Academic research continue to show that models beat experts. Here’s what we had said back in September last year:
Models beat experts. Models represent a ceiling, not a floor. Humans with a model improve performance, but underperform the model. Humans without a model are ineffective. Following a model, but then trying to add value via intuition, actually destroys the model’s benefit and causes investors to underperform the market. Experts need to design the models, but COMPUTERS NEED TO IMPLEMENT THE MODEL.
We also discussed the “Seersucker Theory” where people generally ignore available evidence and continue paying for forecasts.
We often fool ourselves into believing that the more we pay for advice, the better it is.
One explanation is that the client is not interested in accuracy, but only in avoiding responsibility. A client who calls in the best wizard available avoids blame if the forecasts are inaccurate. The evasion of responsibility is one possible explanation for why stock market investors continue to purchase expert advice in spite of overwhelming evidence that such advice is worthless.
It is not that we are dumb. It is just that we cannot help ourselves. There’s a term for it: “identity protective cognition thesis”, which is a self-sabotage of cognitive ability where it conflicts with a deeply-held belief. Basically, human beings have a tendency to want to hear information presented in the form of a story. This presents the risk of us getting psychologically attached to a single narrative prediction, which could then cloud our interpretation of new and potentially ‘inconvenient’ facts.
Say, for example, you have identified yourself as a raging bull on some US tech stock, the fact such a bias could lead you to make mistakes when analysing fresh data on that business does not bode well for the success of your portfolio.
John Maynard Keynes said: “When my information changes, I alter my conclusions. What do you do, sir?”
Turns out most of us will ignore the information and keep trucking. Is it any wonder then, that models beat experts?
Your world at 9am
The CBI has registered a Preliminary Enquiry (PE) against former Sebi Chairman C B Bhave and ex-member K M Abraham, and against Jignesh Shah-founded FTIL and MCX. The probe by CBI is to ascertain how MCX-SX was granted permission despite opposition by Sebi when Bhave was head of the regulatory authority. (ET) MCX 495.30 -21.50 (-4.16%) FINANTECH 365.10 -13.05 (-3.45%)
Goldman Sachs India AMC will start selling India’s first mutual fund scheme aimed at helping the govt divest part of its stake in state-run companies. Retail investors during the New Fund Offer (NFO) stage, or when the asset manager is raising subscriptions, will get one free unit for every 15 held if they hold on to the units for a year. Also, investors will get a 5% discount at the time of the initial subscription. (LiveMint)
Sebi likely to raise fresh concerns of institutional investors that Maruti is at risk of being reduced to a shell company. (LiveMint) MARUTI 1,737.00 -10.35 (-0.59%) Also: Broken Promises
China’s economy is losing speed. Industrial output rose 8.6% in the January-February period, down from +9.7% in December. The slowdown was across the board, including retail, manufacturing, housing and investment. Chinese Premier Li Keqiang said “we are not preoccupied with GDP growth.” (WSJ, WSJ)
A tenth of all short-term FX loans — and 750,000 or so tonnes of copper in Shanghai bonded warehouses alone — is used to back financing deals. (FT)
Good luck, have a nice weekend, and happy Holi!
Malcolm Gladwell’s book “Outliers” popularized the “10,000 hour rule,” which suggests that many people who have reached the top of their fields got there, in large part, due to practicing for 10,000 hours.
In the new paper, published in Intelligence, the authors conclude that practice can only explain one-third of the variation in sucess in chess and music, and probably other fields as well. One player in a 2007 study, for example, “took 26 years of serious involvement in chess to reach a master level, while another player took less than 2 years to reach this level.”
They suggest that other factors together explain the lion’s share of success, such as intelligence, starting age, personality, and other genetic factors.
Source: Popular Science
Your world at 9am
CPI inflation falls to two-year low in February, factory output grows 0.1% in January after three months of contraction. (LiveMint)
Infosys Chief Executive S.D. Shibulal, speaking at a Barclays investors conference in Bangalore, said clients reporting slowdowns across various industries led to “unanticipated project ramp downs and cancellations in Q4 (ending in March).” Shibulal also pointed out “mismatches between skills that clients need and what we have.” (Investors) The ADR dived -6% in NYSE yesterday. We had written about the challenges faced by Indian IT here: Turning coding coolies into solution architects INFY 3,390.00 32.40 (0.96%)
Tighter credit has this week helped push Chinese copper prices to their lowest level since 2009 and dragged iron ore prices close to $100 a tonne. (FT)
Your world at 9am
Lower food prices may have at last helped India’s inflation rates ease in February. The WPI ikely eased to 4.95% last month and the CPI is expected to clock in 8.30% in February down from an 8.79% increase in January. (WSJ)
Quick Heal, a company that started in 1990 as a calculator and computer repair shop with an initial capital of Rs. 15,000, is going to be the first pure software products company from India to list. (ET)
Maruti has about Rs.7,500 crore in cash reserves. Special dividend? No. They are planning to invest it in real estate for dealers, mutual funds, debt funds and fixed maturity funds. And maybe even in overseas plants for Suzuki. Ridiculous. (LiveMint, Broken Promises) MARUTI 1,737.00 -10.35 (-0.59%)
A third of farming households, a key electoral constituency, are likely to vote for the BJP. The UPA did such a fine job of pilfering that many farmers have not heard of its farmer welfare programs. For instance, only 53% have heard of the loan waiver scheme in which some Rs.70,000 crore of agricultural loans was written off, and only 10% benefited from it. (LiveMint)