Forecasting the short term movements of the markets is virtually impossible.
This tidbit hasn’t stopped people from trying Making money from failed predictions is a big-time business.
We are still waiting for hyperinflation and skyrocketing gold prices the “experts” warned us about from all that money printing
From Dow 36,000 to Bitcoin $100,000, so-called experts failed us miserably with their financial astrology.
Why are forecasters so bad and is reliable forecasting possible?
We aren’t just talking financial markets.
“We are probably nearing the limit of all we can know about astronomy.” – Simon Newcomb, astronomer, 1888.
“X-rays will prove to be a hoax.” – Lord Kelvin, President of the Royal Society, 1883.
“This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.” – Western Union, 1878.
“In 50 years every street in London will be buried under nine feet of manure.”
– An article in The Times concerning the great horse manure crisis of 1894.
“You will be home before the leaves have fallen from the trees.” – Kaiser Wilhelm, 1914.
“Taking the best left-handed pitcher in baseball and converting him into a right fielder is one of the dumbest things I ever heard.”– Tris Speaker, talking about Babe Ruth, 1919.
“There is no likelihood man can ever tap the power of the atom.” – Robert Millikan, Nobel Prize in Physics, 1923.
“Stocks have reached what looks like a permanently high plateau.” – Irving Fisher, Professor of Economics, Yale University, 1929.
“No matter what happens, the U.S. Navy is not going to be caught napping.”
– U.S. Secretary of Navy, December 4, 1941.
“I will believe in the 500-channel world only when I see it.” – Sumner Redstone, Chairman, Viacom and CBS, 1994.
Philip Tetlock collected forecasts from 284 highly educated experts from the fields of politics and economics. They averaged twelve years of experience in their chosen fields.
This project lasted 20 years and contained 82,361 predictions of the future.
Their prediction results were abysmal.
According to David Epstein of The Atlantic, The experts were, by and large, horrific forecasters. Their areas of speciality, years of experience, and (for some) access to classified information made no difference. They were bad at short-term forecasting and bad at long-term forecasting. They were bad at forecasting in every domain. When experts declared that future events were impossible or nearly impossible, 15 percent of them occurred nonetheless. When they declared events to be a sure thing, more than one-quarter of them failed to transpire. As the Danish proverb warns, “It is difficult to make predictions, especially about the future.”
Despite this damning evidence, most experts refused to admit flaws in their processes.
One study compiled a decade of annual dollar-to-euro exchange-rate predictions made by 22 international banks: Barclays, Citigroup, JPMorgan Chase, and others. Each year, every bank predicted the end-of-year exchange rate. The banks missed every single change of direction in the exchange rate. In six of the 10 years, the true exchange rate fell outside the entire range of all 22 bank forecasts.
The more tightly focused the expert, the worse they performed. Seeing things through a single narrow lens made them especially vulnerable to factoring data to fit into their world view, conforming their erroneous argument.
Experience and credentials made them worse at their jobs!
Knowing too much equated to knowing nothing in this realm.
Tetlock held another competition. He invited generalists to match wits with content specific experts. He called this the Good Judgement Project.
Among those, they identified a small group of the foxiest forecasters—bright people with extremely wide-ranging interests and unusually expansive reading habits, but no particular relevant background—and weighted team forecasts toward their predictions. They destroyed the competition.
Tetlock and his wife/psychologist Barbara Mellers identified the qualities that distinguish a good forecaster.
They were “curious about, well, really everything,” as one of the top forecasters told me. They crossed disciplines and viewed their teammates as sources for learning, rather than peers to be convinced. When those foxes were later grouped into much smaller teams—12 members each—they became even more accurate. They outperformed—by a lot—a group of experienced intelligence analysts with access to classified data.
Good forecasters didn’t dig in when mistaken. They utilized bad predictions as learning processes. The opposite of narrowly framed experts.
Next time you hear a financial pundit predicting a market crash, depression, or impending armageddon because of some temporary event that’s commonplace in history, take a thoughtful pause.
There’s one constant in the prediction business – they’re almost always wrong.
Trust me, I’m an expert.
Source: The Peculiar Blindness of Experts, by David Epstein, The Atlantic
