From Weather to Money Markets: Why Predictions Are Impossible
Despite all our technological breakthroughs, why can’t we humans predict the weather more than 10 days in advance? And why can’t we predict what global money markets – systems we created ourselves – will do in the next 24 hours?
For international businesses, cash flow projections are to some degree unreliable, and cash flow analysis is inherently limited. But understanding the challenges of making accurate forecasts, be they of weather or currencies, helps us to operate our businesses better.
Too many variables
One similarity between global financial forecasts and weather forecasts puts a hard limit on our ability to accurately predict both: there are simply too many variables to consider.Sea temperature, atmospheric pressure, currents, jet streams, solar activity; the further a meteorologist tries to predict into the future, the more factors must be taken into account, and the more accurately each factor must be measured. Drill down far enough and you’ll arrive at the famous point where a butterfly flaps its wings in China and causes a hurricane in the US.
The sheer size of the computing problem is why anything greater than a 10 day forecast becomes nothing more than a guessing game. And the very same problem is faced by financial markets, but to an even greater degree.
Weather is a natural and to some degree predictable process. Money markets, on the other hand, can be influenced by human hands. If he so chose, Jeff Bezos could devalue most of the world’s currencies overnight. And there’s simply no way to know what each of the eight billion people and millions of organisations on earth will do that could influence financial markets (and subsequently your own business bank account or cash flow.)
A prediction paradox
Not only is making predictions about global financial markets a computing problem, it’s also a logic problem. Let’s say that you do know exactly what the cash flow forecast is for tomorrow. Armed with that information, you wisely put all of your business’s budget in a place where it will benefit from the upcoming market changes.But hold the phone: By adding your business’s capital, you’ve introduced yet another variable into the system. In fact, you’ve probably introduced many more, as others react to your surprising move. Reactionary dominoes begin to fall, and you could soon become the butterfly that causes the financial hurricane.
In short, predicting financial markets is paradoxical. If you could know exactly what is going to happen, acting on that information guarantees that it won’t.
Who wants to be Nostradamus?
But this unpredictability is what makes cash flow investing activities interesting. You don’t know what’s going to happen – no one does – which makes these markets a level playing field. You can however educate yourself on the system and the factors at play, and take a more educated guess.This is what separates the best market players from the rest. They maximise the knowns, minimise the unknowns, and make the most educated predictions possible. They don’t get it right all the time, but they do get it right more often than others.
And for those looking to make educated guesses, we at Certomo are ready to help facilitate those money-making transactions.