Why Forecasters Go to Extremes

A surprise from Money Magazine … a must-read article on forecasters. Philip Tetlock, a professor of organizational behavior at the Haas Business School at the University of California-Berkeley, measured the political forecasts of some 300 experts and mapped more than 82,000 forecasts. WOW! Here’s the key takeaway:

What makes some forecasters better than others?

The most important factor was not how much education or experience the experts had but how they thought. You know the famous line that [philosopher] Isaiah Berlin borrowed from a Greek poet, “The fox knows many things, but the hedgehog knows one big thing”? The better forecasters were like Berlin’s foxes: self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability. The less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs.

Couldn’t have said it better. Take that CNBC! You really need to read the whole thing.

This reminds me of the research done a couple of years ago by Winker and Lichtendahl that basically said the competitive structure of the forecasting business created an incentive system that encouraged extremes. In other words, it’s not enough to say the market is going down. To get noticed, you have to say the market is going to CRASH. Because if the drop does indeed come, as it has with housing and the market, the media is only going to seek those who made the most extreme forecast, as they’re doing now.

And it doesn’t just work on the perma-bear side. Remember that book Dow 36,000 ?

So when you read something in the paper or hear a guru on TV spouting off absolutes and extremes, realize that the person who is spewing that advice is probably no more valuable more than this cute little critter.

Comments

[morph366]

As a pundit getting things right in a big way - even just once - can be good for your financial credentials. Those who like to be in the financial media spotlight- just as in other areas of showbiz have become niche experts with a consistent story or routine. Editors in the financial media and talk show hosts keep lists of people who are really good on some particular topic and when they want to talk to such people they don't want the interviewee to wander off message.

2009 Feb 19 07:21 AM

[Ferdinand E. Banks]

Well, I don't know how forecasters are in the US, but I know they are here in Sweden. They are human being who, for the most part, have never had an original thought in their heads, and they are burning up with jealousy at those of us who are smarter than they are.

2009 Feb 19 08:11 AM

[Nick Gogerty]

CNBC is the WWF of Finance.

2009 Feb 19 09:41 AM

[ValueInvestor]

Excellent article. Global Warming anyone?

2009 Feb 19 04:11 PM

[derryl]

How can I short global warming?

2009 Feb 19 06:43 PM