Why the forecasts of economic experts fail
In December 2010, I appeared on the business channel of the American Fox network in a special television program that dealt with skepticism, hosted by John Stossel. In the program I tattooed many pseudo-scientific beliefs. Stossel, for his part, expressed his own skepticism and raised the possibility of the existence of financial pseudo-science in the form of active investment fund managers who claim they can consistently "beat the market". In a dramatic visual demonstration, Stossel threw 30 half-game darts at a target board to which a stock list was affixed. He then compared the returns of the stocks he hit since January 1, 2010 to the returns of the stocks selected by the managers of the ten largest managed funds. The results: the target board shares increased by 31%, the fund shares increased by 9.5%.
Stossel admitted that his good luck was due to the small sample size, but he went on to explain that if he had thrown enough darts to fully represent the market, he would have gotten a 12% gain, the average gain of the market, which is 2.5% more than the rate of gain of the stocks selected by the funds. Economist Barton E. Melchiel from Princeton University explained in detail during the program how in the last decade "more than two-thirds of the managed funds achieved less than cheap index funds [for example, mutual funds that invest in a large number of shares], and that managed funds that achieved better results in a certain period were not precisely those who excelled in the next period."
Stossel cited a study published in the Journal of Portfolio Economics and Strategy that tracked 452 managed funds from 1990 to 2009 and found that only 13 of them outperformed the market average. Malchiel compared fund managers to "snake oil salesmen" and said that Wall Street misleads ordinary people based on the belief that experts can consistently time their actions in the market and accurately predict when to buy and when to sell. But the experts cannot do this. No one can do that. Not even professional economists and not even about broad market indices. And as Nobel laureate in economics Paul Samuelson wrote long ago in a 1966 column in Newsweek: "Commentators cite economic studies that claim stock market crashes have predicted 4 out of 5 recent economic downturns. That's an understatement. Wall Street indices have predicted 9 out of the last 5 recessions!”
Even within a defined technological field, where we would expect a higher level of specific expertise, the economic predictions fail. On December 22, 2010, for example, the Wall Street Journal magazine published an article describing how the capitalist T. Boone Pickens, chairman of the hedge fund BP Capital Management, abandoned the "Pickens Plan" for investing in wind energy. Pickens invested two billion dollars based on his prediction that the price of natural gas would remain high. But his hope was dashed when the price of gas plummeted along with the drilling industry's improved ability to release methane from oil shale deposits, a development that even an expert like Pickens failed to predict.
Why are the experts (as well as us laymen) so bad at forecasting? The world is a disordered, complicated and unpredictable place in which countless disturbing and changing factors operate that affect each other, and our minds have no tools to evaluate them. Evolution has equipped us with the ability to make quick decisions based on short-term forecasts and not the ability to conduct a rational analysis regarding long-term investments. And so, we delude ourselves into thinking that experts are able to predict the future. Professor Philip A. Tetlock from the University of California at Berkeley studied this self-deception among professional contractors and in 2005 published his findings in the book "Political Judgment of Experts". After examining an astonishing number of predictions, 82,361, produced by 284 experts in political science, economics, history and journalism, Tetlock concluded that they were no better than "a chimpanzee playing target shooting."
But there was one significant factor that improved the success of the predictions and that is the way of thinking of the experts: those who know a little about many things are more successful in their predictions than those who know a lot about a single area of expertise. Those who were less successful, Tetlock wrote, were "thinkers who 'know one big thing' and boldly expand the range of explanation of this big thing into new areas. They show sullen impatience with those who 'don't get it,' and express considerable confidence in their ability to make correct predictions." In contrast, those who excelled in the study were "opinions who know many little things (professional tricks) and express doubt about broad trends. They do not believe that explanations and predictions are the result of a process of drawing conclusions, but rather of flexible thinking adapted to the situation on the ground, which requires a combination of diverse sources of information, and they are quite insecure about their own ability to predict."
In-depth knowledge of one subject improves focus and increases self-confidence but obscures the value of opposing opinions and turns data collection into confirmation of popular belief. One of the ways to avoid a mistake is to doubt every time you catch yourself making a prediction based on reducing a complex phenomenon and compressing it into one comprehensive pattern. This type of thought trap is why I am not in the business of making predictions and never will be.
Michael Shermer is the publisher of Skeptic magazine (www.skeptic.com and his upcoming book is The Believing Mind. Follow him on Twitter: @michaelshermer
17 תגובות
Working on everyone.
It's called a "free market".
