So much for financial predictions, eh?

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CULater
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So much for financial predictions, eh?

Post by CULater » Sun Jun 16, 2019 11:22 am

The Wall Street Journal shared an amazing graphic yesterday showing predictions from 50 economists on the direction of interest rates. The average forecast for the end of June was 3.39% on the ten-year. As you can see in the chart below, not one of them came close to where rates currently are.
Image

https://theirrelevantinvestor.com/2019/ ... n-science/
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JTColton
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Re: So much for financial predictions, eh?

Post by JTColton » Sun Jun 16, 2019 11:36 am

"Nobody knows nothing" indeed!

livesoft
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Re: So much for financial predictions, eh?

Post by livesoft » Sun Jun 16, 2019 11:37 am

I'll make a prediction: There will be at least one more day in 2019 where the S&P 500 index will drop by at least 2.5% in a single day. I'm thinking some day in early October. :)
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runner3081
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Re: So much for financial predictions, eh?

Post by runner3081 » Sun Jun 16, 2019 11:55 am

Last I checked, predicting with certainty is not possible.

Unless you are Biff in Back to the Future.

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Bluce
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Re: So much for financial predictions, eh?

Post by Bluce » Sun Jun 16, 2019 1:26 pm

Maybe many of you here are familiar with this book, but I recently read The Fortune Sellers: The Big Business of Buying and Selling Predictions.

It was published in 1998 so some of the technology-driven info is a bit dated, but the premise of the book is timeless. :wink:

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willthrill81
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Re: So much for financial predictions, eh?

Post by willthrill81 » Sun Jun 16, 2019 1:29 pm

I'll make a prediction: over the long-term, interest rates will go up or down. Similarly, stocks will go up or down. Ditto for real estate, gold, commodities, and my portfolio.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Eric76
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Re: So much for financial predictions, eh?

Post by Eric76 » Sun Jun 16, 2019 1:46 pm

Somebody posted an academic study showing that global interest rates have been in a general decline for centuries. Can't find the thread, but it was fascinating.

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Taylor Larimore
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Re: So much for financial predictions, eh?

Post by Taylor Larimore » Sun Jun 16, 2019 1:52 pm

CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

HEDGEFUNDIE
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Re: So much for financial predictions, eh?

Post by HEDGEFUNDIE » Sun Jun 16, 2019 1:59 pm

Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
In this case, the prediction was about bonds. Plenty of Bogleheads were encouraging folks to go shorter in their bond holdings. Because “rates have nowhere to go but up”.

So the solution is actually this: if you have a long term investment horizon, you should have owned long term bonds.

TN_Boy
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Re: So much for financial predictions, eh?

Post by TN_Boy » Sun Jun 16, 2019 2:13 pm

HEDGEFUNDIE wrote:
Sun Jun 16, 2019 1:59 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
In this case, the prediction was about bonds. Plenty of Bogleheads were encouraging folks to go shorter in their bond holdings. Because “rates have nowhere to go but up”.

So the solution is actually this: if you have a long term investment horizon, you should have owned long term bonds.
My recollection is that:

1) While some posters were saying they wanted to go short on bonds, many (perhaps most of the more senior posters on this forum) were making the exact argument in this thread -- nobody is much good at predicting interest rates. I do not think there anything close to a consensus from BHers that people should go shorter on bonds.

2) HEDGEFUNDIE is a big proponent of long term bonds. Which have done very well in the bond bull market since the early 80s. But there is definitely not a consensus that people should go long on bonds on this forum.

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Taylor Larimore
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Re: So much for financial predictions, eh?

Post by Taylor Larimore » Sun Jun 16, 2019 4:21 pm

HEDGEFUNDIE wrote:
Sun Jun 16, 2019 1:59 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
In this case, the prediction was about bonds. Plenty of Bogleheads were encouraging folks to go shorter in their bond holdings. Because “rates have nowhere to go but up”.

So the solution is actually this: if you have a long term investment horizon, you should have owned long term bonds.
Hedgefundie:

Owning the market in good quality bonds also works as this Morningstar article reports.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

HEDGEFUNDIE
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Re: So much for financial predictions, eh?

Post by HEDGEFUNDIE » Sun Jun 16, 2019 4:39 pm

Taylor Larimore wrote:
Sun Jun 16, 2019 4:21 pm
HEDGEFUNDIE wrote:
Sun Jun 16, 2019 1:59 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
In this case, the prediction was about bonds. Plenty of Bogleheads were encouraging folks to go shorter in their bond holdings. Because “rates have nowhere to go but up”.

So the solution is actually this: if you have a long term investment horizon, you should have owned long term bonds.
Hedgefundie:

Owning the market in good quality bonds also works as this Morningstar article reports.

Best wishes.
Taylor
Let’s look at the evidence. The stock market last peaked in August 2018. If you had a 60/40 portfolio and “owned the market” for bonds, you’d still be down as of the end of May.

If you had owned Long Term Treasuries instead, you’d be up 2.6%.

https://www.portfoliovisualizer.com/bac ... 0&total3=0

MotoTrojan
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Re: So much for financial predictions, eh?

