Economics of fear have gripped the world’s stock markets – but investors are shrugging off their concerns about the bad things that their told could happen.
Since the start of the year, market analysts, politicians, bankers and fund managers have voiced their concerns about pensions, stocks and shares.
First was the rock-bottom price of oil. Next came worries about an economic downturn in China quickly followed by how Brexit will affect global markets, then what to do about record low interest rates and the list rumbles on.
Will the Federal Reserve hike rates and what if scenarios about Donald Trump coming to power are set to dominate the next few months.
Armageddon in the markets has not followed any of these events – in fact, they are bullish.
Experts know less than investors
What seems to be happening is an uncoupling of how investors are thinking from how money managers and economists view the world.
The truth is the so-called experts really know nothing more than an ordinary joe.
The theory was tested over 20 years by Dr Philip Tetlock. Tetlock was a note taker at political intelligence committees in the 1980s. After several cycles of committees, he realised the experts giving their opinions rarely made a correct prediction.
Tetlock put together 28,000 forecasts by experts in science, politics, the military, finance and law, He then weighed their predicted outcome against actual events and found that expert judgment was less likely to be right than decisions made by anyone else.
Tetlock’s theory was also taken up by CXO Advisory, a group that is sceptical that modelling markets and analysing past results actually works.
Rating the gurus
Over seven years, CXO graded the pronouncements of 68 financial experts.
The best result was a success rate of 68% from David Nassar, CEO of MarketWise, while the worst was Robert Prechter, author and president of Elliott Wave International, a technical analyst, who scored almost 21%.
The average guru score was a 47% success rating.
So, before deciding to follow an investment guru – or any other kind of guru for that matter -consider that on average, they only make a correct prediction less than half the time.
To test your own forecasting abilities, check out the web site Good Judgment, part of a wider project based on Tetlock’s theory and led by him.
The aim is to help people make better forecasts. The benchmark is to be right 60% of the time.