We posted earlier on the many problems involved with financial forecasting. A couple of items further emphasize this hypothesis.

Michael J. Mauboussin at Legg Mason has a research piece up on forecasting. Are You an Expert? reviews the literature on forecasting from the perspective of investment managers. According to Mauboussin investor expertise is not readily transferable. Expert investors possess some combination of unique mental models, flexible thinking and old-fashioned hard work. If you are interested in this topic it is worth reading the piece. Thanks to bankstocks.com for the pointer.

CXO Advisory Group pulls some interesting quotes from Emanuel Derman’s autobiography, My Life as a Quant, in regards to financial modelling. According to Derman, financial models pale in comparison to physics models, due in large part to the difficulty in truly modelling the marketplace. This is because human psychology is not an easy egg to crack.

In short, we as humans are poor at predicting the future, but do not hestitate to do so. Investors who wish to become experts will need to rely on their own mental models and severly discount third-party forecasts.

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