“A 40% Chance”

Rolfe Winkler and Justin Lahart have a biting piece in today’s WSJ on how market gurus go about making their claims non-falsifiable.

This is one of my pet peeves. You can see my Buy List all the time. My track record goes back more than a decade. Yet there are lots of famous market gurus who weasel their way out of one terrible call after another. Peter Schiff and Nouriel Roubini are prime examples.

Winkler and Lahart say that when in doubt, claim that your forecast had a 40% probability. That’s the sweet spot. If you’re right, you’re a genius. If you’re wrong, then you never said it was absolutely going to happen.

The nice thing about 40% is that you never have to say you were wrong, says Peter Tchir, a market strategist at Academy Securities. Say you predict the Dow Jones Industrial Average has a 40% chance of hitting 30000 before year-end.

“Get it right and you can say ‘See, I was telling everyone it could happen,’ ” he says. “Get it wrong and you can weasel your way out: ‘I didn’t say it was likely, I just said it was a strong possibility.’ ”

(…)

“Pundits and gurus master the art of going out on a limb without going out on limb,” says Philip Tetlock, a professor at the University of Pennsylvania who has made a career analyzing which people forecast well, and why. One of his pet peeves is how gurus use vague terms like “distinct possibility” instead of percentage odds when they describe probabilities. That makes it easy to wiggle out of, or take credit for a forecast, since it isn’t clear at all what a distinct possibility is.

But one drawback of percentage odds, Mr. Tetlock says, is that people are often unclear on what they actually mean.

(…)

Courageous contrarian calls are the best way forecasters capture the public’s attention, and get television time. New York University Professor Nouriel Roubini was dubbed “ Dr. Doom ” for correctly predicting the financial crisis. Then in 2010 he projected a 40% chance of a “double-dip recession” in the U.S. It didn’t happen.

Mr. Roubini says he doesn’t remember the projection, but that he takes pride in sticking his neck out, as with his latest call that Bitcoin is the biggest bubble in history and will go to zero.

“I would not rule out that I’ve committed the sin of the 40% rule,” said Prof. Roubini. “Everybody has done so.”

Posted by on February 27th, 2018 at 11:13 am


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