What if most of the models and forecasts are wrong? What if we’ve made decisions based on these models that are likely wrong? Depending upon your frame of mind, you might think that I am talking about COVID-19 or the investment markets. Actually, it’s both.
COVID-19 is the worst worldwide health and wealth crisis in roughly a century. A multitude of individual and collective decisions on this health crisis have been made by relying on projections with varying amounts of underlying evidence. This also happens in the world of investments where 80%+ of investors rely on forecasts about the future based on scant amounts of data or evidence.
Science is about trying to make sense of things we don’t know or understand.
Within our firm we follow financial market science, utilizing almost a century of evidence to help us understand the interplay of both risk and investment returns. As has been made very clear over the last few weeks, setting investment policy or public policy based on non-evidence based forecasts can lead to unintended consequences.
The Health and Wealth Connection
Health and wealth are interdependent; they are closely connected one to the other. Healthcare comprises almost 18% of the broad economic output in our country. Our financial well-being and our health are not separate, they are one in the same. Our lives and our livelihoods are attached. Shuttering most of the economy doesn’t have just financial consequences but places a heavy toll on health also. Increased suicides, domestic violence, decreased life spans, depression and despair are but a few of the real-life outcomes.
Everything we do, including matters relating to our health and wealth contain trade-offs. The time we are living through presently is a tailor-made example of how trade-offs work. We want absolute safety and might be afraid to go outside because doing so involves some level of risk. However, we learn to make reasonable trade-offs and find risk levels that are acceptable. We also want safety in our financial lives but we must trade-off some safety and accept reasonable amounts of risk in order to accomplish our most important goals. It’s impossible to have a perfectly “riskless” world. Behavior changes in both health and wealth are dependent upon having a clear understanding of the basic risks involved.
Predicting the Future
Large financial institutions claim they have “experts” who can accurately predict what stocks or which sectors of the economy will perform best. They can’t. Health “experts” also have their own predictions about the future. Deliberative choices are usually based upon some notion of what might happen in the future (a model or forecast) and that’s fine if these models are evidence- based. Oftentimes it’s difficult for us to discern.
There’s uncertainty and risk in everything we do every day. If we try to create a “riskless” environment we instead are creating longer-term problems for our life and our livelihood. That could be the biggest tragedy of all.
We are here if you want to talk. Please stay safe.
Related: How to Flatten Your Emotional Curve