By Brad Thomason, CPA
Consider the following two yet-to-come events: the 2020 presidential election, and the construction of a new bridge over your favorite-est river.
If you go to a civil engineer and ask her who she thinks will win the election, she can answer your question. But the answer will simply be a guess. Humans can’t predict the future.
On the other hand, if you ask her for a bridge design which will support car and truck traffic, she can give you one. And when you build it according to the design, it will do the job as expected.
So how is it that the engineer can predict one future event, but not the other?
Because the bridge thing isn’t actually a prediction.
There is a special category of situations out there in the world which are said to be “deterministic.” That’s the fancy word the philosophers hung on them. Essentially, a deterministic system is one which will play out in a definable, mechanical way once the initial conditions are set. There is a rigid adherence to identifiable factors that is so consistent that it doesn’t matter whether they have happened or not.
If the hammer strikes the nail, we know what is going to happen to the wood beneath.
If your cat knocks your coffee cup off the kitchen table, there’s no mystery to what comes next.
If a lever of x length needs to lift an object of y weight, then the lifting force will have to be z when the fulcrum is two feet away.
If we need to put a rocket into space and then bring the people inside back safely, then we gotta start doing math involving thrust and velocity and rate of oxygen consumption and heat shield thickness.
But in all of these, we can know how they’re going to play out beforehand. In fact, so much so, that we don’t even have to actually play them out.
Notice that all of these examples are of a type that you would commonly find in a high school physics classroom. That’s because the version of physics taught in high school is essentially the mechanics of deterministic systems (i.e. Newtonian physics; not relativistic, nor quantum mechanics).
There are aspects of finance which are deterministic, too. If you have $400 in a bank account and you are spending $100 a month, then you can keep that up for four months. If you bought insurance for a particular event, and it occurs, the policy will pay whatever was described in the contract.
But there are a lot of questions in finance which aren’t based in determinism, too. Failure to realize (and respect) this most-important distinction leads to a lot of the problems people run into when trying to plan and manage their affairs.
Once you move past CDs and Treasury bonds, returns start to become less deterministic. That’s the basis of why they are considered to be riskier. Because they may or may not occur as planned.
Inflation rates aren’t deterministic. Your future medical history is not deterministic. The degree to which a family member might need financial assistance is not deterministic, and so on.
In the face of this, we have to make plans on the basis of what we deem to be plausible possibilities. Then, as the future becomes the past, we have to look to see how well reality matched up to what we guessed was going to happen (because make no mistake: no matter how hard you work at it or who does the projections, it’s still just humans making guesses about a future which can’t be predicted). Based on what we discover, we may have to reset and modify the plans we started with.
What we shouldn’t do is respond to the fact that we can’t predict the future by trying to get someone else to predict it for us. Because someone else can’t do it either. In our next post we’re going to address the common things an expert can do for you. But let me go ahead and give you the punch line: being an expert does not confer the ability to predict the future. Experts are still humans. Can’t fly. Can’t teleport. Can’t predict the future. No aliens, no X-men, no nothing. Just people, just like you.
Life would be easier if more of the big financial questions dealt with deterministic systems. But they don’t. So we have to take the handful of easy answers where we find them, and spend the remainder of our time and attention dealing with the world – and the future – as it is, not how we’d like it to be.
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