“Just as nature abhors a vacuum, people hate randomness. The human compulsion to make predictions about the unpredictable originates in the dopamine centers of the reflexive brain. I call this human tendency ‘the predication addition’.”
This is how Jason Zweig describes the human tendency to predict in his book Your Money and Your Brain.
So do you suffer from prediction addiction?
If yes, don’t worry! You are not alone. And it probably is not your fault, as we had discussed in yesterday’s post. It all due to the chemical called ‘dopamine’ in your brain, the release of which gives you a natural high to make the next prediction, and the next one.
The ‘prediction addiction’, as Zweig explains, is the compulsive desire to try to make sense out of just about everything…even events that are not predictable.
Like the direction of the stock market or the future price of a particular stock.
Investment writer Dan Solin, in an article for the Huffington Post, writes:
“This addiction is a particularly bad one. Not only are our brains hard-wired to believe we can predict the future and make sense out of random acts, it rewards us for doing so. The brain of someone engaged in this activity experiences the same kind of pleasure that drug addicts get from cocaine or gamblers experience when they enter a casino.”
So are you a predication addict?
Don’t feel shy to admit that! Almost 99.99% of all those involved in the stock markets – fund managers, financial analysts, brokers, their office boys and sweepers, IPO form distributors, my father-in-law, his mother-in-law, and her dog – are prediction addicts.
Here are some common statements that predication addicts make. Find the one that you made, or heard, recently:
- I think the Sensex will touch the 25,000 mark by this year end.
- I’m sure this stock is going through the roof over the next two months.
- My analysis suggests that this stock will hit my target price within a year.
- We’ve bought this stock for our equity fund because we know that it’s going to quadruple in two years.
- Haven’t you applied to that IPO? It’s going to double on listing day!
The interesting thing is that most people who are prediction addicts reinforce their addiction by validating the process.
They equate their addiction with their ‘innate’ ability to pick the right stocks, time the markets perfectly, and see through the coming bull market.
These predictors are to the investor what the drug dealer is to the addict or the casino is to the gambler.
No wonder their allure is almost irresistible. Who cares that their much hyped prophetic skills do not exist?
Pick up any business newspaper that you get your hands to, or open any financial website.
You will be amazed to see some or the other prediction (and sometime many) on each page.
Here is a clipping of the news section of a leading financial website. Out of the 14 news items that you see in the list, 7 (or 50%) include some kind of prediction – and on subjects like FII flows, short term trading, US dollar, and Apple.
Leave this, and take a look at the discussion forums on most financial websites and blogs, and you will be inundated with predictions: on inflation, recession, depression, dollar, investing in precious metals, and of course the broader stock markets.
Interestingly, all these predictions are expressed with great confidence.
This is despite ample proof that these events are simply not predictable.
Benjamin Graham, the author of the investment classic, Security Analysis, and the financial genius who is credited with being the inspiration for Warren Buffet, put his dislike for stock market predictions it this way:
“If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.”
And this is what Warren Buffett has to say on the ability of stock market forecasters:
“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
Despite such views from great investors on the futility of predictions, investors continue to get conned into engaging in this process, aided by their brokers, advisors and the financial media.
“But how do I safeguard myself against prediction addiction?”
Good that you asked this question, as not many investors do.
The answer to how you can safeguard against getting into the unending loop of predictions is simple.
Ignore the uncontrollable, and control the controllable.
In simpler terms what I mean is this. Rather than devoting your time and energy to a ‘destined-to-fail’ attempt at finding the next Infosys or figuring out where the Sensex is headed in 2011, focus on what you can control.
And what are the things you can control?
- Expectations: Set realistic goals for the future performance of your stocks. If you think you can beat the market, or earn a return like 30% every year, you’re simply setting yourself up for a guaranteed disappointment.
- Risk: In stock market investing, risk comes from not knowing what you are doing. So you can control risk by knowing what you are doing. Don’t just ask yourself how much you might make if you are right. Also ask how much you can lose if you are wrong. Knowing how much your predication can cost you is a good way to stay away from making one.
- Behaviour: Leave your emotions aside while investing in the stock markets. Tighten the screws of your leaky brain, and promise yourself that you won’t predict where stock prices are headed.
Just take a break
If you are stuck with a prediction addiction, you need a break from the daily cacophony of business channels, financial websites and newspapers firing on their prediction cylinders.
Stop looking at the stock ticker. Its constant beat can sometimes cause you to skip a heartbeat.
Pursue an investment strategy that does not depend on predicting the unpredictable.
“If owning stocks is a long-term project for you,” warns psychologist Daniel Kahneman, “following their changes constantly is a very, very bad idea. It’s the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you’ll be miserable.”
Considering what we’ve learned about how dopamine system works, the ever-changing stock prices hit your brain like a can of kerosene dumped into a campfire.
So, instead of driving yourself crazy by constantly monitoring your stocks, just take a break.
Constantly checking stock prices, getting ecstatic or worried about them, and making the next prediction will only hurt your personal life and financial returns in the long run.
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