This is an excellent little piece on the need for noise management in trading.
1. Consider your source.
Unless the source is unimpeachable, ignore it.
Experts (and especially phony experts) are prone to the same weaknesses all of us are, of course. Philip Tetlock’s excellent Expert Political Judgment examines why experts are so often wrong in sometimes excruciating detail. Even worse, when wrong, experts are rarely held accountable and they rarely admit it. They insist that they were just off on timing (“I was right but early!”), or blindsided by an impossible-to-predict event, or almost right, or wrong for the right reasons. Tetlock even goes so far as to show that the better known and more frequently quoted experts are, the less reliable their guesses about the future are likely to be (think Jim Cramer), largely due to overconfidence, another of our consistent problems.
A CXO study of that data determined that the forecasted probability of recession for a quarter explained absolutely none of the stock market’s returns for that quarter. In fact, the data suggests that the forecasts were a mildly (if not materially) contrarian indicator of future U.S. stock market behavior. The survey reads like a primer on recency bias in that bear markets lead to bearish market forecasts and vice versa while the forecasts have no predictive power whatsoever.Since 1990, the Federal Reserve Bank of Philadelphia has conducted a quarterly Survey of Professional Forecasters, continuing research conducted from 1968-1989 by the American Statistical Association and the National Bureau of Economic Research. The survey asks various economic experts their views of the probabilities of recession for each of the following four quarters and comes up with an “Anxious Index” reflecting those asserted probabilities.
More here – Above The Market
