associated with fear of death.  It takes a brave individual to accept with equanimity the genuine uncertainty and precariousness of life, the fact that ultimately nobody knows and no-one is really in control.  Forecasters in all shapes and forms – long range weather forecasters, energy consultants, investment analysts and stockbrockers, politicians – make a living to a large extent from our strong appetite for the sustenance of certainty.

The great American physicist Richard Feynman said he did not really care about knowledge as such, that it was not ‘knowing’ but ‘the pleasure of finding things out’ that spurred him on.  He frequently thought he himself was wrong, let alone others.  For him, the world is irretrievably uncertain, but the uncertainty didn’t bother him – indeed it excited him.  Alas, very few of us attain that serenity of outlook.