Gurus' forecasts are useless for investors
by Marco Liera - 27/01/2013
As usual, the annual World Economic Forum in Davos (committed - as stated in its mission - to improve the state of the world) has delivered a huge amount of forecasts and scenarios. A funny habit is listing the mistakes made by some “gurus” at previous year’s Forum. The wrong forecasts of 2012 Forum were the ones that predicted the self-destruction of the euro and similar disasters, argued by famous hedge fund managers (John Paulson), Nobel laureates (Joseph Stiglitz) , and professors who have skillfully captured a global visibility (Nouriel Roubini).
Mind you, only the one who does not make any forecast is never wrong. Indeed, among the various areas of knowledge, economics and finance are two where experience and research are not rewarded in terms of improved forecast accuracy. Nassim Taleb, the author of “The Black Swan”, recalls that a taxi driver may predict the trend of stock markets and GDP better than a great economist. That is why it would be appropriate to invite sooner or later some taxi driver as a speaker at Davos. But the real point is another one: should we rely on the prophecies of others (be they “gurus” or taxi drivers) to improve the quality of our financial decisions?
I believe the answer is no, just because of the high unpredictability of economic and market variables. Especially consumers should decide how to spend and invest on the basis of personal characteristics. Essentially, consumers should make financial decisions in order to minimize their risks: the risk of losing their human capital, the risk of losing their house, and the risk of losing their wealth. In this context, it is irrelevant to guess where the equity or the bond market is going, because nobody knows with the required accuracy. It is enough to be aware that at least once (between July 2007 and March 2009) global equities lost 58% inflation-adjusted. And that other asset classes instead are much less risky .
Investors should not expect from their advisors accurate predictions on market or economic trends. And they should refrain from making decisions based on their own forecasting skills. Unfortunately, it is not easy to build the relationship between an investor and his or her advisor by such an ideal model. Gurus’ forecasts are often reported on tv, in the press and on the Internet and there is no way investors should not be affected. Let's face it: investors and their advisers are genuinely concerned about gurus’ forecasts. So, why should they be ignored in newsrooms?
These behavioral and cognitive biases explain the success of many “gurus”. Few of them prefer predicting financial crashes and sharp depressions because, when they happen, everybody remembers indelibly: “The guy had told that!”. In the 80s, an analyst at Shearson Lehman, Elaine Garzarelli, earned a worldwide reputation, because she accurately predicted the Wall Street crash of October 19, 1987. Some of her subsequent forecasts proved to be less accurate. She has since then disappeared from magazines’ covers, even though she is still quite a good analyst.