All the commenters here focused on the issue of stocks and the stock market, while the issue of forecasting the future is a much broader issue. It is true that humans are weak in long-term forecasting, our brains have had to adapt to this in the last million years or so, but in the modern world we have no choice but to try to predict long-term in many of our actions.
Will the apartment we buy as a young couple turn into a shabby apartment in a slum, or will its value increase? Are we investing our pension money in the right place? Is it worth learning a new management software because it will become the next word or are we just wasting a few months of our lives?
And that's why it's so true: experts in one thing never know more than people with a broad canvas. keep your eyes open Maybe the "unnecessary" history book you read last month, and maybe even a retarded article in "Panai Plus" are the ones that will give you the insight into the next successful future forecast.
Eran,
I agree with you 100%. Always, in every aspect of life it is better to understand, even a little, and not rely blindly on the experts, such an approach in my opinion saves a lot of money and adds to health. This is true in medicine, your car's engine, law, taxes and of course the stock market. Regarding technical analysis, at first it looks like astrology or voodoo, but after you get into it, you realize how much crowd psychology and personal psychology is embodied in the Japanese candles and the various indicators and how much the analysis really works.
What you do need is modesty, and the fact that you have read a little here and there does not make you a doctor/mechanic/broker, but at least you can understand their language and they cannot smear you.
R.H. You are right.
But the companies that really manage to make a profit do it more with the help of certain tools like hedging for example
Or there is a method to play by attrition of options.
In any case, the companies that beat the index are not the fund managers you and I know, but private individuals with much more money..
The managers you and I know are "allegedly" guilty of running stocks, and the fact that they caught only one company in the act doesn't mean they don't do it.. The funny thing is that even with that the index does much more than them.
Take for example March 2009 to March 2010 ..a crazy rise in the stock market..the Tel Aviv 25 index flew up 100% ..the most successful venture fund I saw made 40% profits..which by the way months later lost 30% of those 40% profits...so that within Two months later it dropped to approximately 27%.
A warm recommendation for anyone who has money..it is more important than anything else in your life..go learn technical analysis..even the foundation of the foundation of this will change your life.
In any case, but R.H
Here is a case study of smart analysts
Goldman Sachs sat with them in October 2007 on the eve of the great crisis and advised everyone to buy longs (meaning that the market would rise) while behind their backs they sold shorts (betting that the market would fall)...
It's completely illegal and they are being investigated right and left about it today (I doubt if anything will come of it.. the American governor is too connected to them)...
The point is that everyone who trusted them was dealt a fatal blow.
And the more important point here is that you should trust only yourself that it is your money.
If the rule 'it is impossible to lie all the time' would have worked and the figure was true, this obesity machine [of analysts/consultants/banks, etc.] would have disintegrated.
Apparently it doesn't happen for several directions and reasons. I - The mental need for us as people/society to find ourselves a guide/supporter who will give us a sense of security. II - The market is made up of so many stakeholders that any calculation becomes null and void in the face of chaos. On the other hand, they produce complex and complicated 'financial instruments' that the possibility of crashing with them is very common.
To be among those who 'exposed themselves to the big chance' but to avoid the possibility of crashing in a real 'financial instrument', people entrust their fate to experts. They usually deliver the goods in both directions without crashing on one side and also provide the feeling that I am in the profiting from the big game.
Along with the fact that since the stock market was invented it reflects a partnership in a growing world, the multi-year profit was guaranteed and met all needs. If the world shrinks all the rules will change.
And to everyone inside - good luck.
Everything that happens in the stock market or forex can be explained in hindsight, everyone is wise in hindsight
But the truth is that the main purpose of the stock market is to impoverish you and those who really control the economy behind the scenes (the elites) will do everything to impoverish the middle class
This is where it starts and this is where it ends, they know at any given moment how much money there is and where it is invested
And if it's worth it to them to drop the graph or raise it, they will act, they call it shaking the laundry off the graph, I know it sounds like a conspiracy, but before you invest in the capital market
You will learn how it is created and who is always hurt and how it can be avoided (it is very simple for those who really understand the point)
The stock market behaves as a chaotic process, like for example the weather. The weather forecasters are also wrong very often, it's just that it hurts more in the stock market, so you pay more attention to failures. Do you think that if all analysts were always wrong, today there would be hundreds of thousands of banks and companies employing analysts on a regular basis? After all, these bodies are the last to be suckers or to distribute meals to free eaters.
R.H. There are also in the casino. And in the lottery there are winners here and there
Good Eran, don't exaggerate on the other side either. There is no shortage of analysts who manage to make a little money here and there, right? Otherwise, all the investment companies and venture capital funds would collapse, but the fact is that, as mentioned here and there, they make several millions if not billions.
