STREET DOGS

Why is there still rabid demand for forecasts? People listen to financial forecasts because: (1) The stakes are high. An accurate investment forecast can earn or cost you a fortune. Your goals could depend on it. (2) Markets and economies are confusing. Why things happen is often unknown, the result of billions of people responding to their own incentives.

If economies confuse you – and if they don’t you’re not paying attention – and someone says, “I can earn you a fortune if you listen to me and if you don’t you will lose a fortune,” the temptation to listen is huge. The stakes are so high that it can be dangerous not to listen to forecasts, despite their track record – just in case.

This is especially true when you’re surrounded by a huge amount of economic loss and gain. The 2008 financial crisis created diehard followings for those predicting hyperinflation and collapse. And then 2017 brought equal faith and attention to those making the wildest cryptocurrency predictions.

In each case the stakes of loss or gain were huge. Layer in a world that was wildly confusing – banks collapsing, unprecedented monetary policy, digital currencies suddenly worth hundreds of billions – and people hearing these forecasts have no base rate of past accuracy to judge against. When nothing makes sense, any prediction seems as likely as another. So people take the wild ones seriously, just in case.

That’s not an excuse for heeding bad forecasts. We know enough about the types of people who make wild investing forecasts and their incentives to safely discount a big portion of babble. But it’s an explanation for why people do it. High stakes and uncertainty cause rational people to pay attention to crazy forecasts.