How to Spot a Bad Forecaster

“One might wonder if forecasters eventually get bored with being utterly wrong and would like to give up guessing the future.” – James Montier

In The Little Book of Behavioral Investing, James Montier shares some research from Philip Tetlock, the foremost expert on, well, experts. Tetlock has performed exhaustive studies on the forecasting abilities of experts in a wide variety of fields from politics to economics to the financial markets.

His studies show that even the foremost experts in most fields are no better than a flip of the coin at predicting what’s going to happen in their particular area of expertise. In fact, in one study those with 80% confidence in their forecasts were only right 45% of the time, so even worse than a coin flip.

At this point most people know that forecasting the future of the markets is extremely difficult, but what bothers me about most soothsayers is the fact that the majority of them never admit when they’re wrong, even when there’s clear evidence in place that proves it. Tetlock discovered that there are five excuses that are used by these so-called experts on a consistent basis (with commentary from Montier):

1. The If Only Defense: “If only the Fed had raised rates, then it would have been true.” Effectively, the experts claim that they would have been correct if only their advice would have been followed.

2. Ceteris Paribus: Something outside of the model of analysis occurred; therefore it isn’t my fault.

3. I Was Almost Right: “Although the predicted outcome didn’t occur, it almost did.”

4. It Just Hasn’t Happened Yet: “I wasn’t wrong, it just hasn’t occurred yet.” This is my personal favorite.

5. The Single Prediction: “You can’t judge me by the performance of a single forecast.”

Like most level-headed investors, I find little use in basing an entire investment process around my ability to predict the future. The folly of forecasting is becoming more mainstream as we’ve seen over the past few years that no one really has any clue what’s going to happen next. The oil crash, lack of rising rates and continued stock market strength are all cases in point.

But while I think it’s good advice to ignore the noise, it’s basically impossible these days since information is so abundant. The dirty little secret is that although everyone says you should ignore forecasts, they all still look. We can’t help peaking to see what the forecasters think is going to happen, even though everyone knows most will be wrong. So if you’re going to read a bunch of 2015 market forecasts, you have to at least know how to spot the terrible ones from the not-so-terrible ones.

Tetlock got the ball rolling for me by pointing out that the worst forecasters consistently make up excuses when they’re wrong. It doesn’t even bother me that much when so many market predictions turn out to be wrong. It’s that so many make excuses after the fact and aren’t honest about it. I wish more people would just be honest about the fact that predicting the future is hard. If you want to spot a bad forecaster, someone that consistently blames forces outside of their control for being wrong is a good place to start.

Here’s some more negative knowledge if you want to act like a poor forecaster at all times:

  • Argue your case with anyone and everyone that will hear you out.
  • Use words like never, always and guaranteed.
  • Make sure to have an opinion on how to fix everything — the Fed, tax policies, fiscal & monetary policies, the Royal Family, the season finale of Homeland, the NBA draft lottery system, etc.
  • Have a complete lack of self-awareness.
  • Refuse to see both sides of any argument. Your’s is the only one that matters.
  • Make outlandish predictions that have an extremely small chance of occurring. If by chance it does happen, take credit. If not, no worries, it was just a guess.
  • Use the term black swan as much as possible.
  • Constantly predict market crashes or melt-ups. These things happen so you’re bound to be right once and a while.
  • Act with complete and utter certainty at all times. Why concern yourself with probabilistic outcomes when you know exactly how things will work out. Assume you’re going to be right no matter what.
  • Be as precise as possible. Take you estimates out to at least 2 decimal points. Ranges are for weaklings.
  • Don’t change your mind when new facts come to light.
  • Use the phrase “we’ve seen this movie before and it ends badly.”
  • Never say “I don’t know.”

The Little Book of Behavioral Investing

Now here’s the best of what I’ve been reading in between holiday meals and opening presents this week:

  • It’s hard to fire yourself, but easier to blame someone else (Alpha Architect)
  • “Assume fraud until genius is proven” (Simon Lack)
  • Good investment advice doesn’t need to be updated all that often (Abnormal Returns)
  • Paul Graham: “When experts are wrong, it’s often because they’re experts on an earlier version of the world.” (Paul Graham)
  • A dozen business and life lessons from comedians (25iq)
  • Debunking the “thought leadership” narrative (Tom Brakke)
  • What is this intrinsic value you speak of? (Philosophical Economics)
  • 2015’s Twitter must-follows, including my underrated picks (MarketWatch)
  • Strategies can beat the market but you can’t (Irrelevant Investor)
  • The New Year is a perfect time to get back to the basics of investing (Washington Post)
  • 3 lessons learned in 2014 from Cullen Roche (Prag Cap) and James Osbourne (Bason)
  • The Jimmy Fallon episode with Seinfeld was my favorite of the season (Comedians in Cars Getting Coffee)

Subscribe to receive email updates and my monthly newsletter by clicking here.

Follow me on Twitter: @awealthofcs

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Peter commented on Dec 27

    The secret to successful forecasting is to make frequent predictions.
    And only remind the public of the ones that you got right.

    Cheers .. Peter

    • Ben commented on Dec 27

      Sounds about right. Quantity over quality and have a selective memory.

  2. 10 Monday Reads | The Big Picture commented on Dec 29

    […] 2014: The year that nothing worked (Fortune) • How to Spot a Bad Forecaster (A Wealth of Common Sense) • Ten Economic Questions for 2015 (Calculated Risk) • Swedroe: How To Think About Bear Markets […]