A year-end review seems like a sensible way to prepare for the new year. It’s a descendant of a long cultural tradition that goes back to Socrates who said, “An unexamined life is not worth living.”
Twenty-four centuries later, the annual review is a staple of print and digital media.
In its most familiar form it summarizes news stories still fresh in our mind and provides commentary on the implications those stories have for the coming year. Sometimes the review will go out on a limb and make specific predictions.
Byron Wein’s “Ten Surprises,” highly anticipated for over 30 years is my personal favorite.
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Wein is an experienced observer of the world of investing. His “surprises: are thoughtful and compelling. But locating statistics about his track record was not easy.
After collecting enough data, I understood why — the results were unimpressive. He’s correct only 20-30% of the time.
While that says nothing about Wein’s intellect or his industry credentials, it says everything about the impossibility of making accurate predictions.
Investment manager Joel Tillinghast reminds us that Lord Keynes publicly threw in the towel on prediction: “If the greatest macroeconomist ever, with special access to information and policy makers, couldn’t trade successfully on credit and business cycles, I don’t know who can.”
If the idea of a year-end review seems sensible and practical, perhaps we need to rethink what that review should look like.
Tillinghast lays out both the challenge and the trap: “Investing forces you to reach conclusions with inadequate data. No wonder we choose based on the information right in front of us, neglecting evidence we can’t see, or latch onto a well-told story rather than digging into complexity.”
Tillinghast was writing for investors, but his observation could apply to anyone.
C.D. Walcott was one of the most renowned and respected scientists of his time: paleontologist, advisor to four presidents, and head of the Smithsonian Institution. Even as he travelled in the highest circles, with influence over powerful and wealthy men, his first love was science.
Walcott had been traveling to the Canadian Rockies for years collecting fossils when he came across a site in the Burgess Pass in 1909. In that one small area, not much longer than a city block, Wolcott collected 65,000 specimens.
Nearly eighty years later, Stephen Jay Gould wrote of Walcott’s discovery: “The invertebrates of the Burgess Shale…are the world’s most important animal fossils.”
The fossils date from just after the start of the Cambrian Explosion: the wild and wooly flowering of multi-cellular life some 570 million years ago. The fossils were unique not just for their variety and detail, but for the story they told about the nature of history.
Wolcott died never realizing the magnitude of his discovery. Why did this brilliant and devoted scientist not see what was right in front of him?
I’m attracted to year-end reviews and predictions for the same reason everyone else is: They offer hope that uncertainty can be eliminated.
We know that there are lessons to be gained from studying history, so what’s the concern?
By focusing on such a short period, the year-end review fosters a mindset vulnerable to “recency bias.”
Because the history we’re reviewing is still fresh in our minds, it feels more important than something that is far more relevant, but doesn’t feel as compelling because it’s old.
Tillinghast provides a solution: “To fix recency bias, study history – the longer and broader, the better. To envision the future, investors need some idea of the normal baseline. Discover which things change and which endure.”
Year-end reviews are popular, but they blind us at the very time we want clarity.
Science only makes sense within the context of a paradigm (or narrative) that explains how things work. When new information comes in, scientists plug it into the existing paradigm, and if it fits easily, it adds to our knowledge.