Post by MotoTrojan » Sun Jun 16, 2019 4:53 pm

willthrill81 wrote:
Sun Jun 16, 2019 1:29 pm
I'll make a prediction: over the long-term, interest rates will go up or down. Similarly, stocks will go up or down. Ditto for real estate, gold, commodities, and my portfolio.
I will predict the probability of stocks going up in the long-term is much higher than the probability that rates will go up in the long-term (note that does not mean I am predicting rates are more likely to go down than up,). There are economic forces that suggest equity will gain value, but no such uni-directional primary driving force exists for rates.

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willthrill81
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Re: So much for financial predictions, eh?

Post by willthrill81 » Sun Jun 16, 2019 5:01 pm

HEDGEFUNDIE wrote:
Sun Jun 16, 2019 4:39 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 4:21 pm
HEDGEFUNDIE wrote:
Sun Jun 16, 2019 1:59 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
In this case, the prediction was about bonds. Plenty of Bogleheads were encouraging folks to go shorter in their bond holdings. Because “rates have nowhere to go but up”.

So the solution is actually this: if you have a long term investment horizon, you should have owned long term bonds.
Hedgefundie:

Owning the market in good quality bonds also works as this Morningstar article reports.

Best wishes.
Taylor
Let’s look at the evidence. The stock market last peaked in August 2018. If you had a 60/40 portfolio and “owned the market” for bonds, you’d still be down as of the end of May.

If you had owned Long Term Treasuries instead, you’d be up 2.6%.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
And had you owned GLD instead, you'd be up 8.65%.

Backtests over such short periods of time are close to meaningless.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

randomguy
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Re: So much for financial predictions, eh?

Post by randomguy » Sun Jun 16, 2019 5:04 pm

HEDGEFUNDIE wrote:
Sun Jun 16, 2019 4:39 pm


Let’s look at the evidence. The stock market last peaked in August 2018. If you had a 60/40 portfolio and “owned the market” for bonds, you’d still be down as of the end of May.

If you had owned Long Term Treasuries instead, you’d be up 2.6%.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Lets look at some more evidence for another 10 monthish period.

https://www.portfoliovisualizer.com/bac ... total3=100

Hmm total bond at 12.66% and EDV at -.75%. What is the moral of the story? Anything can look good or bad when looking at 10 month periods. It is useless. You would expect on average long bonds to return more than short/intermediate bonds. But every now and then the risk shows up and you have to pay the price.

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Kevin M
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Re: So much for financial predictions, eh?

Post by Kevin M » Sun Jun 16, 2019 5:21 pm

HEDGEFUNDIE wrote:
Sun Jun 16, 2019 4:39 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 4:21 pm
HEDGEFUNDIE wrote:
Sun Jun 16, 2019 1:59 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
In this case, the prediction was about bonds. Plenty of Bogleheads were encouraging folks to go shorter in their bond holdings. Because “rates have nowhere to go but up”.

So the solution is actually this: if you have a long term investment horizon, you should have owned long term bonds.
Hedgefundie:

Owning the market in good quality bonds also works as this Morningstar article reports.

Best wishes.
Taylor
Let’s look at the evidence. The stock market last peaked in August 2018. If you had a 60/40 portfolio and “owned the market” for bonds, you’d still be down as of the end of May.

If you had owned Long Term Treasuries instead, you’d be up 2.6%.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Yeah, it works out that way when the long bond yields decline. Looking at a slightly longer period, it went the other way:

Image

(Portfolio 1 is with total bond, Portfolio 2 is with long bond)

Source

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

l1am
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Re: So much for financial predictions, eh?

Post by l1am » Sun Jun 16, 2019 5:41 pm

Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
Why is it so difficult to predict, because the market moves without reason, or the reasons are too complex?

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willthrill81
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Re: So much for financial predictions, eh?

Post by willthrill81 » Sun Jun 16, 2019 5:44 pm

l1am wrote:
Sun Jun 16, 2019 5:41 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
Why is it so difficult to predict, because the market moves without reason, or the reasons are too complex?
The market is a collection of millions of individual entities, all acting in an interdependent fashion. And then there are myriad unpredictable factors that influence it as well. That's not to say that we cannot potentially make meaningful estimates, but precise predictions are impossible.

"It's difficult to make predictions, especially about the future."
-Danish proverb
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MathIsMyWayr
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Re: So much for financial predictions, eh?

Post by MathIsMyWayr » Sun Jun 16, 2019 6:17 pm

l1am wrote:
Sun Jun 16, 2019 5:41 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
Why is it so difficult to predict, because the market moves without reason, or the reasons are too complex?
Former, reasons are complex. Future depends not only on today, but also has memory. It also does not always have a stable solution, but is often in the non-stable region. In the end, "too complex" is not a much better answer than "without reason". However, it is definitely not a Markov process.

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Stinky
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Re: So much for financial predictions, eh?

Post by Stinky » Mon Jun 17, 2019 7:17 am

JTColton wrote:
Sun Jun 16, 2019 11:36 am
"Nobody knows nothing" indeed!
This pretty well sums it up. Even the "experts" totally missed this one. (And who decided that these guys are "experts"???)

Adopt an investment policy, and stay the course.
It's a GREAT day to be alive - Travis Tritt

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rh00p
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Re: So much for financial predictions, eh?

