Humans have a large appetite for forecasts and predictions across a broad spectrum of domains. – Michael Mauboussin*
Given this quote it is not surprising that the financial media is a voracious machine in constant need of analysts and commentators ready with clever sound bites. For this class of analysts prediction is the currency by which they gain entry into the upper echelons of media stardom. It need not matter whether these predictions turn out to be true, or even falsifiable. These analysts need only be willing and able to promulgate their predictions into the ether.
This problem is not isolated to the financial world. The cable news networks are filled with faux political strategists who provide a stream of predictions. Even the world of science has gotten caught up in this wave.
Stuart Blackman writing at The Scientist (via Arts & Letters Daily) notes how “ill-judged predictions” are damaging the authority of science. Akin to the worlds of finance and politics there are plenty of reasons for a scientist to embrace prediction. Blackman writes:
Of course, scientists have a strong incentive to make bold predictions—namely, to obtain funding, influence, and high-profile publications. But while few will be disappointed when worst-case forecasts fail to materialize, unfulfilled predictions—of which we’re seeing more and more—can be a blow for patients, policy makers, and for the reputation of science itself.
Until there is some sort of disincentive to go public with bold predictions scientists are going to continue speaking with the media. Blackman has four pieces of advice for scientists on how to “predict responsibly.” These include:
- Avoid simple timelines;
- Learn from history;
- State the caveats;
- Remember what you don’t know.
This advice is generalizable to other fields. But don’t expect financial analysts to embrace them any time soon. There is too big a pay off for those who do make a correct prediction (no matter their batting average). Not least of which is the fame that comes with media exposure.
Adam Warner at the Daily Options Report notes how there is an entire class of analysts who are more than willing to call tops and bottoms in the market. Unfortunately for the listener (or reader) these calls are useless as investment advice. He writes:
Calling the top should not be anyone’s real goal unless you aspire to a career in punditry. It has very little value whether you’re trading or tending to a portfolio. If you caught a top or bottom incredibly well once with actual money, you got lucky, don’t expect to do it again…what sounds like brilliance on TV is terrible money managing advice for everyone else.
Adam gets to the heart of the matter. Calling tops and bottoms is for aspiring pundits who are trying to look “brilliant.” The investment blogosphere is filled with analysts trying to play this game. Fortunately each of us has the option to follow those bloggers who don’t play this game.
The hard work of trading and portfolio management has little to do with bold predictions and more to do with an ongoing process of learning, improvement and refining one’s craft. While that does not sound nearly as sexy as making predictions, it does have the benefit of having something to do with actual money management.
*Michael Mauboussin, Think Twice, 2009, Harvard University Press, p. 116.