Everyone Believes It, but Most Will Be Wrong

The headline to the internet link was startling: “Analyst says stocks may fall another 50%.”

A click to it brought up a video of a well-dressed stock picker, ready to predict the future with unflappable conviction.

We haven’t seen anything yet, he warned. The coming months will shower the economy with destruction on par with the Great Depression. Stocks will fall another 50%.

Who was this man? It didn’t matter. He seemed to know the future. What if he were right?

At another source – this time CNBC – a typically well-dressed analyst had more bad news. “Unfortunately, I think the markets are still going lower,” she warned. The Dow Jones Industrial Average (one of America’s oldest stock market indexes) could fall to 4,000. “I hate to say it,” she added for good measure.

It was March 2009. Stocks bottomed that week in the midst of the Global Financial Crisis, beginning one of the largest rallies in modern history, bringing the S&P 500 Index in the USA up by more than 160% since. Singapore’s Straits Times Index (SGX: ^STI) wasn’t left behind as it too benefitted from the surge and gained slightly more than a 100% in that powerful rally from its bottom.

The mass failure of seeing the impending rally in 2009 in America wasn’t a one-off event, of course. To be skeptical of experts’ forecasting ability, all you had to do was look at what transpired in 2007. Economists “say it is unlikely that the U.S. will go into a recession,” one paper reported late that year.

“[W]e don’t expect a recession in 2008,” opined another executive.

One December 2007 article was titled “The Great Recession of 2008?” Did someone finally nail it? No such luck.

“It probably won’t happen,” the article begins. “On balance, it is not likely that the United States will experience a recession in 2008.”

In the 1980s, psychologist Philip Tetlock began one of the most important research projects of the past three decades, studying how experts make predictions, who gets things right, and who gets things wrong. His inspiration came from watching experts predict the future of the Soviet Union — an event that very, very few got right. Notably, most of those who misjudged the event wouldn’t even admit that they got it wrong.

“It was hard to avoid the suspicion that what did or did not happen was almost irrelevant,” Daniel Gardner writes in his book Future Babble. No one cared, or remembered, what experts said in hindsight, which is what made Tetlock’s work so groundbreaking.

Tetlock eventually collected a database of more than 25,000 expert predictions, which he used to write what has become the bible of predictive science, the book Expert Political Judgment. The book draws one big conclusion: Most expert predictions are the equivalent of random guesses.

But, as Tetlock notes, “[t]here’s quite a range. Some experts are so out of touch with reality, they’re borderline-delusional. Other experts are only slightly out of touch. And a few experts are surprisingly nuanced and well-calibrated.”

The main distinction is that those who make the best predictions have a collection of little ideas and are always incorporating new information into their outlooks, while those making the worst predictions have one grand theory that they trumpet through thick and thin. Tetlock calls the former foxes, the latter, hedgehogs.

Pride of the wishy-washy

Foxes – a rare, peculiar bunch – share several other traits. One is that they can change their mind with ease.

During the 2004 US presidential elections, John Kerry was accused of being a flip-flopper. Most of the attacks stemmed from a comment he made describing his position on funding the Iraq War with an $87 billion appropriation. “I actually did vote for the $87 billion, before I voted against it,” Kerry explained, which his opponents pounced on as proof that he was dishonest, senile, or both. In any case, being a flip-flopper was clearly a bad thing, his opponents said.

CNBC host Larry Kudlow demonstrated a similar attitude while interviewing Arianna Huffington in 2009. “Unlike you,” Kudlow said, “I have never changed my stripes. You were a conservative Newt Gingrich supporter, then you flip-flopped into a liberal. I stay the course. … I have not changed my point of view for my entire adult life.”

Think about these views for a second. They imply that changing your mind should be looked down upon, and that it is somehow virtuous to stick with a position even when you believe that it’s no longer valid.

There’s one big reason why this is nonsense and why those who make the best predictions update or even change their views with ease: As journalist James Fallows once remarked, “What looks like tomorrow’s problem is rarely the real problem when tomorrow rolls around.”

In other words, the world is fundamentally unpredictable. Things happen that no one could have seen coming. If you can’t accept that when things change your opinions might need to change, too, you will be left anchored to a reality that no longer exists — and likely making terrible predictions.

