Market Forecasts: Whom Do They Benefit?

Investing
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By Jonathan DeYoe AIF®, CPWA

Learn more about Jonathan on NerdWallet’s Ask an Advisor

On the one hand, consider John Kenneth Galbraith’s comment that “the only function of economic forecasting is to make astrology look respectable.”

On the other, consider that there are numerous magazines, federal bureaucracies, radio programs and 24-hour cable stations dedicated to doing just that.

This is cognitive dissonance writ large, yet it’s absolutely our reality. Why? If economic and, perhaps even more so, market forecasting are exercises in futility, then why do people still attempt to forecast?

One reason: incentives.

First, recognize that there are two participants in the forecast. There is the forecaster and the listener or reader. The benefits of forecasting, if they exist, might accrue to either or both of these participants.

The forecasters in the financial arena have deep financial incentives to offer their predictions. The media outlets and the punditry are incentivized to grow their audience and thus boost advertising dollars. And advisors and portfolio managers (of which I am one) are incentivized to grow their client numbers and assets under management.

The listeners or readers also have a financial incentive: They want to make decisions that pay off. Making money excites them and losing money scares them.

Given the fact that for every “bubble call” there is an equal and opposite “non-bubble call” (and I think that at pretty much any point in history there are people on either end of the continuum), it would be a very difficult case to make that the thousands of competing opinions out there are of any value to the consumer.

One problem: probabilistic accuracy.

This isn’t really a problem for the forecaster. The forecaster knows that it is a game of probability and that he only has to be right some of the time in order to build an audience. Due to what we could call audience inertia, that forecaster will collect a larger number of followers by being right or spectacularly right than he’ll lose for being wrong or spectacularly wrong. And, more importantly, the larger the audience grows, the less important it becomes to offer accurate predictions.

So, given the real probability that a forecaster will be right at some point, and that he’ll be right more often simply by making a lot of predictions; and given the funky audience-building incentive, it makes complete sense that people would attempt forecasting.

The real question we should ask ourselves is: Why do we pay any attention?

Jonathan K. DeYoe, AIF and CPWA, is the founder and president of DeYoe Wealth Management in Berkeley, California, and blogs at the Happiness Dividend Blog.  Financial Planning and Investment Advisory Services offered through DeYoe Wealth Management, Inc., a Registered Investment Advisor.  Securities offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations to any individual.  For your individual planning and investing needs, please see your investment professional.