Building a successful business, growing your company, or even choosing the right professional path all depend on the ability to look ahead and make accurate forecasts about what the world will look like one, five, or 10 years in the future. Forecasting is an essential skill for success. It's also, unfortunately, a hugely hard one to master

If you want proof of that fact, just ask a VC. Startup investors make their living by predicting which companies and trends will take off. They're among the best informed and most motivated predictors around and they still get it right (i.e. back a startup that achieves explosive growth) at best 20 or 30 percent of the time.

The world is messy and mind-bogglingly complex, but according to at least one VC, there is one approach that can make you a little better at guessing the future: Add some psychology to your data. 

"Prediction is hard," Morgan Housel acknowledges in a long post on his fund's blog. "A lot of the reason it's hard is because the visible stuff that happens in the world is a small fraction of the hidden stuff that goes on inside people's heads. The former is easy to overanalyze; the latter is easy to ignore."

Housel breaks down 12 quirks of our weird psychology that make it hard to see the future coming. Like many of Housel's in-depth takes on challenges and trends, it's super smart and well worth a read in full. But for the time-strapped, here are three of his points in brief to get you started. 

1. We believe what we need to believe. 

"Credibility is not impartial," Housel writes. What does that mean? Basically, that we are more likely to believe predictions when they benefit us.

"If you tell me you've found a way to double your money in a week, I'm not going to believe you by default. But if my family was starving and I owed someone money next month that I don't have, I would listen. And I would probably believe whatever crazy prediction you have, because I'd desperately want and need it to be right," he offers as an example. 

This is human nature (and also the reason poor people buy most lottery tickets and interest in the supernatural spikes in disastrous times), so you can't eliminate this tendency from your thinking, but you can be aware of it and try to consciously correct for it. 

2. Patterns are strongest when they're about to change. 

What makes a pattern easy to spot? Often the fact that it has repeated itself over and over. What makes a trend most likely to peter out? Also that it has repeated itself over and over again. Continuity both makes things easier to see and more likely to change soon. 

Here's Housel's more detailed explanation of this essential paradox of forecasting: "Statements like 'this trend has been around for 20 years' make forecasters feel good because it is the data equivalent of safety in numbers. But if you believe in reversion to the mean--and most forecasters do--they should give you pause. Social trends become obvious when they're ubiquitous and old, both of which encourage the trends to become exploited, priced out, and cliché--which is when they stop becoming trends."

Again, it's human nature to see things that have been around for a long time as immutable truths, but reminding yourself that generally the older something gets the closer it is to oblivion should help you remember not to be lulled by long-lasting trends.

3. No one likes to prophecy their own doom. 

Ideally, predictions are objective and based on impartial observation. But in the real world, predictions are often constrained by self-interest. Even if you see the writing on the wall for your company or industry, predicting doom can be career suicide. So you stay quiet. 

"A CEO might be scared out of their mind worrying about how their company is going to dig out of a problem. But morale will plunge and key people will leave if they advertise that view. So they project optimism and faith, even if it's not their most honest prediction. It's normal to do this. I think we all do it to some degree. But we should acknowledge what it is: predictions being influenced by our own attempt to maintain credibility," Housel offers as an illustration.

On the opposite extreme, for pundits and "thought leaders," being unorthodox and/or predicting doom often means more TV appearances and clicks than a more moderate "steady on" prediction.

It's not a giant shock that people act in their own self-interest, of course, but too often we fail to take that truth into account when weighing their viewpoints for our own predictions. Don't just consider whether a person knows what they're talking about. Also ask what they gain or lose by making whatever prediction they're making. 

Published on: Aug 12, 2019
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