How can we beat the experts?
- 22 December 2011
"Nine out of ten fund managers expect 2012 to be another volatile year for the FTSE", reports the Daily Telegraph. Well, the man on the street is likely to say the same.
Anyway, forecasts miss a lot, particularly when it comes to events nobody can predict. Were we talking much about Egypt, Libya, or Syria at the end of last year? Apart from international affairs think tanks, we weren't – just as most experts did not predict the riots, or the extent of the economic meltdown. This year has been a news tsunami, which has prompted severe stock market shocks.
Can we ever rely on experts?
However, as Psyfi blog says here, "in a complex world we often have no choice but to rely on experts to help guide us".
It says: "When we start looking at areas characterised by uncertainty the experts are particularly good at making predictions and equally fine at getting them wrong. In fact, the more fond they are of publicly pronouncing on the future the more likely they are to be in error.
"Famously Philip Tetlock looked at expert political judgement and determined that most of the experts get things wrong slightly more often than the average punter in the street. This is probably because the experts feel that they can't sit on the fence when decisions are particularly tricky, whereas most of us are quite happy to admit we're not sure some of the time."
…Just take a look at last year's predictions
If we consider last year's stock market predictions, it doesn't give you much confidence in financial experts. While wealth manager Dennehy Weller & Co warned its clients that the FTSE could fall to 4,800 this year, most were far more positive. Considering an array of ‘expert opinions' this time last year, they expected to FTSE to be around 6,500 at this stage – with one example here – but it's currently below 5,400 and hit 4,800 in August.
In a feature on the value of uncertainty during these times, rather than pretending to know you know, Susanne Moore says in the Guardian: "I don't know what I am talking about. And, quite frankly, you should be relieved that I know that I don't know. The world is full of people proclaiming about stuff they don't know much about. My trade depends on it. Pundits, politicians and economists, too, all depend on some kind of bladder-busting meta-analysis to keep us quiet. In fact, they are just winging it."
Learning to become an expert yourself
When it comes to investing, most of us aren't very good at managing our own portfolios – or brave enough to take this on during turbulent times.
Psyfi blog says: "We have a tendency to believe we're above average and the normal rules don't apply to us. However, when we looked at people who are genuinely above average in intelligence it turned out they weren't smart enough to pick the cheapest index tracker out of a set of four.
"In fact a rule of thumb is that it takes about 10,000 hours of concentrated practice to become an expert in any given domain. Putting this into the context of investing, if we can devote an hour a day to it, in between all the other tasks making up a busy life, then it'd take about 28 years to achieve expert status. Whichever way you cut it, that's a lot of our lives lost in balance sheets and stress."
"…The fact that it's easy to invest in shares doesn't mean that investing in shares is easy. If it were then no one would need to work for a living."
This sounds like bad news, but there is a route around the hours of study needed to qualify as an ‘expert'. Why not use all tools at your disposal and make a measured judgement? Then, at least you know you've done your research. Take a second opinion, and a third, and a fourth – and read around the subject, but not simply from one source – and challenge what you're told.
The benefits of social media come into play here. We need no longer just rely on those ‘experts' give to us by reporters – but can read the comment sections to get a range of opinions from everyone out there.
And anyway, whether you feel wrong or right in your choices – place some value in your uncertainty.
Perhaps it's worth turning to scientists for some comfort in this. As Jon Butterworth wrote, science has nothing to fear from uncertainty. The Higgs Boson particle, which may have flashed up in the data in Cern has meant we have listened to physicists telling us with pleasure about how much we just don't know.
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