Post by rh00p » Mon Jun 17, 2019 7:39 am

"The future ain't what it used to be."
~Yogi Berra
Preparing for the worst. Hoping for the best.

WillRetire
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Re: So much for financial predictions, eh?

Post by WillRetire » Mon Jun 17, 2019 8:11 am

Robert Kessler is occasionally a guest on WealthTrack (most recently 3/29/19), and his perspective is always original, thoughtful and therefore interesting. He doesn't push predictions of 10-year treasury rates but he does believe that world-wide growth will be low and slow, and rates could very well move lower.

Every time he has been on the show in recent memory, the host (Consuelo Mack) challenges him aggressively on his low rates/slow growth concerns because what he says is so counter to conventional wisdom. He always answers with specifics which is refreshing.

He doesn't say don't hold equities, but he does urge investors to be prepared for prolonged market downturns by holding some treasuries, even long-term, as part of their portfolio, i.e. Hold something for savings, just in case; don't "invest" everything you own, have "savings" too.

Link to his March 2019 appearance on WealthTrack:
https://wealthtrack.com/treasury-bond-m ... e-shelter/

P.S. He is an expert on Treasuries, and his firm makes money trading them, but his advice on wealthtrack is generally targeted to average investors.

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Tycoon
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Re: So much for financial predictions, eh?

Post by Tycoon » Mon Jun 17, 2019 8:19 am

Duh...
Emotionless, prognostication free investing. Ignoring the noise and economists since 1979. I see the world as it is; not how I wish it to be.

chevca
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Re: So much for financial predictions, eh?

Post by chevca » Mon Jun 17, 2019 8:25 am

I forget the exact wording, so I won't quote him. But, in Larry Swedroe's Bond book he said something about if predicting the stock market is difficult, predicting the bond market is about impossible. Seems about right. Even when it seems there's only one way interest rates can go, they don't go that way...

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Re: So much for financial predictions, eh?

Post by nisiprius » Mon Jun 17, 2019 8:30 am

Great find, CUlater.

And it can't be emphasized too much. I don't think the average retail investor, who reads articles in the financial press, truly understands just how bad and how useless expert forecasts are.

Vanguard published this chart a few years ago:

Image

One point of interest in the Vanguard chart is that the "hairs" off the side are the predictions made by the market itself, not by a panel of experts, so all the supposed wisdom of crowds comes into play.

It is also noteworthy that April 2014, Bloomberg polled a panel of 68 economists for their forecasts of what the 10-year treasury rate would do over the next six months. 68 out of 68, 100%, unanimous, every single one said that interest rates would go up. Interest rates went down.

And yet, people take this stuff seriously, to the point of considering it actionable information and a reason not to invest in bonds because "interest rates can only go up," ignoring the obvious facts that
  • Interest rates can go any darn way they please,
  • Interest rates can go down even when they are at zero (if I had a nickel for everyone who said "they're at zero, they can't go lower" I'd have, easily, thirty-five cents...)
  • Expert forecasts of interest rates are probably less reliable than a toy German "weather house..."
  • The past actual real-world effects of interest rate rises on typical "core" bond funds have not come anywhere close to resembling apocalyptic language used by "bond bubble" alarmists. In fact, people kept posting about the terrible things that will happen "when" interest rates rise "as they must," even after interest rates actually rose and nothing dramatic happened.
Image
Last edited by nisiprius on Mon Jun 17, 2019 9:08 am, edited 1 time in total.
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ohai
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Re: So much for financial predictions, eh?

Post by ohai » Mon Jun 17, 2019 8:30 am

Hi. This graph is certainly interesting and shows how much expectations of "experts" have deviated from reality.

However, there is a flaw with this sort of poll. Just because the "best guess" of everyone was not correct, does not mean that their analysis was bad.

A reasonable economist would submit a possible distribution of outcomes: [10% < 2.00%, 20% between 2.00% and 2.25%, 30% between 2.25% and 2.50%... and so on]. In this case, the middle prediction could still have been the best guess. Things that have 10% likelihood happen all the time. If you asked me to guess where the stock market will end this year, I might say up 5% from now, but there is obviously a wide distribution of possible outcomes.

I don't know the confidence level of these economists on their best guess in the article, but the question definitely sets them up for apparent failure.

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Re: So much for financial predictions, eh?

Post by Bluce » Mon Jun 17, 2019 8:36 am

chevca wrote:
Mon Jun 17, 2019 8:25 am
I forget the exact wording, so I won't quote him. But, in Larry Swedroe's Bond book he said something about if predicting the stock market is difficult, predicting the bond market is about impossible. Seems about right. Even when it seems there's only one way interest rates can go, they don't go that way...
I remember "The Taper Tantrum," in the spring of 2013 I believe, when all the "experts" said rates can only go up and will go up. That petered out, then last spring rates again were on the march and would "normalize in a year or two." So much for that.

Who was it that said: "Economists exist to make weather forecasters look good" -- ?

WillRetire
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Re: So much for financial predictions, eh?

Post by WillRetire » Mon Jun 17, 2019 8:53 am

Tycoon wrote:
Mon Jun 17, 2019 8:19 am
Duh...
Care to elaborate?

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HomerJ
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Re: So much for financial predictions, eh?

