Why predictions are pointless

There is very little evidence that we can make accurate decisions, and plenty that we can't. So why do we do it?

by Alastair Dryburgh
Last Updated: 24 Sep 2015

Wading through pages of legalese from my pension fund recently, I struggled to get any idea of likely income in my dotage. It all depends on assumptions about investment returns over the next 20 years, interest rates when I retire, and how long an actuary (who probably hasn't even done his or her maths A level yet) will think I am likely to live after I don pipe and slippers. The only honest answer to any of these questions is 'I don't know' - which all the legal waffle was trying desperately to conceal.

There is very little hard evidence that we can make accurate predictions, and plenty that we can't. Yale psychologist Philip Tetlock's epic 20-year study asked 284 experts in forecasting political and economic trends to make 28,000 such calls. He found that they were slightly less accurate than random guesswork.

Daniel Kahneman analysed data on 25 investment advisors over eight years and found no evidence they could predict anything at all.

Denial is a common human response to uncomfortable truths like this, and tends to make us take refuge in forecasting of baroque complexity and minimal validity. Like the Goldman Sachs model which assessed certain adverse events as having a '25 sigma' probability (meaning they might happen once in the life of the universe), only for several of them to happen in a week.

On a more mundane level, an obsession with prediction makes us prevaricate - will we need 22 or 23 people in year three? Are those recruitment costs realistic? - when we should simply be getting on with things now.

Life would be more fun, faster-moving and more profitable if we could stop worrying about predicting the future. Successful entrepreneurs know this - they tend to be very sceptical about their own or anyone else's claims to be able to say what's going to happen next. Managers need to grasp the nettle of unpredictability too.

Alastair Dryburgh is chief contrarian at Akenhurst Consultants and author of Everything You Know About Business is Wrong (Headline, £13.99). More at www.alastairdryburgh.com

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