This might sound oxymoronic. How can those who make good predictions change their minds? Because absolutely no one is always right. The goal when making predictions isn’t perfection; it’s about getting your prediction-accuracy rate to be somewhat higher than that of a coin flip. Cutting your losses, learning from mistakes, and preparing for the next forecast rather than sticking to a hopelessly wrong one is how you can become better than a coin flip. As the old saying goes, “It’s far better to be mostly right than precisely wrong.”

A good example of someone who’s not afraid to change his mind is money manager Bill Gross of investment management firm PIMCO. Earlier in 2011, Gross became bearish on U.S. government bonds, selling all of his fund’s US Treasury holdings and betting against them through derivatives. Almost immediately, it was clear that this wasn’t a wise move. So he reversed everything, jumping back into Treasuries.

While Gross’s move smacks of market timing (which isn’t exactly the smartest thing to do in investing), it’s still commendable that he admitted his mistake – “we try to be very intellectually honest and honest with the public,” he said – rather than being steadfast just for the sake of being steadfast, as if that somehow made his investors wealthy.


Foxes are also unique in that they’re skeptical of themselves. Yale economist Robert Shiller is a good example. Shiller has a nearly impeccable record of spotting bubbles. His 2000 book, Irrational Exuberance, warned that stocks were overvalued. He updated his research in 2005, this time warning that real estate was overpriced. Both times, he nailed it.

Not only have Shiller’s calls been right, but he personally developed the metrics that other analysts use to gauge whether assets are in bubble territory. He is, in a sense, a sort of godfather of bubbles. If someone has the right to speak with authority on where markets are headed, it’s him.

And yet when Shiller talks, he’s cautious almost to the point of doubtful. “I do not know the future, and I cannot accurately predict the ups and downs of the market,” he writes. When he was once asked when the American housing market might turn around, he responded: The market “could take years to be cleared out. But even that fact does not rule out a possible continuation of the rebound. These are just exceptionally uncertain times.”

He’s quick to point out where things stand historically, but he rarely attaches those views to a prediction of what might happen next — the kind of predictions those with poor track records give out like candy.

It’s remarkable, really: The man whose background makes him uniquely qualified to make predictions actively shies away from them. He’s skeptical of himself.

George Soros follows the same philosophy. Soros became one of the richest men in the world predicting what financial markets will do next. But ask him about his predictions, and you’ll quickly notice that if there’s one person skeptical of George Soros’ predictions, it’s George Soros. “I think that my conceptual framework, which basically emphasizes the importance of misconceptions, makes me extremely critical of my own decisions. I know that I am bound to be wrong, and therefore am more likely to correct my own mistakes.”

Daniel Gardner points out an old Arabic saying in Future Babble tying this all together: “Those who claim to foresee the future are lying, even if by chance they are later proved right.” Those who ultimately make the best predictions aren’t smarter than everyone else. They’re just more humble, only making broad predictions if and when the stars align, updating their views or changing their minds frequently, and having a mindset that makes them totally comfortable with being wrong.

The problem is that these people aren’t very exciting to listen to, so the media pay little attention to them. But hedgehogs, who loudly insist that they know exactly what the future holds? The media love those folks. It’s agonizing to hear that those who make the worst predictions get the most media coverage, and vice versa. But that’s exactly what Tetlock found.

Who’s next?

“When is the last time everyone predicted a recession in advance?”

That was the smart question someone asked on Twitter sometime back in Sep 2011. The short answer is: never. Yet how many experts are now forecasting a recession? And how many of us believe it?

The value in researching bad predictions is not to point fingers at those who have gotten it wrong. It’s to point fingers at those who listen to and put faith in those predictions, assuming that suddenly, this time, experts can accurately see the future when history shows, conclusively, that they can’t. It’s not the experts, but the people who listen to the experts, who are the real fools.

Think of it that way, and some really interesting questions arise. What popular predictions are experts making today that might not come true? What does everyone believe today that will end up being totally wrong? Because we know some things will fall into that category in hindsight. It can be fascinating just to think about it.

So go down the list of current popular predictions: Unemployment in the US is going to stay high for years; US national debt will rise precipitously; the American stock market will never be great again; inflation world-wide is going to surge; China owns the future.

Some of these predictions are almost certain to never come true. Which ones? No one knows. That’s the point.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Morgan Housel and first published on It has been edited for