“Forecasting: the attempt to predict the unknowable by measuring the irrelevant; this task employs most people on Wall Street.” (Brilliant description – wish I had thought of it)
The words of Jason Zweig, author of the Devil’s Financial Dictionary, are particularly apt at this time of year. We hear a lot from financial forecasters every January, as strategists prognosticate on what’s in store for markets for the year ahead, even though decades of research confirms the prediction game is a pretty fruitless one.As far back as 1933, US economist Albert Cowles concluded even the most successful market forecasters did “little, if any, better than what might be expected to result from pure chance”. Cowles conducted a larger follow-up study 11 years later; the results were no different. Since then, studies have investigated the accuracy of forecasts from market analysts, investment newsletter writers, financial journalists, and various other investment experts. Suffice to say, today’s forecasters are no more accurate than their predecessors in the 1930s.“The stock market is like a beauty contest where you make money not by selecting which face you think is the prettiest, but by guessing who others will think the prettiestThis problem is not confined to the financial domain. Predictions expert Philip Tetlock’s famous study of political forecasts over a 20-year period found the average expert is “roughly as accurate as a dart-throwing chimpanzee”. Countless studies in other fields have reached the same conclusion.