Good Enough
Spare a thought for the poor guppy fish, who lives a miserable existence but teaches us something important about forecasting.
Small, brightly colored, and terrible at defense, the guppy faces an unusually high rate of predator attacks. Birds eat guppies. Small fish eat guppies. Big fish eat guppies. Crabs eat guppies. It’s everyone’s favorite lunch.
How does a species under so much threat avoid extinction?
In short, guppies get busy as soon as they’re born. They can reproduce at seven weeks old, and deliver new offspring every 30 days. By the time a six-month-old guppy is eaten by a bird it might be a great-great-grandmother. The family lives on.
But this evolutionary trick has a nasty flip side.
Knowing how much danger they’re in, guppies expend nearly all their energy on reproducing from the moment they’re born. They grow as fast as possible, then devote a huge portion of their resources to nourishing their young.
That leaves little energy left to care for themselves. Their bodies are thrown together slipshod, like cheap plastic toys, and few resources are available for cell repair and maintenance. By the age of a year or two old it’s a crusty senior citizen, crippled by disease and decline, soon to go belly up. That’s how it should be: No use investing in the future when you’re likely to be eaten anyway.
Now compare the guppy with the Greenland shark, whose life is nearly a mirror image.
The Greenland shark has no natural predator. It rules its habitat like a dictator.
With few threats, it takes its sweet time becoming an adult. It’s one of the slowest-growing creatures we’ve discovered, reaching sexual maturity at – and this isn’t a typo – 150 years old.
In the meantime it spends more than a century devoting its energy to building itself a perfect body. Slow and methodical, with all of its resources going to cell repair and maintenance, it becomes virtually immune to cancer and infectious disease. As best we can tell a Greenland shark can live for 500 years, maybe more.
The point is that nature is very good at assessing future risk and uncertainty and allocating resources accordingly.
It takes a realistic look at future threats and says, “There are so many risks lurking. Don’t even bother trying to plan for the future.” For others it says, “Your future is clear and foreseeable – predict away with confidence.”
Fish are masters at this balance.
Birds are masters at this balance.
Insects are masters at this balance.
But people trying to forecast the economy? Different story.
Everyone knows the economy is hard to predict, and the history of economic predictions is abysmal.
But leaving it at that is too simplistic.
I think we’re actually very good at predicting the future – except for the surprises, which tend to be all that matter.
In most years the biggest economic risk turns out to be something nobody could have seen coming at the beginning of that year. 9/11, or Covid, or Lehman Brothers’ failure to find a buyer, or Russia invading Ukraine – the biggest risk is always what you don’t and can’t see coming.
The question then is, how much effort do we put into forecasting the economy only to have that forecast upended by an event no one could have predicted?
So much.
Too much.
Sometimes we pretend we’re Greenland sharks, unburdened by threats and able to devote all our resources to a predictable future. But we’re closer to guppies, constantly facing risk from every direction. When you see how much effort and energy are devoted to forecasting the next year or two, then compare it to the constant level of threat and surprise we face, it’s astonishing. Mother nature would shake her head.
Investing in your long-term future is of course great, because the odds that you’ll be around and everyone else will become more productive are pretty good.
But trying to predict the exact path we’ll take to get there can be such a waste of resources.
I describe my forecasting model as “good enough.”
I’m confident people will solve problems and become more productive over time.
I’m confident markets will allocate the rewards of that productivity to investors over time.
I’m confident in other people’s overconfidence, so I know there will be mistakes and accidents and booms and busts along the way.
It’s not detailed, but it’s good enough.
When you keep forecasting that simple, you free up time and bandwidth to invest elsewhere. I like studying the investing behaviors that never change, and I’d never have the time to do that if I spent my day predicting what the economy will do next quarter. For others it’s operating a business, or understanding an industry. Or something else entirely.
It’s less about admitting that we can’t forecast, and more about acknowledging that if your forecast is merely good enough, you can invest your time and resources more efficiently elsewhere.
Nature has been honing this truth for hundreds of millions of years – perhaps we should pay attention.