Hayo Heerink: An octopus in the media spotlight
This column was originally written in Dutch. This is an English translation.
People want to predict the future. During the 2010 World Cup, that desire for certainty led to a remarkable source of ‘insight’: Paul the octopus, who correctly predicted the outcome of eight matches in a row. It was a period in history when a mollusc was trusted more than many an analyst.
By Hayo Heerink, former investment strategist at pension funds
This World Cup summer, it was a German economist, Joachim Klement, who made the front pages. After an octopus, an economist surely had to be taken a lot more seriously, didn’t he? Klement had already correctly predicted the World Cup winner three times before. For 2026, he predicted that the Netherlands would be the winners. We now know how that turned out.
But didn’t Paul the octopus get eight predictions right? Based on probability, the chances of that happening are very slim. It couldn’t have been a coincidence. It had to be a gift, or so the thinking went. The world was spellbound by a mollusc that – or so it seemed – could see the future.
But anyone who looked closely saw one thing above all else: What You See Is All There Is (WYSIATI).
Let’s take a step back. Because it wasn’t just Paul the octopus making predictions. There were hundreds, if not thousands, of pubs around the world where a guinea pig, a dog or a cat was trying to predict the results. Many pub owners, looking to attract customers, tried to draw attention to themselves using one animal or another. If there are a thousand pubs, there’s bound to be an animal somewhere that gets the result right eight times in a row. The probability of that is almost 100 per cent. Only the animal that predicted correctly made it into the newspaper. The missing information is all those other dogs, cats or guinea pigs that made predictions but didn’t make it into the newspaper – because, after all, they didn’t predict very well either.
Exactly the same thing can happen in the world of investing. In 1999, guidelines were introduced in the form of the Global Investment Performance Standards (GIPS). From that point on, cherry-picking by asset managers was no longer permitted. Until then, an asset manager could highlight a fund that had performed well in the recent period. Only that fund. And only for the period during which the results were good. Funds from the same manager that had performed poorly were not mentioned. This was a deliberate attempt to create a WYSIATI situation. GIPS requires that all comparable portfolios be included in a single composite. This means you cannot single out one ‘star fund’ without also showing the rest. GIPS is the antidote to WYSIATI.
The illusion of sufficient information
WYSIATI is the tendency to base decisions on the information that is available, without considering information that you cannot see, but which does exist. We see a price chart, a quarterly report or an analyst’s quote and assume that this is the whole picture.
The problem is that our brains do not cope very well with uncertainty, such as an uncertain future. When we have a piece of information, we fill in the rest ourselves. Just as Paul’s fans thought that his eight correct predictions were proof of a supernatural gift. WYSIATI led people to believe that the available picture was the whole picture.
Paul’s lesson for investors
Paul’s lesson is simple: eight correct predictions say nothing about an octopus’s gift. Above all, they say something about how many other predictors did not make it into the papers. Think of all those dogs, cats, guinea pigs and economists who didn’t go viral. Take a step back!