Following on from the posting on why fund managers fail to generate positive alpha . I thought I would look at the notion of cognitive blindness and emotional overconfidence within the domain of prediction. This was prompted by set of predictions I came across for this year by a group known as Bespoke who have produced a series of year end price targets for the S&P500.
This list got me searching for a local list for last year to examine and in my travels around the googlebox I came across some fascinating predictions. They ranged from Elliot Wavers who last year predicted that the US would descend into a new civil war. Now if Billy Joe and Bobby Joe from Arsebite Arkansas put down their banjos and stopped complaining that their cousin at 14 was simply too old to marry long enough to march in Washington then I and the rest of the world missed that. Amongst the looney Elliot Wavers was the ever present Robert Prechter who still seemed to be predicting that the Dows hould be at 100 points, that’s right I have not dropped some zeroes off that – they mean 100 points.
To be honest the local scene was not that much more inspiring. The table below was taken from an ABC Lateline roundtable discussion. All predictions are for the ASX 200 at the end of 2010.
You can see that predictions (guesses) ranged from not bad at a 5.3% miss to friggen woeful at an 18% miss . The notion of predictions raises the question as to why “experts” within a field would commit such an action that would hold them up to such scrutiny. I think the answer to this is to be found in many ways within the innate human desire for attention and in many ways they are the ultimate act of hubris.
Those who make predictions seem to have a self sustaining ecosystem around them. The bolder and more outrageous the prediction the more oxygen it receives and the more attention the individual making the prediction gets. In many ways this is in no way different to emotional failings that investment managers have when it comes to managing other peoples money. The environment those making the predictions surround themselves with in no way allows for critical or self conscious analysis as to whether their performance is any good at all.
I can almost guarantee that no one who makes a prediction for a given market in 12 months time looks back at their prediction and says to themselves – Bloody hell….I got that wrong.
If the do look back at all any self analysis will be tempered with all sorts of internal self justifications as to why they were wrong. In the end it will be the fault of the market not cooperating with their prediction as opposed to it being their fault for being incompetent.
For an extended look at the failing of predictions see this article in the New Yorker.