“It’s tough to make predictions, especially about the future.”  -Yogi Berra, or Neil Bohr

 

Last week, I was in San Francisco speaking to 700 financial planners from northern California. The areas that seemed to generate the most feedback and questions were on expert commentary and on risk.

People love forecasts. They shouldn’t but it’s how they’re wired. When it comes to forecasting the future, people have two strange and internally inconsistent perspectives. First, most of us know that forecasts are folly: Experience teaches that the people who make these guesses about the future aren’t very good at it. Economists, strategists and analysts have amassed a track record that is more or less abysmal.

The second aspect of forecasting is even more fascinating: As consumers of predictions, we want them to be bold and precise, and informed by very confident forecasters. If they happened to have gotten a big outlier right, we like them even more.

What makes these circumstances so odd is how little we seem to care about the track record of these prognosticators. To be polite, it is embarrassing how wrong they have been as a group. Yet, that seems irrelevant to the public, who prefer specificity over uncertainty, confidence over humility, accuracy be damned.  (continues here)

Category: Investing, UnGuru

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “How to Make Better Predictions”

  1. VennData says:

    People think it’s easy, and don’t track their success rates.

    And on this, media diet, I am 80% with BR

    http://www.thereformedbroker.com/2014/06/02/investors-plagued-by-continuous-partial-attention/

    You can turn the news off and turn off the reactions. When I get with friends they always have some nuggent in isolation that redefines their world view. The end result, bad behavior. And even if they get it eight, it only reinforces future worse behavior. You have to not react, stay the course, rebalance once a year. Period.

  2. CD4P says:

    Yes, but the TV producer needs “bomb throwers” to produce or their shows don’t get eyeballs and they’re out of a job. The “Jerry Springer” show presents several train wreck relationships every episode, yet the show has never highlighted any relationships Jerry has actually saved. Jerry’s record is unblemished, and has aired for 20+ years.

  3. rd says:

    The real key is learning to think probabilistically. It is how engineers design things to operate for an extended period of time with low chance of needing major replacement. We come up with some sort of “average” or expected normal condition, look at the likely range of outcomes and apply a factor of safety to that average that would then also accommodate most of the alternative outcomes. Really bad scenarios, like major earthquakes, get analyzed a bit differently so that most structures will survive without collapsing, thereby preventing major injury, but may need major refurbishment or replacement afterwards.

    For example, I know what Social Security tells me I will get in retirement if I keep working at my current pay and I know what the current tax law says how it will get taxed. However, I could stop working earlier or end up in a lower paying job that could change my total amount. There is also a lot of political uncertainty about how Social Security will get treated over the next 30 years for individual benefits, spousal claiming strategies, and tax treatment. So I make guesstimates of what a reasonable expectation would be of these changes and use those in my financial planning. I then look at the potential major negative things that could happen, and make sure that we are structured to survive those. It is a very low probability that Social Security would disappear altogether during my lifetime, but I expect to be in a wealth and income category that will be targeted for reductions in spousal claiming strategies and possibly have 100% taxed instead of 85%.

    I make sure we are positioned to be substantially above a cat food for dinner retirement budget, have a high probability of sustaining a comfortable existence, and the opportunity is there if everything lines up to have a good “travel the world” retirement budget, at least for a few years. Most of the things that would allow the latter are totally out of my control, but by not putting everything in Treasury bills, the opportunity is at least there.

    I think one of the fundamental causes of most financial failures (including the 2008 financial crisis) is that people structure their financial systems to survive successfully only if the best conditions and assumptions prevail. Financial systems need to be able to survive a muddling through type of scenario but people’s minds don’t seem to be hard-wired to think that way, so training is needed..

  4. Frilton Miedman says:

    I”m with Mark Hulbert’s method. – by default, 2 of 3 prognosticators are wrong.

    It’s a given that many have their own agenda and will intentionally mislead, others are just wrong though well intended, while half of that well intended group will get it right.

    I track my own set, there are fire breathing bomb throwers who constantly misunderstand economics via political tunnel vision & fixed ideology…when I’m in doubt I refer to this group as a default contrarian, they have the worst record of all.

  5. ERISANation says:

    in the Social Animal, David Brooks talks about most folks longing for certainty rather than adopting the approach of a wanderer. We hate uncertainty because it promotes fear. If we refrained from taking comfort in accepting a “this is going to happen prediction” we might make better decision because we observe more and synthesize more between the conscious and unconscious drivers of our decisions.

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