I have a question for you. If you take all of the hearts from a standard deck of 52 playing cards, and then lay them out one by one, in how many different orders can the 13 cards be dealt?

For example:

J, 7, 5, A, 9, K, 3, 10, 6, 2, Q, 8, 4.

K, 4, 2, 9, Q, 6, A, 8, J, 3, 10, 5, 7.

The answer is…

6,227,020,800. That is over 6 billion different permutations of the 13 cards.

If you did the same with the full deck, the number of possible arrangements is so large that it is not worth even trying to write it down. It is not a number you would ever encounter in daily life. When you shuffle a deck of playing cards and deal them out, it is overwhelmingly likely that the order you reveal has never been seen before and never will be again.*

Trying to predict how the cards will land is as close to impossible as you might wish to get, but it is much easier than making accurate short-term financial market predictions.

Dealing out playing cards has a number of useful features from a prediction perspective:

• The number of cards is fixed.

• The rules of the game are stable and simple.

• You know all possible outcomes.

• When you draw one card, it has a known impact on the next step.

It is a stable, closed and well-ordered system. Financial markets are nothing like this. When investors are trying to forecast how the equity market might perform over the next year, or how a certain geopolitical issue will unfold, they are faced with a complex, chaotic and changeable environment.

It has all the features of a system where accurate predictions are not possible:

• It has an unfathomable number of inputs.

• There is significant path dependency, where each step profoundly influences what occurs next.

• The environment is adaptive – meaning the variables in the system react to what is happening.

• It is impossible to even comprehend the range of potential outcomes.

Despite this, a huge amount of time is spent espousing views and making investment decisions based on precise forecasts of an inherently unknowable future. Even in a very simple system, once the number of steps reaches even a modest level, the chances of making accurate predictions evaporate. Financial markets are anything but simple.

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* I came across this idea in the excellent More or Less podcast, which you should absolutely be listening to if you enjoy numbers and statistics.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).