Post by HomerJ » Mon Jun 17, 2019 8:59 am

TN_Boy wrote:
Sun Jun 16, 2019 2:13 pm
HEDGEFUNDIE wrote:
Sun Jun 16, 2019 1:59 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
In this case, the prediction was about bonds. Plenty of Bogleheads were encouraging folks to go shorter in their bond holdings. Because “rates have nowhere to go but up”.

So the solution is actually this: if you have a long term investment horizon, you should have owned long term bonds.
My recollection is that:

1) While some posters were saying they wanted to go short on bonds, many (perhaps most of the more senior posters on this forum) were making the exact argument in this thread -- nobody is much good at predicting interest rates. I do not think there anything close to a consensus from BHers that people should go shorter on bonds.
This. Stating that "Bogleheads" were stating that "rates have nowhere to but up" is like stating that "Bogleheads" think it's possible to "time the market".

Almost exactly the opposite is true. Both things have been posted on the Bogleheads forum, but not by most veteran Bogleheads.

Every time some new poster said "rates have nowhere to go but up", most veteran members of this board responded "people have been saying that for years - nobody knows"
The J stands for Jay

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HomerJ
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Re: So much for financial predictions, eh?

Post by HomerJ » Mon Jun 17, 2019 9:01 am

rh00p wrote:
Mon Jun 17, 2019 7:39 am
"The future ain't what it used to be."
~Yogi Berra
"It's tough to make predictions. Especially about the future"

-Yogi Berra (or maybe Neils Bohr)
The J stands for Jay

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nisiprius
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Re: So much for financial predictions, eh?

Post by nisiprius » Mon Jun 17, 2019 9:32 am

ohai wrote:
Mon Jun 17, 2019 8:30 am
Hi. This graph is certainly interesting and shows how much expectations of "experts" have deviated from reality.

However, there is a flaw with this sort of poll. Just because the "best guess" of everyone was not correct, does not mean that their analysis was bad.

A reasonable economist would submit a possible distribution of outcomes: [10% < 2.00%, 20% between 2.00% and 2.25%, 30% between 2.25% and 2.50%... and so on]. In this case, the middle prediction could still have been the best guess. Things that have 10% likelihood happen all the time. If you asked me to guess where the stock market will end this year, I might say up 5% from now, but there is obviously a wide distribution of possible outcomes.

I don't know the confidence level of these economists on their best guess in the article, but the question definitely sets them up for apparent failure.
1) When the actual value lies far outside the entire range of fifty estimates by economists, something is wrong. You can't formalize it exactly, but the fact that there are fifty economists doing fifty analyses is vaguely like looking at the distribution and a range estimate.

In this case, the spread of forecasts looks to be, ballpark, close to 1.0%, and the actual value is 0.5% below the lowest of the fifty forecasts. If you assume that the standard deviation is actually 1.0%--based on a 1% range it would be expected to be much less--then the chance of a single forecast being 0.5% above the true value is about 30%. The chances of fifty of them all being 0.5% or more above the true value is 0.000000000000000000000007%. That's just the roughest of rough back-of-the-envelope estimates and I might have miscounted a zero or two on my fingers either way, but you see the point. It's absurd to say "they were right, but they just had bad luck." Look, take the square root of 0.000000000000000000000007% if I somehow needed to do that to account for, two tails or something, I don't think you can come up with any plausible statistical model in which an accurate model would be that far off more than once-in-a-millennium.

2) It's a completely different set of forecasts, but GMO, to their credit, does put ranges on their own 7-year forecasts, and apparently nobody pays any attention to those ranges or GMO's track record, because when the seven years have elapsed, the actual values are frequently well outside GMO's own stated full range. For example, see this post by longinvest

Image

3) It is much closer to the truth to say "financial forecasts are so bad it is better not to pay attention to them, and positively reckess to act on them," than to say "financial forecasts are really pretty good, it's just bad luck that we've had a thousand-year flood every year."
Last edited by nisiprius on Mon Jun 17, 2019 9:41 am, edited 1 time in total.
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Re: So much for financial predictions, eh?

Post by willthrill81 » Mon Jun 17, 2019 9:39 am

HomerJ wrote:
Mon Jun 17, 2019 9:01 am
rh00p wrote:
Mon Jun 17, 2019 7:39 am
"The future ain't what it used to be."
~Yogi Berra
"It's tough to make predictions. Especially about the future"

-Yogi Berra (or maybe Neils Bohr)
Actually, Quote Investigator believes the statement to be a Danish proverb that became popularized through Niehls Bohr. :)
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: So much for financial predictions, eh?

Post by willthrill81 » Mon Jun 17, 2019 9:43 am

nisiprius wrote:
Mon Jun 17, 2019 9:32 am
ohai wrote:
Mon Jun 17, 2019 8:30 am
Hi. This graph is certainly interesting and shows how much expectations of "experts" have deviated from reality.

However, there is a flaw with this sort of poll. Just because the "best guess" of everyone was not correct, does not mean that their analysis was bad.

A reasonable economist would submit a possible distribution of outcomes: [10% < 2.00%, 20% between 2.00% and 2.25%, 30% between 2.25% and 2.50%... and so on]. In this case, the middle prediction could still have been the best guess. Things that have 10% likelihood happen all the time. If you asked me to guess where the stock market will end this year, I might say up 5% from now, but there is obviously a wide distribution of possible outcomes.

