Every investor dreams of an investment with high potential returns and negligible risk. And this is exactly where many financial service providers find their psychological hook. They claim it is possible to spot risks early through sophisticated risk-management systems and to act accordingly. That is precisely what investors hope for when they switch on the market commentary on TV or comb through other media in search of forecasts and opinions. The theory: anyone who appears in front of the camera or draws a salary from an international investment bank must surely know which stocks and which markets are worth it and which are not.
In practice, however, things look quite different: no system in the world and no expert, however highly regarded, can actually deliver such predictions. Scientific research shows beyond doubt that the major swings in the international financial markets — and that is what this is about, not the short-term ups and downs — cannot be forecast. The best example is a look back at the financial crisis of 2007/2008 and the corresponding slump in the DAX. After all, it was not only private investors who had to absorb painful losses. It was the large institutions in particular that were hit — the very ones with access to the most diverse and most expensive risk models and human experts.
Experts barely better than a random number generator
The American psychologist Philip Tetlock cannot let the experts off the hook either. The 54-year-old is a professor at the University of California, Berkeley. In a research project spanning more than two decades, he examined the forecasts of nearly 300 commentators on all kinds of subjects. By 2003, he had collected more than 82,000 predictions. These were compared against reality as well as against forecasts from simple statistical models and from laypeople. The result: the experts fared hardly any better than the laypeople or a random number generator.
As their research progressed, Tetlock and his team made one further discovery. There are so-called “superforecasters” — people who often make better predictions than other experts. Superforecasters tend to be self-critical thinkers who are willing to question and revise their beliefs when confronted with contradictory facts. As a rule, however, these people also tend to be rather reserved. Unlike the kind of expert who has one big idea and articulates it skillfully and persuasively. The problem: the media tend to pounce on the second group.
For a systematic, forecast-free approach to investing, the discovery of superforecasters is no more than a fun fact. In the capital markets, sound predictions are all but impossible. That is why quirion relies on facts and on the findings of modern financial market research. At best, the gurus provide good entertainment for the evening schedule.
