This question posed in the National Geographic magazine (June 2015),… titled “Why Do Many Reasonable People Doubt Science?” … got me thinking about why reasonable people think it is possible to time the markets, even though there’s plenty of academic evidence to the contrary.
Some points from the NG article that are also in many ways relevant to investing:
- Empowered by their own sources of information and their own interpretations of research, doubters have declared war on the consensus of experts.
- In a sense all this is not surprising. Our lives are permeated by science and technology as never before. For many of us this new world is wondrous, comfortable, and rich in rewards—but also more complicated and sometimes unnerving. We now face risks we can’t easily analyze.
- “Science is not a body of facts,” says geophysicist Marcia McNutt, who once headed the U.S. Geological Survey and is now editor of Science, the prestigious journal. “Science is a method for deciding whether what we choose to believe has a basis in the laws of nature or not.” But that method doesn’t come naturally to most of us.
- Even when we intellectually accept these precepts of science, we subconsciously cling to our intuitions—what researchers call our naïve beliefs.
- Most of us do that by relying on personal experience and anecdotes, on stories rather than statistics.
- We have trouble digesting randomness; our brains crave pattern and meaning.
- Meanwhile the Internet makes it easier than ever for climate skeptics and doubters of all kinds to find their own information and experts.
- The Internet has democratized information, which is a good thing. But along with cable TV, it has made it possible to live in a “filter bubble” that lets in only the information with which you already agree.
How does this relate to investing?
There is plenty of academic research on investing science. You may get a sense of the debate in the investing world when you read about passive (now being called evidence based) versus active investing. A good summary on the topic may be found hereby By Dana Anspach. A lot of confusion may be from active investing doing better in the short term compared to indexes. However, Standard & Poor’s Indices Versus Active (SPIVA) findings find that it is short lived, not persistent, and the outperformers in one period are not the same as those in another … in other words, now you also need to predict ahead of time who may outperform in addition to what fund.
The academic findings are best summarized by Fama and French. Their forum discusses luck versus skill. Luck is simply fitting within statistical expectations while skill would be a measure of who stays outside statistical explanation the majority of the time (nobody does).
There is a long list of biases that investors face (click on the first link on that page for a descriptive article on the list). Which ones are you prone to? To eliminate as many biases as possible, one should adhere to evidence based investing (much like how the medical profession evolved with evidence based medicine).
As Anspach explains in her article I linked to above, “Active investing is like betting on who will win the Super Bowl, while passive investing would be like owning the entire NFL, and thus collecting profits on gross ticket and merchandise sales, regardless of which team wins each year.”