You Are Bad at Making Predictions

There’s a new pop-stats book making the rounds, and it’s been generating quite a bit of buzz – at least, as far as pop-stats books go. Nate Silver, who is probably best known as the author of the New York Times’ FiveThiryEight politics blog, delves into the tricky art of predictioneering in The Signal and the Noise: Why So Many Predictions Fail – but Some Don’t.

After the style of one of our favorite authors – Nassim Nicholas Taleb – Silver is adding to the volumes describing how complicated and messy it is to make predictions. The reviews so far are generally positive, and anything aimed at taking down the over-inflated talking heads – who lurch from one confident forecast to another without pausing to tally up their misses – is welcome. Unfortunately, what we like to think of as common wisdom these days doesn’t seem to be sinking in – especially in the financial world. That’s why, when we see articles like today’s gem from CNN Money entitled “The Stock Market Rally is Over,” we can only shake our heads:

Despite a slowing global economy, political and fiscal uncertainty and ongoing turmoil in Europe, the U.S. stock market has delivered quite the performance this year, thanks in large part to stimulus efforts by the world’s central banks.

But experts believe the robust gains are now remnants of the past. In fact, according to an exclusive CNNMoney survey of 37 investment strategists and money managers, the S&P 500 will finish 2012 at 1,440, up a healthy 15% for the year but in the exact same spot where it started the fourth quarter.

Sigh. With no acknowledgement of uncertainty, the analysts’ guesses are averaged to come up with a straightforward “prediction” produced by their survey. In cases like these, we’d be much better served framing the analysts’ guesses as probabilities: what are the odds that the market will end Q4 up, down, or flat, and how confident can we be in assigning such probabilities? Hopefully the more that writers like Silver tackle these sorts of fallacious prediction-making, the less we’ll have to put up with such terrible forecasts in the future.

Not all of the reviews of Silver’s new tome are glowing – several reviewers complain that Silver bounces a little too frequently between topics, and express disappointment that the book doesn’t do more to provide some practical instruction on improving predictions. Nevertheless, it looks promising, and is certainly going to be on our reading list in the near future.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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