Predicting the Future and Other Delusions
January 8, 2016 · 9:34 AM EST
Barry Ritholtz, a financial planner and asset manager, writes a regular column in The Washington Post’s business section. I read him religiously, and his last column of 2015, on financial prognosticators, offered important observations for anyone interested in politics, sports or Wall Street.
I include all three subjects because they have so much in common. And more important, all three are covered the same way by the media.
They all produce winners and losers. But even more important, all involve a wealth of statistics, scenarios and story lines that produce rules of thumb and hypotheses about which variables are important and which may be predictive.
In political analysis, we rely on past voting statistics, public opinion survey data and fundraising numbers to figure out who will win elections and who is a mere also-ran. We look for information about a campaign’s ground game and the amount of money spent on TV ads.
Those of us who enjoy baseball at least as much, if not more, than politics, look at earned run averages, strikeouts per nine innings, team wins and losses, WHIP (walks plus hits divided by innings pitched), WAR (wins above replacement) and plenty of other statistics to divine which players are likely to do well next season and which teams could win it all.
For those of us who follow business and Wall Street, price to earnings ratios, interest rates, market breadth, dividend yields, earnings per share, changes in gross domestic product and a seemingly infinite number of numbers, statistical tests and formulas for predicting the future (often on the basis of past performance) can be consulted.
Of course, “experts” in all three areas also use “subjective” measures to separate winners from losers.
Political analysts evaluate individual candidates and talk about their appeal, their speaking abilities and the quality of their messages and campaign operations. Baseball aficionados talk about whether a player is disruptive or good in the clubhouse, or whether a “thrower” is starting to become a “pitcher.” And stock watchers often talk about investors’ psychology, what the members of the Federal Reserve’s Open Market Committee are thinking or the skills of individual CEOs to explain why a company is or isn’t doing well.
If you listen to sports radio or watch ESPN, or watch CNBC or Fox Business, or watch political talking heads on cable talk TV or listen to talk radio, you have to be struck by how similar the coverage is. Sure, the names change, but everything else is the same.
Whether it’s politics, baseball or stocks, everyone has an opinion — and everyone wants to argue. You don’t even need to have credentials. Everyone is an “expert.”
Television segments inevitably consist of a liberal arguing with a conservative or a stock market bull arguing with a stock market bear. You want to hear someone’s opinion on the Cubs’ chances in 2016 or whether Apple is a good investment at these price levels or whether Donald Trump can win the Republican nominationt? No problem. Just turn on your radio or TV and watch a political or sports talk or business program.
Indeed, experts in the three fields are wrong often enough to give any reader pause, and I am not only referring to my own mistakes.
Many oil analysts predicted in early 2015 that oil prices would recover during the second half of the year, but the International Energy Agency was less sanguine, projecting that oil would remain around $55 per barrel throughout the year. Both West Texas Intermediate Crude and Brent Crude ended 2015 under $38 a barrel.
CNBC stock market guru Jim Cramer spent much of 2014 and the first part of 2015 waxing eloquent about the brilliance of Macy’s CEO Terry Lundgren. On May 11, 2015, The Street, the website co-founded by Cramer, reported that Macy’s stock spiked “after Jim Cramer was bullish on the stock on his ‘Mad Money’ show on CNBC.”
Of course, that was when Macy’s was selling at just more than $66 a share. The stock ended 2015 selling at just under $35 a share.
I really don’t mean to pick on Cramer. He is very entertaining and sometimes insightful. I simply use him as an example because he is so well-known in the world of stocks.
Then there is this gem from MLB.com writer John Schlegel, who surveyed experts about the 2015 baseball season: “According to our poll of MLB.com and MLB Network experts, it’ll be Matt Williams hoisting that golden trophy encircled in pennants, and a giddy band of Washington Nationals doing the champagne dance in October.”
Williams, of course, was the manager of the Nationals who got fired after his team didn’t make the playoffs, let alone win the World Series. After the Nationals signed free agent Max Scherzer early in 2015, some in the baseball world said the team had one of the great starting rotations in baseball history. Ultimately, the Nats finished seventh in team earned run average.
The longer I live (and the more cable TV I watch), the more I believe that most of the chatter from politics, baseball and Wall Street is simply hot air. And yes, I am aware that some of it comes from me.
I certainly am not suggesting that all opinions are equal, that all rules of thumb are no longer valid or that it is pointless to try to look into the future — only that anyone looking into a crystal ball ought to be aware how unpredictable the future is and how little he or she truly understands.