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Consequences of Bad Predictions and Emotional Decision-Making

The sun sets and rises the following day: we have confidence that this event will happen again…and again, although it’s never been guaranteed, it gives us faith in the power of prediction, even if we’re incorrect.

During tough, uncertain times, it’s difficult to keep a level head; emotions take over and lead us to make decisions without fully understanding the potential consequences such as making an emotionally-based forecast about unit trust prices.

How bad predictions hurt your financial wellbeing

Predictions about performance of unit trusts need to be based on logic, not emotion, misinterpreting a pattern or incorrectly extrapolating the recent past can have devastating effects.

The performance of unit trusts isn’t linear: this year’s short-term performers are more than likely to be the next year’s under-performers.

When it comes to investing in unit trusts, taking shortcuts to save money, making a decision based purely on speculation can be a very risky path. Without substantiated information founded on logical analysis of patterns made by professionals, you could be susceptible to financial disaster.

A bad prediction can often lead to an investor switching from an under-performing investment to another which is performing well. The problem with this method is that short-term performance shouldn’t be influencing you to make a hasty decision.

An equity-only fund, for example, is susceptible to market fluctuation, but this is a long-term investment and it’s important to keep a rational mindset.

If you switch regularly, the back-and-forth movement of your money, makes you vulnerable to locking in losses and lowering your returns.

A few rules to improve your decision-making ability

If you’re someone who finds it difficult to remain calm if you see under-performance in your unit trusts, take a breath; don’t switch. Follow these steps which can help you evaluate the quality of your prediction, leading to logical decisions:

  1. Establish the facts

 People often get flustered and make a decision based on speculation and facts that are thin, at best. Today, there is so much information readily accessible online that a financial decision made through naivety or based on someone else’s opinion shouldn’t be an excuse for poor decision-making.

It’s important to resist the temptation to only listen to information that supports a particular view. Rather, do your own research; try and speak to industry professionals and people you trust before you make any type of prediction. 

  1. Consider a source’s motivation

Consider the source; could it be that they are pandering to your emotions, knowing that their agenda will compromise a prediction? Take a step back and reassess the situation. Consider your emotional state at that point, this can help you identify any emotional triggers that could be hindering your ability to make rational decisions.

  1. Consider all outcomes

The most effective decisions that you make are the ones that take potential outcomes into account.

An investment manager will use all of his/her expertise to help craft a portfolio that combines both rewards and risks, in an effort to create an investment ‘balance’. An investment that may be performing well, may compensate for one that is experiencing under-performance.

Unfortunately, correctly predicting the future can’t be guaranteed, but you do have the power to make choices about how you respond.

Elliot Preece

Elliot is the Editor at ABCMoney. He manages a team that writes and contributes to many leading publications across a number of industries.

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