Ritholtz on Why We’re Bad at Forecasting

Forecasts are unproductive, writes Barry Ritholtz in a recent Bloomberg article, and we should not make investment decisions based on them.

Ritholtz offers a list of reminders for readers of “what we know about forecasts and predictions, and why they are so rarely right.” Here are some highlights:

  • We’re generally bad at it. “Examples are everywhere,” Ritholtz argues, citing how data provides clear evidence to support our failings at economic forecasts, expectations of future technologies, and earnings estimates, “not to mention election predictions.” Ritholtz adds that “whenever you see someone forecasting their own behavior, what you are getting is a read of their emotional state.”
  • Random and unforeseeable events introduce more error;
  • Bad forecasts, writes Ritholtz, “are quickly forgotten, while those who make accurate predictions that are nothing more than the result of luck or random chance get elevated to stardom.”
  • Technology—Ritholtz references Microsoft’s Steve Ballmer, who predicted in 2007 that Apple’s iPhone would never become popular;
  • We don’t want to acknowledge our mistakes—people tend to stick by their predictions rather than do what’s best from an investment perspective.