Most short-term opinions on markets or any system that includes human beings as part of the machinery are generally worthless in a financial sense. Mostly we can’t predict what side of the bed our children will emerge from in the morning so why anyone should expect to be able to accurately forecast the outcome of the interactions of millions of people remains an abiding mystery.
Despite this reams of words are written each day by pundits safe in the knowledge that today’s news is forgotten tomorrow and that expressing unwarranted certainty is the way to succeed. They’ve learned that extreme, albeit incorrect, precision will fool most of the people most of the time, and no one ever checks.
We’re especially attracted to people who express certainty about the future. Since the future is virtually unforeseeable these gurus are, at best, deluding themselves but they’re tapping into our desire to believe that the world isn’t the nasty, brutish and unpredictable place it really is.
The counter to this is that forecasters who are precisely wrong will, eventually, be uncovered and revealed to be the fraudulent charlatans they really are. This should be the effect of the marketplace on ideas but unfortunately it turns out that we tend to disregard feedback, which presumably is why there are thousands of media pundits out there pushing their unsubstantiated opinions onto a gullible public, safe in the knowledge that they can write or say pretty much anything they want, because no one will ever hold it against them.
When Joseph Radzevick and Don Moore analysed peoples’ responses to overconfident investment judgements in Competing to be Certain (But Wrong) they noted that the preferred advisors were the ones that expressed the most confidence that they were right – even though they were frequently wrong – yet they didn’t suffer any reputational damage. This aligns with Philip Tetlock’s famous research on political pundits that suggests the more famous the procrastinator the worse their prediction accuracy (see: Expert Political Judgment: How Good Is It? How Can We Know?).
Radzevick and Moore suggest three possible explanations for our credulousness in the face of certainty. One idea is that we simply forget where our ideas come from, so that when things go wrong we don’t remember who to blame. A second one is that the advisor argues that they weren’t really wrong or that they were nearly right. Finally, there’s the “this time it’s different” gambit, where previous failures were a blip which will be fixed under the latest set of circumstances.
Whatever the reason, extreme confidence in a pundit is a quality that many people seem attracted to, and the hallmark of this is overprecision. Moore and Healy identified three types of overconfidence in The Trouble with Overconfidence, which tend to get muddled in the literature. The first type is overestimation of our abilities, the second is overplacement where people believe themselves to be better than the average and the third is overprecision, what the researchers describe as “excessive certainty about the accuracy of one’s beliefs”. Overprecision seems to be the quality we’re most attracted to in gormless, incompetent and popular pundits and advisors.
Hindsight and History
Overestimation is inherent in the human condition. When Baruch Fischhoff looked at the impact of historical knowledge on judgement, in Hindsight ≠ foresight: the effect of outcome knowledge on judgment under uncertainty, he discovered that participants significantly overestimated what they would have known without prior knowledge and also what others did know without such knowledge. The impact of this is a failure to properly learn the lessons of history – we can’t possibly address the real impact of uncertainty, that there are some things we can never predict, unless we overcome the problem of overestimation.
So, hindsight bias leads to overestimation and means that we fail to properly understand the lessons of the past; which in the case of pundits means that they fail to recognize that they’re completely useless. As in so many biases no one is exactly sure what it is that makes us so inclined to be fooled by overprecision, but one idea is that it’s more valuable in communication – after all, there’s nothing so annoying as someone who won’t put a figure on some important category.
Checks and Balances
Unfortunately a bias towards more precise information also opens us up to being biased towards less truthful information. It’s not much good being precise in your estimate of earnings if you’re utterly wrong about them but, oddly, in normal life people who are confident in their predictions are usually reasonably accurate:
“When it is difficult to get accuracy data (as with predictions of the future) then the advisor’s own confidence that he or she has made the correct prediction may be the only clue available, and it may well be better than nothing. It may therefore be perfectly sensible for people to prefer confident advisors.”
This naturally occurring expectation that confidence plus precision equals accuracy may be the cause of our unwarranted attraction to clueless pundits. Of course, we should add our own estimates of the likelihood of anyone being able to be precise about anything, and to develop checks and balances to gauge the accuracy of such precision. Simply accepting a confident individual’s assurances about the likely outcome of events that are fundamentally unpredictable is about as sensible as relying on, say, a committed politician’s evidence about the existence of weapons of mass destruction or an investment guru’s expectations of indefinite 13% stockmarket growth.
However, But ...
In fact Radzevick and Moore propose that markets are likely to exaggerate the impact of overconfidence amongst pundits. Our infallible attraction to overprecise and overconfident estimates causes a kind of market failure, where advisers with these attributes continue to attract fame and fortune despite their manifest failures, driving out more cautious opinions. In short, we get the pundits, gurus and advisers we merit, and we often pay a full price for it.
Obviously we should seek out more cautious advisers, and try to avoid people who provide spuriously accurate estimates. Challenging the numbers is always a worthwhile exercise, although you’ll find it hard to get closure. If it’s your money at stake then you shouldn’t care, just avoid them. Someone who constantly expresses overprecise expectations is a danger, and the only person they'll be generating money for is themselves.
However, there is a way to identify more cautious analysts through simple analysis of their texts. They tend to use the words “however” and “but” a lot: they hedge their bets, which makes them less attractive to people who don’t care to think for themselves, but at least tells us that they’re aware of their own fallibility. But you might want to read the research for yourselves, rather than just taking my word for it.