Economics & Growth | Monetary Policy & Inflation
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The talking heads on TV give such a convincing forecast it’s hard to doubt them sometimes. But try pinning them down to a specific time frame and discrete future event – now that’s next to impossible! So it’s always a bit of a mystery whether they were right or wrong. Perhaps unsurprisingly, when such people are pinned down, their track record turns out to be very poor. It seems they are picked more for their entertainment value than their track-records. That, at least, is one of the findings of political scientist Philip Tetlock in his excellent book “Superforecasting: The Art and Science of Prediction”.
So if the talking heads aren’t up to scratch, who are the real super-forecasters? People like Doug Lorch (ex-IBM, retired, lives in Santa Barbara), Mary Simpson (independent financial consultant, formerly regulatory affairs at utility Southern California Edison), and Devyn Duffy (welfare caseworker, Pittsburgh). And what they lack in TV appeal, they make up for in their approach to forecasting.
Tetlock and his team found them as part of an Intelligence Advanced Research Projects Activity (IARPA) to improve the forecasting of political and other events. He found that the way you approach forecasting rather than your credentials or political leanings matter most. If you’re a ‘one big idea’ person (i.e. a hedgehog) you will struggle, while if you’re a pragmatic tinkerer (i.e. a fox), you will do well. He listed the eleven commandments for aspiring super forecasters:
1. Focus on questions where your handwork will pay off. So don’t bother with a question like “who will win the US election in 2028?”. It’s too far in the future to bother predicting.
2. Break big problems into smaller ones.
3. Strike the right balance between inside and outside views. There is nothing new under the sun. So first calculate the odds of an event happening based on similar ones in the past (i.e. top-down or outside view), then work-out the bottom-up/inside view of the specific event.
4. Strike the right balance between under- and overreacting to evidence. Carefully incorporate new evidence and update beliefs accordingly. The best forecasters are incremental belief updaters.
5. Acknowledge the counter-arguments. If you believe military action never works, be open to the possibility that it might. Take both views and synthesise.
6. Distinguish as many degrees of doubt as the problem permits. Your uncertainty dials needs more than 3 settings (certain, maybe, impossible). Translate vague hunches into numeric probabilities.
7. Strike the right balance between under- and over-confidence. Understand the risks of rushing to judgment and yet also of dawdling too long near “maybe”.
8. Don’t justify or excuse your failures. Conduct an unflinching post-mortem.
9. Bring out the best in others and let others bring out the best in you. Master team management: perspective taking (being able to reproduce the others’ argument to their satisfaction), precision questioning (clarify arguments so there is no misunderstanding), and constructive confrontation (learning to disagree without being disagreeable).
10. Master the error-balancing bicycle. Learning requires doing, with good feedback that leaves no ambiguity about whether you are succeeding.
11. Don’t treat commandments as commandments!
Tetlock has created the Good Judgment Project to find superforecasters and he features some big political questions of the day. It’s well worth looking at to see how his approach works in practice. You can then adapt to you own investment process. Happy forecasting.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)