Meaningful Returns

The Cleveland Cavaliers won the 2016 NBA Finals on Sunday night in unprecedented fashion. I didn’t see a single serious basketball fan pick the Cavaliers prior to the series starting, with typical over-the-top pundits like Steven A. Smith and others treating the outcome as foregone a conclusion as the spherical nature of the earth.

But, the Cavaliers did win.

There are many similarities between Sports (and those who cover sports) and the capital markets (and those who cover them.) I think the greatest similarity lies in the difficulty (and futility) of making predictions about an unknown future.

Philip Tetlock is the recognized expert on prediction making and the difficulties that professional prediction makers inevitably run into. This interview with Jason Zweig of the Wall Street Journal is a bit of a primer on his work. There are a number of really intriguing pieces to his research, but the one I find most intriguing is this: those who are the most confident in their predictions are often among the very least accurate.

Making predictions and educated guesses is a part of living in the world as a human. But don’t fall into the Steven A. Smith trap or the (“anyone on CNBC trap” or the “your brother in law with a stock tip trap”) of holding your predictions as simple, foregone conclusions about an infinitely complex future.