Wednesday, February 14, 2007

Don't Trust the Forecasts

Peter Martin, Economics Editor of The Canberra Times. Posted this blog some time ago:

It’s the time of year to make forecasts - to gather together a group of experts to predict the course of politics, interest rates and the stock market throughout 2007. Most of the papers do it.

I’m here to issue a consumer warning: You would get a better handle on 2007 if you wrote out scenarios on scraps of paper, pinned them to dartboards, blindfolded yourself and aimed the darts.

Think I’m being too harsh?...It is one of the best-kept secrets of punditry that the better known a pundit is, the less likely are his or her forecasts to be correct. That’s right – the LESS likely...

...The problem facing experts is that they have the tools (and often the incentive) to convince themselves that their pet theories are right even when a rough glance at the evidence suggests that they are wrong. They know enough detail to convince themselves of things that you or I could not.

...year after year, in aggregate Australian fund managers have performed worse for their clients than they would have had they just left the money in the top 100 stocks and done nothing...

Daniel Kahneman, the first psychologist to win the Nobel Prize for economics, has coined the phrase “delusional optimism” to describe the way in which most of us convince ourselves that we are better at what we do than we really are.