An analyst is free food...they make mistakes all the time...if in any other profession you made mistakes even half or a quarter of what an analyst makes, you would be kicked out of all the stairs.
And every advanced tool that an analyst has is worth nothing in any case even if you stick to a fundamentalist analysis of the market (as they taught at the university) .. since all the information that reaches you reached long before the owners of the stock you analyzed and they have already acted on it ... add to that that everyone today is cooking a little anyway their books ..and so on
We reach a situation where one second after analysts do an analysis for Teva and make brilliant reports, the stock drops 30 percent.
Analysts are sacred work for people like me, but more so for those with wealth, since they: "drive" the stupid herd of investors in the desired direction and generate enough fluctuation for you to make money on their backs.
How many times do you have to bring a monkey to these investment tests to show that it wins and all the guns don't.
And speaking of training and advanced tools.. a few months ago something won the lottery for 50 million or so in the annual lottery.. that evening sat on a financial night on channel 10 two chief investment house managers whose names we will not mention.. but are constantly being interviewed.. and they recommended how to choose You should invest your money…
They said, in their opinion, solid things.. (although in my opinion there is nothing dangerous about that..) such as branches of Eastern Europe, emerging markets, etc...
Any "skilled" technical surgeon would have been wary of what they recommended like fire...but according to the rules taught at the university it was perfectly fine because the "surgery" was good.
The short story..less than a month after that..if the poor guy had listened to their advice he would have shaved off a 30 percent loss.
pure shame.
By the way, personally, I don't understand how a person can hold a profession where he just barely manages to work properly..
An analyst earns not because of forecasts but because of quick reactions that he has thanks to advanced tools and training
To the point..I'd rather not tell you how much money I've made in just the last year thanks to technical analysis
Suffice it to say that it is measured in 3 digits... (the percentages of it).
And about a book..it's ridiculous...it's like going and learning to be a carpenter by reading a book..what are you Forrest Gump?
This world is huge..and has existed for centuries by the way..long before the modern So Cold economy..
If anything is ridiculous it's how analysts make millions and get crazy bonuses even though they fail to predict anything day after day... they are so consistent that there's a running joke on them
"Analyst = a person who is an expert in explaining today why what happened yesterday is not his fault"
In any case, to our point..before you listen to any moron who studied economics at the university and was told nonsense and cheesbats about technical analysis..I would recommend investing a little more time and thought.
Like everything in life, the main thing is the teacher..because in theory you will find some good teachers for this in Israel..but all in all..using yourself..is something completely after
Oh and just in case "point" maybe I sound like a braggart about how much I did or didn't do...please...here is a website
profitrider.co.il please has a review archive .. I had my heart set on two main reviews ... one right before the great crisis at the end of 2007 until March 2009 and the other in March 2009 which predicted its end...
And unlike the idiots who are constantly being interviewed in America, he did not predict a crisis in 2005, 2006, 2007, and it just so happened that he was right in 2007...he predicted exactly with the help of tools that can be learned..
And technical analysis doesn't guarantee 100 percent either...but it does give you over 70 percent success and even more depending on your skill level...if it's not enough it's already a problem and your incompetence as an investor.
People's desire for experts is a psychological need, if the money goes there will be someone to blame.
The only way to make money from technical analysis is to write and sell books on how to make money from technical analysis. Of course the book will lie and explain to you that the money is made from the stock market...
Technical analysis is the most ridiculous and stupid tool invented by uneducated people in random processes.
In fact, all this seemingly research is talking about fundamentalist economists .. that is, those who try to predict the economy within the tools they learned in their degree ... they try to quantify the existing information about the markets when in fact they have no chance because in our world this information by the time it reaches the little man has already been done by the guy inside use
A second issue is that they will always be wrong since they try to project the events of the economy in general (real estate trading, etc.) on what happens in the stock market.
Why is this a mistake?
Because the stock market is almost a year ahead of what is happening in the economy... Yes, small local events have some effect and create declines or increases that are contrary to the prevailing trend here and there, but in general, the movement of the stock market is the one that dictates the pace of the economy and it is the one that reflects all the people.
For anyone who really wants to know that he should go study technical analysis... I recommend Eitan Rotem by the way.
The market is ultimately people and the behavior of people in a very large amount can be predicted with a very high probability
It's not 70 percent, but you definitely have over 70 percent success... and those who know how to invest from XNUMX percent success will make a fortune.
Think about it: if there was someone who was truly an expert, that is, someone who knew how to predict what would happen in T time, don't you think he would have revealed it to others? for what? For an expert's salary? Never. He would go on to make billions from it.
In short, you are all being worked on.