December 22, 2022 by Ethan Gilbert
Wall Street Journal reporter, Jason Zweig, published a fascinating story last week that details how difficult markets are to predict and provides great documentation of hindsight bias.
Hindsight bias is the phenomenon where people perceive events in the past as having been more predictable than they actually were.
In his piece, Zweig discusses an annual survey where he asks readers to forecast where they think markets will be in a year. He did this for the first time in December 2021. A year later he compares those results to what people expected but more interestingly, he asked readers who submitted a response the previous year to recall what their forecast was.
The following table outlines a few of the predictions made by Jason’s readers in 2021, what they recalled their original prediction to be a year later, and what actually happened in the markets.
2022 has been a tough year for markets so it’s not surprising that people’s forecasts are so far off. What’s most interesting is how poor people are at remembering their predictions.
Investors predicted the S&P 500 would gain a historically modest 6% this year. But after knowing it dropped nearly 15%, their memory was that they figured it would decline by 1%.
With 10-year yields at 1.4%, investors correctly predicted rates would rise to 2% by the end of 2022. But with the benefit of having seen them rise to 3.6%, investors recalled they predicted a more accurate rise to 3%.
Lastly, with Bitcoin at $46,900, investors predicted a 15% rise to $53,900. However, after seeing the 64% drop in 2022, investors’ memory was that they had originally predicted a 34% decline to $30,850.
The next time you’re thinking about the markets and want to be greedy, remember markets are hard to predict and most people are not as good at predicting them as they think they are.