Prediction addiction: Do you suffer from it?

Posted by TEBI on January 9, 2024

Prediction addiction: Do you suffer from it?



Robin writes:

I believe it was Jason Zweig from the Wall Street Journal who coined the phrase prediction addiction. Whoever came up with it, the term helps to explain why so many people earn lower investment returns than they should.

Of course, prediction addiction isn’t confined to the investing arena. We love to predict the outcomes of everything from elections to sporting events, and, of course, gambling has become a multi-billion-pound industry worldwide.

Behavioural scientists tell us this drive to predict the future stems from a complex interplay of evolutionary, cognitive and socio-cultural factors. For example:

  • humans have a strong desire for control and certainty;
  • our brains are wired to recognise patterns, even where they don’t exist:
  • confirmation bias leads us to ignore information that doesn’t support our predictions, which leads to overconfidence;
  • optimism bias can encourage us to predict and shape a more favourable future;
  • and the world, and predicting the future is a way of extending the narratives we like to create about our lives and the world; and
  • societal and cultural norms often encourage future planning, emphasising the importance of being “ahead of the game”.

There is abundant evidence that this desire to predict and to gamble has an impact on the many people invest their money. In a 2011 survey, for example, 41% of high-net-worth investors around the world said they wished they were more disciplined in their investment decision-making.

I don’t want to sound puritanical about this. As the behavioural finance expert Meir Statman has explained, investing provides “expressive and emotional benefits” as well as financial ones. Some investors see picking stocks stocks and funds and trying to time the market as a hobby, while others, let’s face it, just enjoy a flutter.

However, as I explain in this, the first of a new series of articles for Index Fund Advisors in California, there is a price to pay for prediction addiction in terms of investment performance. For some it can be significant.

Thankfully, if you’re addict yourself or fear you’re becoming one, there are steps you can take to reassert control over your investment decision-making.




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Burton Malkiel: How passive investing won the argument



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