Of market experts and their predictions

It is tough to make predictions, especially about the future - Yogi Berra
One of the professional hazards of being a business journalist is trying to answer the question, “Where do you think the market is going?” My answer to this question always is: “If I knew, I wouldn’t be a journalist.”

But, everyone is not as lucky. Some of us have to try and answer this question day in and day out - among them, business news channels, journalists covering the stock market and so-called ‘stock market experts’. These are the people who present the stock market as a big event every day.

In the book, What Goes Up, The Uncensored History of Modern Wall Street, by Eric J Weiner, Tom Rogers, former president of NBC Cable, says, “At CNBC, what we intended to do was give people a sense that every day you had this huge event, the way a football game is a huge event on Sundays.”

And in their zeal to present everyday as a big event, the various business media experts have an explanation for every rally, every sell-off and everything else that happens in between.

But, it’s hardly the case that a particular rally or a particular sell-off happens because of what they serve. Mostly, explanations start pouring in after the market moves.

As John Allen Paulos points out in his book, A Mathematician Plays the Stock Market, “Because so much information is available - business pages, companies’ annual reports, earnings expectations, alleged scandals, online sites, and commentary - something insightful sounding can always be said.”

By having an explanation for everything, the business media and its experts end up oversimplifying things.And this leads to a lot of people, who do not have a good understanding of the stock market, thinking that they know more than they actually do and then investing in the stock market.

As Bill Griffeth, an anchor with CNBC, points out in What Goes Up, “My take is, and this is probably controversial and I don’t know if the people at CNBC would want me to say this, but there were lots of people watching us in the late nineties who had no business watching CNBC because they didn’t understand fully how the market works, or the companies they were investing in, or the investment process.”

The oversimplification at times magnifies the effect of stock market movements. As Nicholas Nassim Taleb points out in his book, Fooled By Randomness, “The market movements in the eighteen months after September 11, 2001, were far smaller than the ones that we faced in the eighteen months prior - but somehow, in the mind of investors, they were very volatile.
The discussions in the media of the “terrorist threats” magnified the effect of these market moves in the people’s heads. This is one of the many reasons that journalism may be the greatest plague we face today - as the world becomes more and more complicated and our minds are trained for more and more simplification.”

But, why should we be apprehensive of such experts and their analyses. As Taleb writes in The Black Swan, The Impact of the Highly Improbable, “Simply, things that move, and therefore require knowledge, do not usually have experts, while things that don’t move seem to have some experts.

In other words, professionals that deal with the future and base their studies on the non-repeatable past have an expert problem. I am not saying that no one who deals with the future provides any valuable information, but rather that those who provide no tangible added value are dealing with the future.”

Stock brokers, economists and financial forecasters fall in the list of experts who have to deal with future and base their decisions on a non-repeatable past.

“You can watch these economists talk, theorising eloquently and convincingly. Most of them earn seven figures and they rank as stars, with team of researchers crunching numbers and projections. But the stars are foolish enough to publish their projected numbers, right there, for posterity to observe and assess their degree of competence,” writes Taleb.
The problem with experts is that they do not know what they do not know. Lack of knowledge and delusion about the quality of your knowledge come together - the same process that makes you know less also makes you satisfied with your knowledge,” writes Taleb.

Experts keep getting it wrong and the public still keep buying their logic. As Taleb points out, “Many financial institutions produce booklets every year-end called “Outlook for 200X,” reading into the following year.

Of course they do not check how their previous forecasts fared after they were formulated. The public might have been even more foolish in buying arguments” So what is the way out of this situation? A simple solution obviously is not to follow the stock markets on a day-to-day basis.

“The more detailed knowledge one gets of empirical reality, the more one will see the noise (i.e. the anecdote) and mistake it for actual information. Remember that we are swayed by the sensational. Listening to the news on the radio every hour is far worse for you than reading a weekly magazine, because the longer interval allows information to be filtered a bit,” writes Taleb.
Source: DNA