I don't know the confidence level of these economists on their best guess in the article, but the question definitely sets them up for apparent failure.
1) When the actual value lies far outside the entire range of fifty estimates by economists, something is wrong. You can't formalize it exactly, but the fact that there are fifty economists doing fifty analyses is vaguely like looking at the distribution and a range estimate.

In this case, the spread of forecasts looks to be, ballpark, close to 1.0%, and the actual value is 0.5% below the lowest of the fifty forecasts. If you assume that the standard deviation is actually 1.0%--based on a 1% range it would be expected to be much less--then the chance of a single forecast being 0.5% above the true value is about 30%. The chances of fifty of them all being 0.5% or more above the true value is 0.000000000000000000000007%. That's just the roughest of rough back-of-the-envelope estimates and I might have miscounted a zero or two on my fingers either way, but you see the point. It's absurd to say "they were right, but they just had bad luck." Look, take the square root of 0.000000000000000000000007% if I somehow needed to do that to account for, two tails or something, I don't think you can come up with any plausible statistical model in which an accurate model would be that far off more than once-in-a-millennium.

2) It's a completely different set of forecasts, but GMO, to their credit, does put ranges on their own 7-year forecasts, and apparently nobody pays any attention to those ranges or GMO's track record, because when the seven years have elapsed, the actual values are frequently well outside GMO's own stated full range. For example, see this post by longinvest

Image

3) It is much closer to the truth to say "financial forecasts are so bad it is better not to pay attention to them, and positively reckess to act on them," than to say "financial forecasts are really pretty good, it's just bad luck that we've had a thousand-year flood every year."
I really believe the underlying problem to be our inability to predict what will happen in even seemingly very simple situations, such as the movement of a double-rod pendulum, as shown below.

Image
A double-rod pendulum animation showing chaotic behavior. Starting the pendulum from a slightly different initial condition would result in a completely different trajectory. The double-rod pendulum is one of the simplest dynamical systems with chaotic solutions.
https://en.wikipedia.org/wiki/Chaos_theory
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Re: So much for financial predictions, eh?

Post by HomerJ » Mon Jun 17, 2019 9:44 am

nisiprius wrote:
Mon Jun 17, 2019 9:32 am
ohai wrote:
Mon Jun 17, 2019 8:30 am
Hi. This graph is certainly interesting and shows how much expectations of "experts" have deviated from reality.

However, there is a flaw with this sort of poll. Just because the "best guess" of everyone was not correct, does not mean that their analysis was bad.

A reasonable economist would submit a possible distribution of outcomes: [10% < 2.00%, 20% between 2.00% and 2.25%, 30% between 2.25% and 2.50%... and so on]. In this case, the middle prediction could still have been the best guess. Things that have 10% likelihood happen all the time. If you asked me to guess where the stock market will end this year, I might say up 5% from now, but there is obviously a wide distribution of possible outcomes.

I don't know the confidence level of these economists on their best guess in the article, but the question definitely sets them up for apparent failure.
1) When the actual value lies far outside the entire range of fifty estimates by economists, something is wrong. You can't formalize it exactly, but the fact that there are fifty economists doing fifty analyses is vaguely like looking at the distribution and a range estimate.

In this case, the spread of forecasts looks to be, ballpark, close to 1.0%, and the actual value is 0.5% below the lowest of the fifty forecasts. If you assume that the standard deviation is actually 1.0%--based on a 1% range it would be expected to be much less--then the chance of a single forecast being 0.5% above the true value is about 30%. The chances of fifty of them all being 0.5% or more above the true value is 0.000000000000000000000007%. That's just the roughest of rough back-of-the-envelope estimates and I might have miscounted a zero or two on my fingers either way, but you see the point. It's absurd to say "they were right, but they just had bad luck." Look, take the square root of 0.000000000000000000000007% if I somehow needed to do that to account for, two tails or something, I don't think you can come up with any plausible statistical model in which an accurate model would be that far off more than once-in-a-millennium.

2) It's a completely different set of forecasts, but GMO, to their credit, does put ranges on their own 7-year forecasts, and apparently nobody pays any attention to those ranges or GMO's track record, because when the seven years have elapsed, the actual values are frequently well outside GMO's own stated full range. For example, see this post by longinvest

Image

3) It is much closer to the truth to say "financial forecasts are so bad it is better not to pay attention to them, and positively reckess to act on them," than to say "financial forecasts are really pretty good, it's just bad luck that we've had a thousand-year flood every year."
Yep. Exactly how I feel about making investing decisions based on "expected" returns. Those predictions been so far off, so frequently, it is indeed reckless to move hundreds of thousands or millions of dollars around based on what any expert predicts.
The J stands for Jay

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Re: So much for financial predictions, eh?

Post by ohai » Mon Jun 17, 2019 9:48 am

nisiprius wrote:
Mon Jun 17, 2019 9:32 am
ohai wrote:
Mon Jun 17, 2019 8:30 am
Hi. This graph is certainly interesting and shows how much expectations of "experts" have deviated from reality.

However, there is a flaw with this sort of poll. Just because the "best guess" of everyone was not correct, does not mean that their analysis was bad.

