The Big Short?

What’s with all the predictions?

Everyone’s into predictions: financial bloggers, political pundits, sportswriters, even my kids are into predicting who’s going to get which chores tomorrow. Predicting things seems to be in our blood–especially in the investment business. People always have opinions about what the economy’s going to do, where interest rates are going, what programs the government will support, and so on.

The problem is, predictions are hard. There are all kinds of variables, and bad luck can play an enormous role. A month ago, most sports pundits thought that the Indianapolis Colts would be a serious force in the AFC-North. Now, with Peyton Manning out, the Colts are struggling. The same can be said about markets and economies: bad luck can derail the most careful estimate of supply, demand, and prices. And the prediction game itself is complex: if your estimate is right in line others, no one will notice. But if you stand out—and you’re right—everyone notices: you get invited to tony conferences at posh resorts; book deals come in; it’s easy to get clients.

This creates a sort of moral hazard for prognosticators: people tend to remember—and focus on—the times when an analyst was “out there” but turned out right. But a management professor at NYU rigorously studied economic forecasters and found that accurately predicting an extreme event is often an indicator of poor forecasting ability. Those folks tend to make undisciplined “gut calls”—either through overconfidence or poor methodology. But the one time they get lucky, they get their name in lights.

So take predictions with a grain of salt. And check the batting average: because even a broken clock is right—twice a day.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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