Why Market Predictions Fail Investors

If there is one thing I try to learn every day, it is not to make predictions. Our brain is a prediction machine. That is exactly the problem.

Why Our Brains Chase Predictions

Last night I watched a footy game and one side dominated the first half. They went to the sheds leading 16-0.

Game over.

The home team were so bad their supporters booed them off the field at half time. We are a fickle bunch.

It is said that football is a game of two halves. Last night proved that. The home side staged a miraculous comeback to snatch victory in extra time.

The fun part is scrolling through X and seeing how many footy pundits made predictions before the game, during the game, and then after. Like stocks, plenty of folks now gamble on footy hoping to hit the jackpot and get bragging rights.

Beforehand, opinions fly left, right and centre. Certainty prevails.

The Market Version: Certainty, Doubt, Disgust

When the game starts, there is chirping. As the chosen side moves ahead, the confidence grows. Some betting places offer a "cash out early" where you can collect your bet at a discount. Instead of winning $100 at the end of the game, you take $70 now. Most people do not do it. That is why betting places offer it.

Recency bias kicks in. You look forward to collecting the pot of gold at the end. Then doubt creeps in. Maybe I should have cashed out. Now it is too late. You are in the hands of the footy gods.

The home side comes back and wins in extra time.

Damn you gods.

The losers then do what we all do. Blame the other side. Point to flaws in the game. Whinge about the coach who then whinges about the referee. Bad decisions, bad luck.

Few admit they jumped the gun, got greedy, and predicted the outcome before the game was over.

This is exactly what happens in markets. The initial confidence. The sly boasting when you look right. The shock when it goes south. The disgust when you lose.

For a deeper look at how recency bias plays out in Australian markets right now, see our guide on stocks vs property in Australia.

The One Habit That Beats Prediction

Two habits, actually.

First, resist making predictions, even when everything appears to be in your favour. Even I wrote to a mate before the game and told him the eventual winners were hopeless. So I will not pretend to cover myself in any glory.

Second, rebalance. Yes, sometimes you sacrifice a bit of profit. But you do not go broke taking a profit.

Aim to become wiser, not to show off. And do not gamble on football matches. The odds are against you.

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This article is for informational purposes only and does not constitute financial advice. Total Money Management | AFSL 568642.