A reasonable economist would submit a possible distribution of outcomes: [10% < 2.00%, 20% between 2.00% and 2.25%, 30% between 2.25% and 2.50%... and so on]. In this case, the middle prediction could still have been the best guess. Things that have 10% likelihood happen all the time. If you asked me to guess where the stock market will end this year, I might say up 5% from now, but there is obviously a wide distribution of possible outcomes.

I don't know the confidence level of these economists on their best guess in the article, but the question definitely sets them up for apparent failure.
1) When the actual value lies far outside the entire range of fifty estimates by economists, something is wrong. You can't formalize it exactly, but the fact that there are fifty economists doing fifty analyses is vaguely like looking at the distribution and a range estimate.

In this case, the spread of forecasts looks to be, ballpark, close to 1.0%, and the actual value is 0.5% below the lowest of the fifty forecasts. If you assume that the standard deviation is actually 1.0%--based on a 1% range it would be expected to be much less--then the chance of a single forecast being 0.5% above the true value is about 30%. The chances of fifty of them all being 0.5% or more above the true value is 0.000000000000000000000007%. That's just the roughest of rough back-of-the-envelope estimates and I might have miscounted a zero or two on my fingers either way, but you see the point. It's absurd to say "they were right, but they just had bad luck." Look, take the square root of 0.000000000000000000000007% if I somehow needed to do that to account for, two tails or something, I don't think you can come up with any plausible statistical model in which an accurate model would be that far off more than once-in-a-millennium.

2) It's a completely different set of forecasts, but GMO, to their credit, does put ranges on their own 7-year forecasts, and apparently nobody pays any attention to those ranges or GMO's track record, because when the seven years have elapsed, the actual values are frequently well outside GMO's own stated full range. For example, see this post by longinvest

Image

3) It is much closer to the truth to say "financial forecasts are so bad it is better not to pay attention to them, and positively reckess to act on them," than to say "financial forecasts are really pretty good, it's just bad luck that we've had a thousand-year flood every year."
Hi. You are equating standard deviation of best estimates to standard error of estimates. This is, in principle, not consistent with what I stated.

If we roll two dice and have 1000 economists predict the most likely outcome, all 1000 will say it's seven (the most likely sum of the two dice). Even if the dice roll produces a non-seven value, this doesn't mean the economists were wrong.

Standard deviation of best estimates can be very small, even zero if all information is known. This says nothing about the range of reasonable estimates.

I am not saying these guys know what they are talking about. However, we must be fair and acknowledge that the question in the article is not fair to begin with.

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Re: So much for financial predictions, eh?

Post by Tycoon » Mon Jun 17, 2019 9:53 am

WillRetire wrote:
Mon Jun 17, 2019 8:53 am
Tycoon wrote:
Mon Jun 17, 2019 8:19 am
Duh...
Care to elaborate?
Economists are especially bad at predicting the future.
Emotionless, prognostication free investing. Ignoring the noise and economists since 1979. I see the world as it is; not how I wish it to be.

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Re: So much for financial predictions, eh?

Post by willthrill81 » Mon Jun 17, 2019 9:55 am

ohai wrote:
Mon Jun 17, 2019 9:48 am
Hi. You are equating standard deviation of best estimates to standard error of estimates. This is, in principle, not consistent with what I stated.

If we roll two dice and have 1000 economists predict the most likely outcome, all 1000 will say it's seven (the most likely sum of the two dice). Even if the dice roll produces a non-seven value, this doesn't mean the economists were wrong.

Standard deviation of best estimates can be very small, even zero if all information is known. This says nothing about the range of reasonable estimates.

I am not saying these guys know what they are talking about. However, we must be fair and acknowledge that the question in the article is not fair to begin with.
I think that what you may be getting at is that we cannot necessarily equate the quality of a strategy or process with the results. For instance, if there is a 1% chance of event A occurring and a 99% chance of event B occurring, and the occurrences are independent of each other, then the best strategy is to predict that event B will occur in every discrete instance. We know that we will be wrong approximately 1% of the time, but that's still the best strategy.

Was the decline of interest rates a '1% event' that no logical process would have predicted? Or is it because the future is simply 'too random' to warrant the kind of predictability being attempted? It's probably impossible to say with certainty, but nisiprius's analysis suggests that the latter is more likely to be accurate.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: So much for financial predictions, eh?

Post by Vanguard Fan 1367 » Mon Jun 17, 2019 10:00 am

HEDGEFUNDIE wrote:
Sun Jun 16, 2019 1:59 pm
Taylor Larimore wrote:
Sun Jun 16, 2019 1:52 pm
CU Later:

Great post. Thank you.
Nobody knows nothing - John Bogle
Solution: Own the market and stay-the-course.

Best wishes.
Taylor
In this case, the prediction was about bonds. Plenty of Bogleheads were encouraging folks to go shorter in their bond holdings. Because “rates have nowhere to go but up”.

So the solution is actually this: if you have a long term investment horizon, you should have owned long term bonds.
I have a long term investment horizon and own long term bonds. Many of my Boglehead buddies disagree with that approach.

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Re: So much for financial predictions, eh?

