The Illusion of Knowledge

I’ve been expressing my disregard for forecasts for almost as long as I’ve been writing my memos, starting with The Value of Predictions, or Where’d All This Rain Come From in February 1993. Over the years since then, I’ve explained at length why I’m not interested in forecasts – a few of my favorite quotes echoing my disdain head the sections below – but I’ve never devoted a memo to explaining why making helpful macro forecasts is so difficult. So here it is.

Food for Thought

There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.

– John Kenneth Galbraith

Shortly after putting the finishing touches on I Beg to Differ in July, I attended a lunch with a number of experienced investors, plus a few people from outside the investment industry. It wasn’t organized as a social occasion but rather an opportunity for those present to exchange views regarding the investment environment.

At one point, the host posed a series of questions: What’s your expectation regarding inflation? Will there be a recession, and if so, how bad? How will the war in Ukraine end? What do you think is going to happen in Taiwan? What’s likely to be the impact of the 2022 and ’24 U.S. elections? I listened as a variety of opinions were expressed.

Regular readers of my memos can imagine what went through my mind: “Not one person in this room is an expert on foreign affairs or politics. No one present has particular knowledge of these topics, and certainly not more than the average intelligent person who read this morning’s news.” None of the thoughts expressed, even on economic matters, seemed much more persuasive than the others, and I was absolutely convinced that none were capable of improving investment results. And that’s the point.