Six Ways to Fake a Forecast
Economic and market forecasts are useless, yet the people making them remain in a job. How does this happen?
It’s an open secret that financial forecasts don’t work, yet forecasters stay in a job. Why?
To explain, I thought it would be fun to list some of the tricks economists and financial commentators use to make predictions without getting egg on their Teflon-coated faces.
First a nod to Ian Rowland’s excellent The Full Facts Book of Cold Reading, which explains the techniques used by fairground fortune tellers and other charlatans to make us believe. That they can be transposed to the strategy departments of the world’s largest banks speaks volumes.
I’ve borrowed three of his examples here and added three of my own (I had a lot of fun making these up — I found more than made it onto this shortlist).
All quotes are lifted from recent ‘outlook’ documents from respected industry research departments.
1. The Rainbow Ruse
This makes both a prediction of one thing and then its opposite. For a sideshow psychic, that’s something like: “You can be a very considerate person, but you recognise a selfish streak in yourself”.
In the financial word, it will look like this: “We expect energy prices to rise, but economic weakness may interfere”.
So they’re right if energy prices rise, but also right if they don’t.
Useful to your investment decision?
Nope.
2. Certain Predictions
These are predictions which can’t fail; “Someone new is going to come into your life”.
The financial classic is “We expect volatility”. But this is like saying “we expect weather” — it’s useless guff.
A good way to spot a certain prediction is to ask; what’s the opposite? In this case, that would be volatility dropping to zero and all markets proceeding in a perfectly straight line for the rest of eternity. Hardly a brave call to predict that not happening.
3. The Question Prediction
If you make a call, but pose it as a question, it serves as a prediction if you’re right, but merely an interesting conundrum if you’re not.
“Will this excess valuation and frothy sentiment lead to a severe correction?”
Umm, I don’t know. I thought you were telling me?
4. Clown in Sage Clothing
These sound wise and helpful, but when you dig deeper they’re no help at all:
“In equity markets, we expect macroeconomic discussions to shift toward how specific market sectors and companies can navigate higher costs and slower growth”.
This sounds like they’re saying share prices are going to fall, right? But look closer. They’re predicting that, at some undefined point, some undisclosed people will chat about some things. What are we supposed to do with that?!
5. Coulda-Shoulda Predictions
A simple classic: Make a prediction but insert a ‘could’ or a ‘should’. Now you can wriggle out if it doesn’t come true, as you only suggested it might happen, not that it definitely would.
“…a decline in bond yields could be led by the middle and eventually the front end.”
Yes, and Kanye West could be elected US President. But that’s different to saying he will be.
6. Vague Predictions
This is a catch-all for so many bobs and weaves used by financial commentators. Example:
“Returns will be limited.”
The returns of what? All markets? Some markets? The average?
And limited to what? And over how long?
By leaving out crucial details, such as timeframes, levels and even the asset class, their prediction can never be proved wrong. Or useful.
Why?!
So why do they use these ruses?
In almost all cases there’s no malign intent. I’ve been guilty of a few of these myself, particularly early on in my career.
And it’s not like these tricks are taught as part of an economics degree. They weren’t in mine (or if they were I slept through that lecture — not impossible).
I think, instead, they result from a desire to give people what they want — to know the future — while subconsciously acknowledging that it’s impossible to do that. So they make predictions, but then reflexively couch them in all manner of subtle caveats as self-defence for the ego.
I have some sympathy. When I present to clients, I’m usually asked what I think will happen. It’s tempting to give them what they want, even if I know I shouldn’t.
So, what can you do?
I think it’s fine to say “I don’t know”. Just say it with confidence. I’m usually impressed when a professional has the humility to admit this.
It’s also fine to highlight the risks. Risks are about what might happen, not necessarily what will. This is legitimate, as it acknowledges that a whole range of things might happen, and that you’re considering them (known or unknown).
If you do this with clients on a consistent basis, your business will definitely flourish. Unless macroeconomic, regulatory, or firm-specific conditions present unexpected headwinds, that is.
