Market Predictions: It Pays to Be Wrong as Long as You're Sure

Here’s a question whose answer should be so obvious that it’s almost ridiculous I’m even asking it: Who wants accurate economic and market forecasts? The obvious answer should be EVERYONE. Sadly, the evidence is piling up that accuracy is NOT what people want. It’s confidence and extremism. Actually, it’s confidence to the point of cockiness.

Numerous studies have shown the popularity of stock market gurus has nothing to do with forecasting accuracy. Here’s one example.

Other studies (Lichtendahl and Winkler) have shown that there are reward systems in place, primarily through media exposure, that cause the greatest benefits to go to those with the most extreme predictions. Don’t predict a downturn, predict a CRASH. Don’t predict a bull market, predict Dow 36,000.

What’s striking is that there are other research studies that show that cockiness is actually a sign of a bad forecast! The most accurate forecasters were those who were “rather modest about their predictive ability”. Furthermore, the same research found, “Ironically, the more famous the expert, the less accurate his or her predictions tended to be.”

Now comes this: Humans Prefer Cockiness to Expertise. Here’s the key takeaway, with some advice to me: “The findings add weight to the idea that if offering expert opinion is your stock-in-trade, it pays to appear confident.” Note that it doesn’t say for me to be confident, just for me to appear that way.

In sum, the cockier and more extreme the forecast, the worse the performance. But cockiness and extremism mean greater popularity because of the reward systems in place. That means that greatest financial benefits go to the guru who is most likely to be wrong.

Comments

[market ace:]

You have hit the nail on the head with this article, but it is not just in finance that wild big mouths are covered more the extremist in politics, sports and "entertainment" also get the most traction in the media. Predicitng the future in economics is difficult and those that take a position that shows some common sense and does not necessarily follow the crowd can be very helpful, but those that are contrarian just for the sake of being contrarian and do not follow both the ups and downs are useless and should be avoided.

Jun 12 10:21 AM