December means one thing − predictions − lots of them, mostly bad. We’ll hear forecasts about interest rates, stock prices, commodities, gold, economic growth, and of course, a fresh batch of Doomsday predictions. You’ll hear the bad, the ugly and the worst in that order. There may be a few good predictions out there, but you won’t recognize them in all the noise.
The media loves spectacular predictions, especially when the outcome is dire. They’ll focus on the most outrageous forecasts and the forecasters who make them. On a day when oil prices are up, we’ll hear an expert predict $200 per barrel. On a day when stocks tumble, we’ll hear about an impending crash in global equity markets. That’s show business!
Sergeant Schultz from the famed comedy show Hogan Hero’s would say, “They know nothing, NOTHING!” But it doesn’t matter that forecasters can’t predict. The networks aren’t keeping score. Why would any producer let bad forecasting get in the way of good theater?
The only accurate prediction you can take to the bank is mine. I predict the media will air the most outlandish market predictions and not give a hoot about the accuracy of the results.
Wise investors know better because they do keep score. Take Nate Silver, a well-known statistician and author of The Signal and the Noise: Why So Many Predictions Fail – But Some Don’t. Silver finds that most economic predictions are way off the mark, often overestimating or underestimating the actual economic performance by several percentage points each year. He sees these flawed predictions as a combination of physiological biases, methodology errors, and misaligned incentives.
This means a majority of financial forecasts you’ll hear about 2013 are completely useless. In fact, Silver says you’d be better off just taking what happened in 2012 and naively extrapolating the results into next year. This method will likely beat most expert forecasters.
Of course, that’s only if we make it to next year. The end of the world might occur first. Some people believe the Mayan Calendar is forecasting Armageddon to start on December 21, 2012.
Centuries ago, a Mayan leader declared his devastating defeat on the battlefield as a single event in a larger cycle of devastating events that would eventually lead to the end of the world. That end is now. If it happens, I hereby recant this story and become a believer in predictions.