Post by ohai » Mon Jun 17, 2019 10:02 am

willthrill81 wrote:
Mon Jun 17, 2019 9:55 am
ohai wrote:
Mon Jun 17, 2019 9:48 am
Hi. You are equating standard deviation of best estimates to standard error of estimates. This is, in principle, not consistent with what I stated.

If we roll two dice and have 1000 economists predict the most likely outcome, all 1000 will say it's seven (the most likely sum of the two dice). Even if the dice roll produces a non-seven value, this doesn't mean the economists were wrong.

Standard deviation of best estimates can be very small, even zero if all information is known. This says nothing about the range of reasonable estimates.

I am not saying these guys know what they are talking about. However, we must be fair and acknowledge that the question in the article is not fair to begin with.
I think that what you may be getting at is that we cannot necessarily equate the quality of a strategy or process with the results. For instance, if there is a 1% chance of event A occurring and a 99% chance of event B occurring, and the occurrences are independent of each other, then the best strategy is to predict that event B will occur in every discrete instance. We know that we will be wrong approximately 1% of the time, but that's still the best strategy.

However, I'm not sure that that accurately describes the situation at hand. Was the decline of interest rates a '1% event' that no logical process would have predicted? Or is it because the future is simply 'too random' to warrant the kind of predictability being attempted? It's probably impossible to say with certainty, but nisiprius's analysis suggests that the latter is more likely to be accurate.
No, you misunderstood what I said. Someone can be correct about the most likely outcome, but still be incorrect about the actual outcome. The distribution of most likely outcomes can be very tight; it could even have zero dispersion, as the dice example shows. Stating the most likely outcome doesn't rule out all other outcomes.

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Re: So much for financial predictions, eh?

Post by willthrill81 » Mon Jun 17, 2019 10:07 am

ohai wrote:
Mon Jun 17, 2019 10:02 am
willthrill81 wrote:
Mon Jun 17, 2019 9:55 am
ohai wrote:
Mon Jun 17, 2019 9:48 am
Hi. You are equating standard deviation of best estimates to standard error of estimates. This is, in principle, not consistent with what I stated.

If we roll two dice and have 1000 economists predict the most likely outcome, all 1000 will say it's seven (the most likely sum of the two dice). Even if the dice roll produces a non-seven value, this doesn't mean the economists were wrong.

Standard deviation of best estimates can be very small, even zero if all information is known. This says nothing about the range of reasonable estimates.

I am not saying these guys know what they are talking about. However, we must be fair and acknowledge that the question in the article is not fair to begin with.
I think that what you may be getting at is that we cannot necessarily equate the quality of a strategy or process with the results. For instance, if there is a 1% chance of event A occurring and a 99% chance of event B occurring, and the occurrences are independent of each other, then the best strategy is to predict that event B will occur in every discrete instance. We know that we will be wrong approximately 1% of the time, but that's still the best strategy.

However, I'm not sure that that accurately describes the situation at hand. Was the decline of interest rates a '1% event' that no logical process would have predicted? Or is it because the future is simply 'too random' to warrant the kind of predictability being attempted? It's probably impossible to say with certainty, but nisiprius's analysis suggests that the latter is more likely to be accurate.
No, you misunderstood what I said. Someone can be correct about the most likely outcome, but still be incorrect about the actual outcome. The distribution of most likely outcomes can be very tight; it could even have zero dispersion, as the dice example shows. Stating the most likely outcome doesn't rule out all other outcomes.
That's actually exactly what I was referring to. The question is whether the most likely outcome (e.g. event B in my example above) was what these economists were predicting or not. It's impossible to know.

The most relevant point that I can see from this and what we also know about the historical accuracy of such predictions is that they are not accurate enough to justify forming an investment strategy based upon them.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: So much for financial predictions, eh?

Post by retiringwhen » Mon Jun 17, 2019 10:20 am

ohai wrote:
Mon Jun 17, 2019 10:02 am
No, you misunderstood what I said. Someone can be correct about the most likely outcome, but still be incorrect about the actual outcome. The distribution of most likely outcomes can be very tight; it could even have zero dispersion, as the dice example shows. Stating the most likely outcome doesn't rule out all other outcomes.
Playing Euchre yesterday (good Father's day fun when it is raining), I kept reminding my son that don't confuse strategy with outcome after he made reasonable bids on two hands but the card distribution destroyed his card play both times and he started to doubt himself and his knowledge of the game. For those that don't know Euchre, it is a simple trick-based card game played with a small deck (24 cards) so calculating odds is actually pretty easy and there is enough information on the table for most players to effectively "play the odds".

It is really hard to internalize that truth in so many parts of life.....

The current epic factors thread has been pretty interesting on that front as well, in part because one of the questions is fundamentally "do we have an enough data to reasonably calculated the odds?" Too often we are arguing against the odds by recent outcomes and forgetting that those outcomes could surely be within the odds. Secondly, just how sure are we of those odds (especially when some folks are only comfortable with a shoot-the-moon hand in Euchre with 4 Aces and 2 Kings).......

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Re: So much for financial predictions, eh?

