“Prediction is very difficult, especially if it’s about the future.” – Neils Bohr

There’s a lot of talk in the news at the moment about Greece and a potential bailout (or otherwise). There is a lot of speculation about how it might impact the rest of the world, especially from an economic perspective.

Unless you have a direct relationship with Greece, which very few people in New Zealand do, the reality is that it’s almost impossible to know what is going to happen.

If someone has a strong opinion about what will happen, then that probably reveals more about that person than what will transpire.

Some people will have great stories and we’ll want to believe them

There a number of people who can give very good explanations about what is happening and what will happen. And they’ll probably explain it with conviction.

As Dan Gardner explains in Future Babble, we have a “hard-wired aversion to uncertainty”. We have an innate desire to look to experts – or people who sound like experts – to tell us what will happen. And we’ll often believe them.

I can’t tell you a great story about Greece. But some people can. And I’ll tell you this: stories aren’t always true, even when they’re about the real world.

Reflexivity

George Soros talks about a concept called “reflexivity”. It refers to a situation where cause and effect impact each other. Especially when there are a number of potential causes and effects, the relationship can become circular and outcomes become essentially impossible to predict.

Who knows what positive and negative feedback relationships will result from a Greece bailout or otherwise?

Economists and political scientists often get lambasted because they’re not so good at predicting the future. It’s not rocket science, surely? It’s not. And that’s exactly the point. Rocket science often has clear inputs and outputs that can be calculated with a high degree of precision. In this limited context, reflexivity doesn’t come into the picture and you can make sound predictions. Economics and politics isn’t like this, and never will be.

Some people will get it right, big time

Without doubt. And you’ll hear about them.

But what you won’t see is that thousands of other people who predicted but didn’t get it right. There will be some people who predict correctly, simply because of the number of people who make such predictions. This is an example of sampling bias.

There might be some people who have an unusually good understanding of this situation, and who might even be able to predict the outcomes of similar events. But distinguishing these from the others who made the right calls simply because of dumb luck will be very difficult. And parsing whether those who predicted well can repeat this in different situations: well, that’s even more difficult.

So what can we do?

I don’t have an answer that relates specifically to the Greece situation. Markets might not be 100% efficient, but they are efficient enough so that the average opinion about what is likely to happen has already been priced into the prices of relevant financial products.

To my mind, the broader question, which doesn’t relate to Greece necessarily, is this. In the event of a significant downturn, which could be triggered for any reason, will you be prepared, especially from a professional and financial perspective?

Are your skills valuable enough to attract employment and an adequate wage even in a weak economy? Do you have savings and contingencies in place in the event that your net worth was to drop more than you might normally anticipate?

If you don’t have a good answer to these questions right now, you might want to consider addressing these risks over the medium- to long-term. 

Sonnie Bailey

Sonnie is an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).