Knowing the Future Isn’t Enough

Last week’s note, The Problem with Interest Rate Predictions, made the case that the future is unknowable and therefore investment outcomes are always uncertain. 

But what if the future was knowable?  Would that change things?

According to a new study, the answer is “not really.” 

The study’s authors ran an in-person, experiment inspired by a 2016 tweet from Nassim Nicholas Taleb where he theorized “If you give an investor the next day’s news 24 hours in advance, he would go bust in less than a year.”

The authors called the experiment “The Crystal Ball Challenge.” They gave 118 young adults trained in finance $50 each and the opportunity to grow that stake by trading in the 500 index and 30-year US Treasury bonds with the information on the front page of the Wall Street Journal (WSJ) one day in advance, but with stock and bond price data blacked out. The game covered 15 days, one day for each year from 2008 to 2022 and they could use leverage. 

(You can try the game yourself here but admittedly I haven’t done so myself because it requires providing a name and contact info).

The findings: Taleb was basically correct.

• The average payout was just $51.62 per player, representing a weighted average return of 3.2%.

• Just under half of players lost money. 16% of players went bust.

• Players guessed the direction of stocks and bonds correctly on 51.5% of the roughly 2,000 trades they made.

Keep these disappointing results in mind the next time someone presents you with a sure thing. As Mark Twain once said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” 

---

Now for the good news:

Last Friday, my mother-in-law, Karen Payne, rang the bell at MD Anderson to signal that she is now cancer-free.