Seeing Patterns in Financial Information

The human brain is quite a remarkable machine. Much like a computer, it is capable of receiving, interpreting, and processing inputs in order to generate outputs. These outputs typically help us make better decisions regarding the objects our five senses encounter. For example, our brain may process a smell (input), interpret it as a skunk (output), and then prompt a beneficial behavior (run). And we do all of this, without   giving it a second of deliberative thought.

Like many computers, our brains have also been programmed to recognize patterns. Let’s say you want to create a column of numbers that are multiples of 5. You don’t have to manually input every number–five, ten, fifteen, twenty, and so on. Instead, you can just insert the “5” and the “10”, then highlight the two cells. After that, you simply click, hold, and drag downward on the bottom right hand corner of the highlighted area. Magically, the numbers in the cells beneath will be entered in multiples of 5–because Excel recognizes the pattern you are seeking to create.

It’s the same way your smartphone works to “autocorrect” misspellings of words you frequently use. Just like computers, our brains recognize patterns about our environment. If your brain recognizes a foul smell once, it may be construed as a skunk lurking nearby. If it smells the same foul smell several days in a row just outside your house, it may draw the conclusion that the skunk has died somewhere underneath your house…and you might have to dig it out.

In years past, when we understood a lot less about nature than we do now, the pattern recognition capabilities of our brains were extraordinarily helpful. We could tell changing of the seasons by recognizing patterns that occurred annually when seasons changed. These patterns helped us know when to plant and harvest crops, or when to hunt animals that would soon be migrating. In many facets of everyday life, pattern recognition is still very helpful today. If we see a ball bouncing in front of our car while we’re driving, pattern recognition tells us that there is probably a child behind it–and we should hit the brakes immediately.  However, if there is one area of life in which pattern recognition has done us a great disservice, it is in making predictions about the future–especially when those predictions have to do with investing.

In 2000, there was a massive crash in technology stocks that could not have been predicted from the emerging pattern. If you looked at the financials, it would appear that tech stocks were going to keep going up indefinitely. As it so often does, though, it turned out to be a bubble on the verge of popping. Now you see it; now you don’t. It was there; then it was gone. It wasn’t a pattern; it was an illusion.

As investors, we need to be careful about seeing patterns in financial information. There is no guarantee as to how long the pattern will continue and, many times, there isn’t even a pattern at all. Sometimes, we’re just seeing what we want to see. If you need any help navigating the complexities of financial information with which you are bombarded daily, feel free to contact us for a free consultation. We would love to help you separate the patterns from the illusions.