We have always been skeptical about forecasting experts. However, skepticism about forecasts is nothing new. Lao Tzu, a 6th century poet is quoted as saying: “Those who have knowledge don’t predict. Those who predict don’t have knowledge.” The Little Book of Behavioral Investing has an entire chapter dedicated to explaining why Forecasting is a Sham. And yet, people are willing to pay heavily for expert advice. They generally ignore available evidence and continue paying for forecasts.
As J. Scott Armstrong so eloquently put it: “No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers.” This is the Seersucker Theory.
Its not that experts are useless. But expertise beyond a minimal level is of little value in forecasting change. This conclusion is both surprising and useful, and its implication is clear: Don’t hire the best expert, hire the cheapest expert.
However, we often fool ourselves into believing that the more we pay for advice, the better it is. Armstrong goes on to say: 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.
The whole paper is worth a read and raises some important questions about our own beliefs.
- The Excuses Cheat Sheet (stockviz.biz)
- Overcoming the 5 common mistakes that investors make (stockviz.biz)