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How to Make Better Predictions

Posted By Barry Ritholtz On June 2, 2014 @ 8:45 am In Investing,UnGuru | 7 Comments

 

 

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

 

Last week, I was in San Francisco speaking [1] 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 [2] 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 [3])


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2014/06/how-to-make-better-predictions/

URLs in this post:

[1] speaking: http://www.ritholtz.com/blog/2014/05/norcal-fpa-this-is-your-brain-on-stocks/

[2] forecasts: http://www.thestreet.com/print/story/10226887.html

[3] continues here: http://www.bloombergview.com/articles/2014-06-02/the-trick-to-making-better-predictions

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