Most CFO's in the U.S. are not very good at forecasting the future of their corporations. This may be because they don't have enough understanding of the economy, they assume to much about the economy and their business, or that they simply do not acknowledge important factors and information in their businesses. When they expressed their 80% confidence limit, they were only right 1/3 of the time. This means that if we were asked what we think the returns were supposed to be on our hypothetical business, we would have either a 10% higher return, or a 10% lower return, than we predicted. To top that off, these predictions were negatively correlated with their stock returns. This means that the lower limit of their prediction made a positive correlation, and vice versa.
It seems obvious that they can't predict correctly, because if they could they would all be billionaires. The troubling factor is that as a whole, they do not realize the lack of forecasting ability that they have. The economists, stated above, said that things feel more uncertain in rough times, but when the worst prediction made was simply a flat market, we are only hoping for the best, when in actuality the market may plunge.
The reason CFO's, and the rest of us, make these wrong decisions, is because we suffer from overconfidence. The trait most of us do not suffer from, but the CFO's do, is narcissism. Although we have confidence in ourselves, we acknowledge that mistakes can be made, and that bad things can happen. When the thought that we can do no wrong is inserted in our minds, we seem to commit more mistakes, and more errors are made. Once we consider that we may not have done the best, most optimal, job, we can accept failure, and even make better decisions to begin with.
Mark Twain once said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”