Monday, January 14, 2019

Coffee Break: The Crystal Ball Fallacy

Jim Parker, from DFA Australia Limited, shares some more wonderful insights and links:

As a new year begins, the financial media typically is full of speculative commentary about what the coming 12 months will hold for markets. The assumption underlying this content is that someone, somewhere has a reliable crystal ball.

The truth, however, is that everyone is guessing. A few guesses turn out to be right. Most turn out to be wrong. And that’s because those making these forecasts fail to account for the random nature of events. Ultimately, it’s not a good way to invest.

Wrong, Random or Worse
Share on LinkedIn
Share on Facebook
Everywhere you look at this time of the year, someone is telling you what stocks to buy in 2019, the chances of a recession, the likely path of interest rates and what will happen to currencies. These forecasts are really guesses and are often just a pitch to get you to trade. In fact, Barry Ritholtz sees forecasting as an exercise in futility.
Share on TwitterThe problem with market forecasts goes beyond their inaccuracy. The real issue is their failure to recognise the randomness of the world.
The Market in Fear
Share on LinkedIn
Share on Facebook
Have you noticed how much media commentary about the market outlook is gloomy? We’re told to brace for everything from meltdowns to depression. Part of this is economic, as research shows human beings are wired to give greater weight to bad news than good. This means there’s an in-built market for fear.
Share on TwitterOur in-built loss aversion makes us more likely to click on bad news headlines. Keep that in mind when you are confronted with 2019 ‘outlooks’.
Separating Noise from Signal
Share on LinkedIn
Share on Facebook
So much media commentary around markets is just noise. For example, at the start of every year you’ll see articles saying it’s now “a climate for stock pickers” or that “the rules have changed”. Veteran investor and fund manager David Booth has heard it all and provides a refreshing perspective on market forecasting.
Share on TwitterMarket forecasts are ubiquitous around this time. But this veteran fund manager says most are just noise designed to get you to trade.

DFA Australia Limited 

This section may provide links to the sites of independent third parties which contain information, articles and other material prepared by persons who are not employees or representatives of DFA Australia. These links are for your convenience only. These third parties are not affiliated with DFA Australia, and DFA Australia does not control or endorse and is not responsible for any information, opinions, representations or offers on these linked sites. DFA Australia is not responsible for the contents or accuracy of this material, and the opinions expressed in this material should not be taken to be the opinions of DFA Australia.