This post is a preview of WorthPointe’s e-book Evidence-Based Investing: Separating Fact From Fiction, written by Certified Financial Planner™ Scott O’Brien. In Evidence-Based Investing, Scott discusses the myths and misinformation that most often slow or halt our financial goals. Get your complimentary copy of Evidence-Based Investing here.
Information is not knowledge or judgment. The Internet and cable financial shows are full of information. However, you need to interpret the data to gain wisdom from it. As you can imagine, Homeland Security sifts through a lot of information to detect a piece of data that is of value. Investors or their advisors must do the same.
Author Michael Mauboussin points out that the talking heads on television satisfy a human need for an expert, without providing the value of an expert.
Philip Tetlock in his book, Expert Political Judgment found that so-called experts who are in the business of making predictions fail miserably. He observes:
- Optimists tend to be more accurate than pessimists.
- The only predictor of a forecaster’s accuracy was how frequently he was cited in the media. His academic credentials, field of study, policy experience, access to classified information or the number of years of work in his field has no effect on the level of forecasting success.
- Amazingly, this relationship of accuracy and media citing was negatively correlated — the more the forecaster was cited by the media, the worse his forecasts.
- The experts, like most of us, suffered from hindsight bias — they claimed to know what was going to happen, but after the fact. This is one way experts become overconfident.
William Sheridan, author of The Fortune Sellers, reviewed the leading research on forecasting accuracy from 1979 to 1995 covering forecasts made from 1970 to 1995. He concluded that economists cannot predict the turning point in the economy.
He found that of the 48 predictions made by economists, 46 missed the turning points. The forecasting skill of economists is about as good as guessing. Even the economists who can directly or indirectly influence the economy (the Federal Reserve, the Council of Economic Advisers, and the Congressional Budget Office) had forecasting records that were worse than pure chance.
There are no economic forecasters who consistently lead the pack in forecasting accuracy and consensus forecasting doesn’t improve accuracy.
Read the rest in Evidence-Based Investing. Get Your Complete Copy of the Book Now.
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