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Bad Predictions and Decision-Making in Investing

Bad Predictions and Decision-Making in Investing

The morning brings a sunrise as the earth keeps spinning and time advances with no retreat. We take these predictions for granted: They are not guaranteed, but very few doubt them and they are of the few that we are able to rely on. Our confidence in the movement of celestial bodies and the nature of the universe encourages our belief in the power prediction holds, even when proven otherwise.

Times of turmoil and change in business can drive us to make predictions of the future, but without the right information we often hurt ourselves. This is especially true when we try and make financial predictions.

How do bad predictions hurt you?

We can make bad predictions by mistaking logical patterns and incorrectly extrapolating the recent past. Just because a unit trust performs well this year does not mean it will continue this performance next year. Statistically, a year’s short-term performers are more likely to be the following year’s underperformers. We may assume that a strong GDP growth implies an increase in future investment returns, but they are not statistically correlated.

We make ourselves vulnerable to the errors by not taking the time to get the right information. Instead, we prefer to take shortcuts to save time and money, often relying on opinions and gut feel.

Bad predictions can often lead to investors switching from one investment, which has recently performed poorly to that of a top performing investment company. However, short-term performance should not be the only information you use to make a decision. Switching will move your money back and forth, while you chase performance. This often locks in losses and lowers your returns.

A few rules to improve your decision-making ability

Here are three steps to help you assess the quality of your prediction, which will lead to better choices:

1. Establish the facts

People often make decisions based on very little or no facts. It is remarkable that this is still so prevalent since information is more accessible than ever. Don’t just blindly follow someone else’s opinion when it’s your savings on the line. Resist the temptation to only pick information that confirms a specific view. Do the research and try and talk to the right people before making any decisions.

2. Consider a source’s motivation

Sources can have their own agenda, which often compromises a prediction. It is important that you consider your own emotional state and psychology in order to get on the road to investing properly. This can help you identify any emotional roadblocks and help you make more rational decisions as an entrepreneur.

3. Consider all outcomes

The decisions you make when investing should ideally cover a range of outcomes. Professional financial managers will create a portfolio, which combines various perks and risks so that an investment that may perform well covers an investment that underperforms. We can’t predict the future with absolute certainty, but we can choose how we react to it.

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Source: Main home business mag


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