Our Brains Are Prediction Machines - What Advisors Should Do About It

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I have written frequently about the futility of trying to predict the direction of financial markets. And, of course, I am not alone in issuing these warnings.

Now I know why most people ignore my warnings.

Our surprising brains

The brain is a small but powerful prediction machine. We literally can’t stop ourselves from making predictions. If we didn’t make predictions, we couldn’t perceive the world as we do. Making predictions is hard wired into our circuitry and is essential to our survival.

The mechanisms at work are described in eye-opening detail in How Emotions Are Made by Lisa Feldman Barrett, Ph.D. Barrett is a noted psychologist and neuroscientist who has studied the inner workings of the brain for years.

She says the classic view of how brains work is wrong. Most of us think that we take input from our five senses, create a picture of reality from that information and then react to it. In other words, we make rational decisions after reviewing the data presented to us.

Not so.

Instead, our brain constantly makes predictions about our surroundings and the future we will encounter. We manufacture our version of expected reality and compare it to the information provided through our senses, making any needed adjustments along the way.

As another brain researcher, Anil Seth, put it, “The brain doesn’t hear sound or see light. What we perceive is its best guess of what’s out there in the world.” He suggests that our perceptions are just predictions or simulations – what he calls “controlled hallucinations.”