Its Philosophy Friday, and I want to discuss in broad terms the same interesting conversation that keeps coming up:
Over the past few weeks, I keep getting that question: Whats your forecast for the economy? Where will interest rates be at the end of the year? Are Jobs going to improve?
And of course, the big one: Are you bullish or bearish?
Most of the time, I give a two part answer that goes something like this:
1) I have no idea or real opinion on that, but here are some risk factors;
2) What I find more interesting than forecasts is trying to discern what consensus is, and then war-gaming what scenarios the Street is least prepared for. What outcomes cause the greatest disruption? What are the major portfolios least positioned to handle?
That often leads to an interesting discussion, and allows me to avoid saying what I really want to say, but often don’t. It goes something like this:
“Before anyone at this table gives us their NEW forecast, I must request, and indeed insist upon, in the spirit of full disclosure and objective accuracy, on the following 2 data points:
1. What was your forecast last year at this time on the same subjects?
2. What is your overall forecasting track record over the course of your career? Prior to the 2008-09 Crisis? Since then?
I have on occasion brought that up, and it causes a delightfully uncomfortable squirming, for all the right reasons. (That’s the fast track to — heh heh — not get invited back to many dinners).
The thing I find most fascinating about the disclosure demand is what it does to the most confident (i.e., over-confident) forecasters. Humans, as I have pointed out many times, love a confident precise forecast over an accurate ambiguous one. Regardless of the obvious fact that most forecasts are bullshit, the track record disclosure does some lovely things.
A. It completely wilts the cocksuredness of most forecasters;
B. It provides a context for the forecast itself, namely, that they are mostly worthless;
C. It forces the participants to admit, both to themselves and others, that they actually have no idea what the future holds.
The next time you are in a group and some of the assembled people start making forecasts, ask the two track record questions above. Watch the stammering and rationalizing of the past performance, and the change in attitude. It is great fun!
Here’s my forecast: If you do this, you should not expect to get invited back many dinner parties in the future . . .
The Folly of Forecasting, (The Street.com, 06/07/05)
Worst Predictions for 2008 (December 31st, 2008)
Inside the Paradox of Forecasting (January 11th, 2011)
Forecasts Are Not Analysis; They are opinion (May 7th, 2013)
What’s your outlook on the markets and the economy?” (June 18th, 2013)
The Narrative Fails (Washington Post, July 19th, 2013)
Curse of the Narrative: Everybody Loves A Good Story (August 3rd, 2013)