Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 639

Invest like you are bad at making predictions

Investing can often feel like one giant prediction game. Most financial market commentary involves forecasts about the future that are hastily discarded and wilfully forgotten, and many investment approaches are founded on taking bets about the complex interactions of economies and asset prices. The problem with all this activity is that the world is a highly uncertain place and we are wildly overconfident in our ability to foresee what will happen next. A fact confirmed (again) in a recent study by Jeffrey A. Friedman, an associate Professor of Government at Dartmouth College.

Friedman ran a large-scale study of over 63,000 judgements made by nearly 2,000 national security officials from NATO allies and partners. The expert participants were given a set of 30 to 40 statements and had to estimate the chances that they were true.

Such as:

“In your opinion, what are the chances that NATO’s members spend more money on defense than the rest of the world combined?”

Or apply probabilities to future events:

“In your opinion, what are the chances that Russia and Ukraine will officially declare a ceasefire by the end of 2022?”

How did these experts fare when posed these questions?

It is fair to say that their calibration was a little off or, to put it another way, they exhibited pronounced levels of overconfidence.

When the officials believed that a statement was likely to be 90% true, this was the case on only 57% of occasions. On the flip side, when a statement was assigned a 10% likelihood of truthfulness, it was correct 32% of the time. Notably, participants were more likely to say something was true when it was not, than the reverse (false positives were more common).

There was also a problem in dealing with certainty. When a participant had absolute confidence that a statement was false, they were incorrect 25% of the time. (They were obviously ignorant of Cromwell’s rule).

Here is a visual depiction of the calibration gap, or level of overconfidence:

Friedman’s paper goes in to more detail on the study, and he has also written an excellent book on decision making under uncertainty, which I would strongly recommend, but I wanted to turn to the implications of this study for investors:

Be very careful with geopolitical risks: Investors get very excited about geopolitical risk and love the opportunity to become foreign policy experts for the week, but making decisions based on geopolitics should be avoided. In Friedman’s study, experts in the field consistently made off the mark, poorly calibrated judgements – what chance do generalist investors have?

Financial markets are harder to predict than most things: Although the foreign policy questions in Friedman’s study were difficult, they are not as challenging as those many investors try to tackle. When investors make market predictions, they are attempting to forecast something as complex and chaotic as the global economy and how that will impact financial markets. It is incredible to me that anyone thinks this is possible.

Reduce your confidence levels: The participants in the study were overconfident, investors are overconfident, humans are overconfident. A very useful rule of thumb is to reduce our conviction every single time we express a view, this will almost certainly make our guesses more realistic.

Don’t make an investment approach reliant on predictions: I appreciate that it feels like we should be constantly making predictions about financial markets – it is interesting, lucrative and everyone else is doing it – but it is a really bad idea.

Make easier predictions: Of course, all investing involves making predictions about the future in some form but let’s make easy ones. I predict that over the next decade economies will grow, and stock markets will generate real returns. It is a forecast, and it is not certain to be true, but I have a reasonable level of confidence in it being so. Simple predictions, humbly made are always the way to go.

Reduce overconfidence by diversifying: Diversification is an exercise in humility. The future is uncertain, and we are terrible at making predictions, so our portfolios should reflect this.

If you are reading this and thinking that financial market forecasts are not really as difficult as I am making out then feel free to replicate Friedman’s test. Make a set of statements about the future and apply a probability to them being true. Things like these:

The ten-year US treasury yield will be above 5% by the end of 2026.
Or
The US equity market will not lose more than 25% in value at any point over the next 12 months.

Let me know how you get on.

It is an oddity that investors are often reluctant to systematically measure themselves in this way given how much time we spend making predictions. It suggests that even though we behave in an overconfident way underneath it all we know the truth, we would just rather not remind ourselves of it.

 

Note: All opinions are my own, not that of my employer or anybody else. I am often wrong, and my future self will disagree with my present self at some point.

 

Joe Wiggins is Director of Research at UK wealth manager, St James’s Place and publisher of investment insights through a behavioural science lens at www.behaviouralinvestment.com. His book The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions.

This article was originally published on Joe’s website, Behavioural Investment, and is reproduced with permission.

 

  •   26 November 2025
  • 1
  •      
  •   

RELATED ARTICLES

The two most dangerous words in investing

Putting portfolios together when the world is falling apart

US market boom-bust cycles - where are we now?

banner

Most viewed in recent weeks

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Latest Updates

Planning

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Investment strategies

CGT reform and fund turnover: who really feels the impact?

The implications of CGT reform are far and wide. As the 50% discount gives way to inflation indexation, turnover and return profiles may become critical drivers of after-tax performance. Some strategies face a far greater hit.

Superannuation

Super was built for a very different Australia

Our retirement system was built around assumptions that no longer hold. Lower homeownership, longer lifespans and changing expectations are exposing cracks that policymakers and super funds need to address.

Retirement

Retirement in reality - 4 months in

Many people spend years planning financially for retirement but little time preparing for what comes next. Four months in, here are the surprising lessons I've learnt on finding purpose, social connection and healthy habits.

Investment strategies

After the Budget, Australia needs its own definition of quality

As tax reforms reshape investment incentives, investors should rethink what quality investing means in the uniquely concentrated Australian market, where traditional frameworks may not translate as effectively.

Datacenters are the new shale oil

Why are tech giants pouring billions into datacentres when the economics look questionable? The most dangerous words in investing may be: "everyone else is doing it". Today's AI boom has striking parallels with the shale bust.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.