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Being right and being early

When making predictions, it isn't just important to be right. It matters a great deal as to whether we get the timing of the prediction right. There's an excellent article in the Collaborative Fund outlining this point, and here is an excerpt:


"I remember watching CNBC in March 2009, when the S&P 500 bottomed out 60% below its previous high. Host David Faber noted that every trader he talked to knew a big market rally was coming. “So, how are you invested?” Faber asked them. “In cash,” the traders told him. Faber said it was because they couldn’t afford to have another down month. They were confident a turn was coming – and they were right – but being even a month early was too much risk. They couldn’t stand going to their bosses or their investors and explaining why they lost money again."
 I've had numerous discussions in the recent weeks with friends on whether governments could have done more to be prepared to deal with a pandemic of the kind we are in. While the answer is obviously yes, they could have, the answer to "Should they have done it?" is not at all clear. It is similar to asking "Should the traders have invested their money in the market right away knowing there was a bull run coming?"

The same article illustrates another example, this time with reversed consequences:

"Say it’s 2003 and you predict the economy is going to collapse under the weight of a housing bubble. In hindsight, you got that right. But it’s 2003. So those who listened to your predictions have to wait four years for that prediction to come true. And I guarantee you, most would not have. They would have given up and walked away long before housing tanked. Those who did stick with your prediction have to account for the opportunity cost of being four years early – both the financial cost and the social cost of looking wrong. The two can easily swamp the eventual benefit of being right."
The financial cost and the social cost of looking wrong are each enough to bring down governments and end political careers on their own. Both together would exponentially increase the probabilities. 

So, it's no wonder governments do the bare minimum they can get away with. Because that is the right thing to do. 

The same goes for CEOs and leaders of companies. It's not that big and successful companies become complacent or stifle creativity. It is simply not the right thing to do for them to take risks that can have a big financial cost or the social cost of looking wrong. Startups can bear those costs because those costs are negligible for them. 

So, the question is not "could we have done better?", but "should we have done better?"

And the answer is, perhaps not.

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