Post by garlandwhizzer » Mon Jun 17, 2019 1:07 pm

I believe it's okay to align your portfolio to some degree with what you expect to occur in the market's future but it's important to keep in mind that your expectants have a very significant probability of being wrong. There are so many input variables that determine market action, both macro-economic and human psychological, and all these variables are constantly changing. Pre-ordaining what the output is going to be at a given time in the future with a high level of certainty and tilting 100% to that outcome overweights the ability of humans to predict the future IMO. The pathetic track record of economic predictions made by supposedly brilliant experts clearly demonstrates this. Often it is best to assume that expert insight into the future is, like ours, inherently flawed and unreliable with a much wider range of outcomes than predicted. I think there are advantages to admitting up front that you're not sure what's going to happen in the market's future and diversifying the portfolio for a very wide range of circumstances. The most critical aspect of this is setting the equity/quality bond mix at the right level to suit your goals and risk tolerance. Whether you choose to use factors, cap weight, or alternates in your equity portion is IMO much less important as long as your risk assets align properly with your safer assets.

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Re: So much for financial predictions, eh?

Post by visualguy » Mon Jun 17, 2019 1:19 pm

garlandwhizzer wrote:
Mon Jun 17, 2019 1:07 pm
I believe it's okay to align your portfolio to some degree with what you expect to occur in the market's future but it's important to keep in mind that your expectants have a very significant probability of being wrong. There are so many input variables that determine market action, both macro-economic and human psychological, and all these variables are constantly changing. Pre-ordaining what the output is going to be at a given time in the future with a high level of certainty and tilting 100% to that outcome overweights the ability of humans to predict the future IMO. The pathetic track record of economic predictions made by supposedly brilliant experts clearly demonstrates this. Often it is best to assume that expert insight into the future is, like ours, inherently flawed and unreliable with a much wider range of outcomes than predicted. I think there are advantages to admitting up front that you're not sure what's going to happen in the market's future and diversifying the portfolio for a very wide range of circumstances. The most critical aspect of this is setting the equity/quality bond mix at the right level to suit your goals and risk tolerance. Whether you choose to use factors, cap weight, or alternates in your equity portion is IMO much less important as long as your risk assets align properly with your safer assets.

Garland Whizzer
Right, but deciding on the "proper" mix of "risk" assets and "safer" assets is also making a call. Ultimately, we are all placing bets of one kind or another in my opinion, which is fine - that's life.

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Re: So much for financial predictions, eh?

Post by willthrill81 » Mon Jun 17, 2019 1:50 pm

garlandwhizzer wrote:
Mon Jun 17, 2019 1:07 pm
Often it is best to assume that expert insight into the future is, like ours, inherently flawed and unreliable with a much wider range of outcomes than predicted.
I heard Les Stroud, a survival expert, state that when he was training new people, he would ask them to gather enough firewood to last through the night. After they had done so, without even looking at how much they had gathered, he then told them to gather five times more. They universally grossly underestimated how much it took to achieve the goal.

Similarly, the range of possible outcomes has been shown to routinely be greater than the range predicted by the 'experts', despite the experts knowing that this strong tendency occurs. This is why many of us approach the equity return forecasts put forward by many with great skepticism, particularly when it comes to incorporating these forecasts into our financial planning.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: So much for financial predictions, eh?

Post by RAchip » Mon Jun 17, 2019 2:55 pm

Forecasts and predictions are only reliable if you know what is going to happen.

It is pretty shocking in my opinion for the market to expect drastically lower interest rates at a time when the stock market is near all time highs and unemployment is near historic lows.

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Re: So much for financial predictions, eh?

Post by nisiprius » Mon Jun 17, 2019 3:02 pm

ohai wrote:
Mon Jun 17, 2019 9:48 am
...
Hi. You are equating standard deviation of best estimates to standard error of estimates. This is, in principle, not consistent with what I stated.

If we roll two dice and have 1000 economists predict the most likely outcome, all 1000 will say it's seven (the most likely sum of the two dice). Even if the dice roll produces a non-seven value, this doesn't mean the economists were wrong...
I more or less take your point, but you are comparing apples and oranges. In the case of the dice, the system is not a black box. We have very good insight as to what the probabilities should be. Furthermore, we are free to perform experiments on real dice, and they will confirm the high-school-probability model (equal probability of landing with each side up, and very little chance of predicting the outcome if the dice are thrown in the standard way).

In the real-world example, the economists are looking at a black box, not a pair of dice that can be weighed or measured or dropped into a glass of water to see if they are loaded.

I don't know how to do a rigorous analysis of the "economists predicting interest rates" example, but I flatly do not believe that the fifty economists were all correct, and that the fact that the actual interest rate landed far outside the range of forecasts was just a bit of bad luck. I don't know how to calculate the probability. I would welcome any efforts you might make to estimate it, to put some kind of upper bound on just how likely it could be for the results to fall that far outside the range spanning a sample of fifty estimates.

Sure, maybe it's higher than 0.000000000000000000000007% but I don't think it could be 7% or 0.7% or even 0.07%.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: So much for financial predictions, eh?

Post by afan » Tue Jun 18, 2019 10:37 am

There have been many studies over many years showing that people cannot successfully predict interest rates. The best predictor of future rates has been current rates. So the economists who predicted that the 10 rate would stay the same were playing the safest bet. They were still wrong, but at least they had evidence on their side.

What is amazing is that, all evidence to the contrary, people still listen to these predictions as if they meant something.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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