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Predicting the Future

March 13, 2012 | About:
One year ago, on January 4, 2011, Byron Wien, vice chairman of Blackstone Advisory Partners, made ten predictions for the coming year. Wien began making annual predictions in 1986 when he worked at Morgan Stanley.

Wien joined The Blackstone Group in September 2009 as a senior adviser to both the firm and its clients in analyzing economic, political, market and social trends. Prior to joining Blackstone, Wien was chief investment strategist for Pequot Capital and before that served for 21 years as chief (later Senior) U.S. investment strategist at Morgan Stanley.(i) It’s obvious that Wien is a pretty smart and well-connected guy.

In addition to his position and vast network of contacts around the world, he also has access to teams of analysts who feed him insight to trends way before the average person hears about them in the media.

With that kind of buildup, I’m sure you’re expecting a very high accuracy rate on Wien’s predictions. Before you glance down and see them, keep in mind that Wien himself only sees a 50% chance that any of them will come true.

The predictions cover a range of events — political, economic, and financial markets. Each prediction is scored as follows: 1.0-prediction was correct, 0.5-prediction was partially correct, and 0.0-prediction was wrong.

The Ten Surprises for 2011

Predictions Made January 4, 2011

Predictions Yes No
1. S&P 500 rises to 1500 0
2. Yield on 10-year Treasury tops 5% 0
3. Gold tops $1,600 a troy ounce 1.0
4. China’s GDP slows on currency intervention 0.5
5. Obama removes troops from Afghanistan 0.5
6. Housing improves, oversupply declines 0.5
7. Oil tops $115 a barrel/demand from emerging markets 1.0
8. Agriculture prices increase 0.5
9. Merkel works to reform Europe 1.0
10. Unemployment falls<9%, GDP growth +5% 0.5
TOTAL 5.5
Source: businessinsider.com (ii)

Wien was spot-on with his prediction that only 50% of his predictions would come true. His accuracy for 2011 was 5.5 out of 10, or 55%.

Last year was a pretty good year for him but 2010 wasn’t… he went 0 for 10. (iii)

I don’t mean to pick on Mr. Wien and his record of predictions. I just want to share with you how difficult it is to make predictions and how most of the time they are way off the mark.

Philip Tetlock, professor of psychology at the University of Pennsylvania, conducted a 20-year experiment in which 284 experts in professions ranging from professors to journalists were asked to make 28,000 predictions.

Tetlock’s finding showed that his experts’ predictions were only slightly more accurate than chance. A dart-throwing monkey would’ve beaten most of his experts.

How is it possible that experts — who have the best education, contacts, and professional experience — miss the mark by so much? And if we know that experts are so wrong, why do most people feel a need to take their predictions seriously?

101927_1331665601ckco.jpg

“He who lives by the crystal ball soon

learns to eat ground glass”- Edgar R. Fiedler, economist

Can’t get it right

There have been several attempts to explain why expert predictions aren’t worth the paper they are printed on. In a nutshell, the world is a pretty complex and complicated thing. Trying to predict human behavior under a host of conditions is downright difficult, to say the least.

Many try to see patterns in events that are simply not there. Our brains are wired to make order out of disorder and to try and make sense out of our environment. Doing so gives us the illusion of certainty and control in a rapidly changing world.

Nobel laureate Daniel Kahneman, professor of psychology, doesn’t put too much faith in predictions. He said, “Experts cannot predict better than the average reader of the New York Times.” Asked what the value added of experts’ long-term predictions is, he simply responded, “none.” Kahneman concluded:

“It's not that the world is completely unpredictable. It is that some of it is trivially predictable, and to get beyond the trivial seems to be impossible.” (iv)

If trying to predict the future is a lesson in futility, then why do we place so much weight in what the experts say?

Author Dan Gardner says that we hate uncertainty so much, we listen to experts because they fill that desire: “Whether sunny or bleak, predictions about the future satisfy the hunger for certainty. We want to believe. And so we do.” (v)

No predictions here

Nowhere is the craving to fill our desire for certainty more pervasive than in the financial markets. The outcome of accurate predictions can yield enormous wealth, power, and recognition. Yet it is in the financial markets that predictions oftentimes look silly only six to twelve months after they’re made.

Trying to predict a company’s earnings five to ten years out is virtually impossible. Given how complex companies are, analysts spend a lot of brainpower predicting a company’s quarterly earnings…most of the time with terrible results.

We base our selections on information that is current: the balance sheet, earnings, free cash flow, and several other criteria. We’re basically taking a snapshot of the company based on what is known and not what is unknown.

Buying financially sound companies when they are selling at bargain prices frees us from playing a guessing game about what is unknown and unknowable.




(i) http://www.blackstone.com/cps/rde/xchg/bxcom/hs/firm_ourpeople_byron_wien.htm.

(ii) http://www.businessinsider.com/byron-wien-2011-predictions-2011-12#.

(ii) http://www.zerohedge.com/article/byron-wiens-prediction-track-record-zero-out-ten.

(iv) Daniel Kahneman, Legg Mason Capital Management Thought Leader Forum 2011.

(v) Gardner, Dan. Future Babble: Why Expert Predictions Are Next to Worthless, and You Can Do Better.

About the author:

Charles Mizrahi
Charles Mizrahi is editor and publisher of Hidden Values Alert newsletter, which focuses on finding stocks trading significantly lower than their underlying business value. He has over 30 years experience in the financial world as a money manager and investor.

Visit Charles Mizrahi's Website


Rating: 4.4/5 (17 votes)

Comments

Patience Investing, Inc.
Patience Investing, Inc. - 2 years ago
Thanks Charles for bringing up an important issue.

I wonder why so many economists (that includes some Nobel laureates as well) are trying to accomplish something (for example, forecasting in this case) even if they know it is simply impossible to do so.

I thought the following two brainy quotes by Edgar R. Fiedler on forecasting might be useful:

1. If you have to forecast, forecast often.

2. The herd instinct among forecasters makes sheep look like independent thinkers.

3. If a camel is a horse designed by a committee, then a consensus forecast is a camel's behind.

4. The moment you forecast, you know you're going to be wrong, you just don't know when and in which direction.

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