Join        Login             Stock Quote

The Fallacy Of Predictability

 April 11, 2012 09:32 AM

By Darrel Whitten
each market crash or major economic recovery/bull market there are inevitably many so-called gurus claiming that they got it right, i.e., "called" the market or forecast the economy correctly. Research departments of sell-side and buy-side financial firms as well as independent forecasting firms all tout their "accurate calls". But as MarketWatch.com's Paul Farrell pointed out, the investment research and economic forecasting industry is built on a huge fallacy, which is the myth that mere humans can predict the future with any sort of consistent accuracy. 

Farrell quotes Brandeis University's International Business School professor William Sherden's research; "The Fortune Sellers: The Big Business of Buying and Selling Predictions:" Professor Sherden's 10 findings shoot the myth that any forecaster has a clue about the future.
  • No better than guessing: The forecasting skill of economists is on average about as good as guessing. Even the predictions from the President's Council of Economic Advisors, the Federal Reserve Board and Congressional Budget Office are often worse than guessing.
  • No long-term accuracy: Forecasting accuracy declines with longer lead times. 
  • Cannot predict turning points: Economists cannot predict turning points in the economy. In fact, the vast majority of all long-term predictions fail. 
  • No leading forecasters: No particular forecasters consistently led in accuracy. 
  • No forecaster was better with specific statistics: No economic forecaster has consistently higher forecasting skills predicting any one economic statistic. 
  • No one ideology was better : No ideology consistently produced superior forecasts.
  • Consensus forecasts do not improve accuracy: (but the press still loves them!) 
  • Psychological bias distorts forecasters and forecasts: Some economists are naturally optimistic and bullish. Others are consistently pessimistic bears. Their inner mental biases and ideologies distort their research, data selection, predictions. 
  • Increased sophistication does not improve accuracy: New technologies, algorithms, computer models of the economy can make forecasts worse.

Next Page >>12
iOnTheMarket Premium


Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageGermany Is On The Rebound - Time To Buy?

Based on this year's 17% spike in the Stoxx Europe 600 Index, it seems investors have found a home in read on...

article imageIs Drought Risk In The American West An Economic Threat?

The historic and ongoing drought in California is getting harder to ignore in terms of its potential impact read on...

article imageFunds Behaving Badly

Discipline is still the key to read on...

article imageGenuine Parts Co. (GPC): This Company's Raised Dividends For 59 Years

There are 253 million cars and trucks driving along U.S. roads. And the average age of those automobiles is read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.