Podcast Summary
Staying Informed and Adaptable in a Changing World: Maintain a 360 degree perspective for investing opportunities and practice empathy and awareness for personal and professional growth
We are currently experiencing a wave of global anxiety, with many calling for impending recessions, bear markets, and the start of easing cycles. This isn't the first time we've seen such sentiment, as similar inflection points have occurred in markets and politics over the last decade. Principal Asset Management, a real estate manager, emphasizes the importance of having a 360 degree perspective to identify compelling investing opportunities. Meanwhile, in a different context, Holly Robinson Peete encourages empathy and awareness to better understand the invisible struggles of those around us, which can lead to healthier individuals and companies. These messages underscore the significance of staying informed and adaptable in an ever-changing world.
Tracking Forecasts for Improved Accuracy: Phil Tetlock's research on forecasting accuracy involves categorizing predictions based on confidence and outcome, creating a database to assess expert performance, and encouraging individuals to track their own forecasts for potential improvement.
Forecasting is a common practice in various fields, but it's not always accurate. Phil Tetlock, an Annenberg University professor at the University of Pennsylvania and author of numerous books and papers on forecasting, has spent decades studying the accuracy of experts' predictions. He keeps track of forecasts and their outcomes to evaluate their accuracy. However, not all forecasts can be definitively labeled as right or wrong since many come with probabilities rather than binary outcomes. The construction of a forecast database involves categorizing forecasts based on their level of confidence and the eventual outcome. The database helps assess the accuracy of experts and improve forecasting overall. Tetlock started this work during his tenure at Berkeley in 1984 and has been tracking forecasts since then. He is often referred to as an "expertologist." Despite being an expert on why experts get forecasting wrong, Tetlock believes that if we all kept track of our forecasts and their outcomes, we could potentially improve our accuracy.
Experts' overconfidence in forecasts: People's overconfidence in their forecasts can lead to incorrect decisions and actions, but not everyone is overconfident and some may underestimate their confidence. The balance between accuracy and being interesting in forecasts can make punditry challenging.
People, including experts, are often overconfident in their forecasts, leading to a misalignment between their subjective probabilities and the objective frequency of events. This overconfidence is a common finding in the field of cognitive social psychology. When analyzing forecasts, it was found that many experts' forecasts did not align well with reality, with events occurring less frequently than predicted. This overconfidence can be detrimental, as it can lead to incorrect decisions and actions. However, it's important to note that not everyone is overconfident, and some people may underestimate their confidence in their judgment. Additionally, the purpose of making forecasts may not always be to be accurate, but rather to be interesting or to get attention. This delicate balance between being interesting and not being too far off can make the art of punditry a challenging endeavor.
Better forecasters are calibrated and less overconfident: Effective forecasters participate in well-calibrated tournaments, balance causal forces, and avoid excessive overconfidence.
The accuracy of forecasts depends on the calibration of the forecasters, and those who participate in well-calibrated forecasting tournaments are not using probabilities as a cop-out. However, some patterns have been observed among better forecasters, including being less overconfident and engaging in more explicit balancing of causal forces. Contrarily, forecasters who make compelling sound bites for the media often tend to be less accurate. For instance, in the case of political and economic forecasting, those who predict dramatic events may be more appealing to the media but less accurate in their predictions. Therefore, the imperative for the media to find sensational forecasts may lead to less accurate predictions being presented to the public.
Understanding historical patterns and base rates is key to effective forecasting: Focus on data and analysis, not quick judgments or strong views, for accurate predictions. Examine base rates and be cautious of claims of inflection points or rare events.
Effective forecasting is not about quick judgments or strong views, but rather a deep understanding of historical patterns and base rates. Those in the accuracy business, such as the intelligence community, seek out forecasters who are not entertaining and instead focus on data and analysis. Experience can be both a help and a hindrance, as it can lead to dogmatism or new perspectives. To improve forecasting skills, one should start by examining base rates and being wary of claims of inflection points or rare events, such as military coups or revolutions. These principles apply not only to the intelligence community but also to anyone seeking to make more accurate predictions about the future.
Forecasting tournaments for accountability and accuracy: Forecasting tournaments encourage independent judgments and minimize the gaps between probability judgments and reality over the long term for effective forecasting.
The accuracy of forecasts is crucial, but often overlooked due to the high volume of information and the focus on correct predictions. Forecasters can increase accountability by participating in forecasting tournaments, where they make probability judgments on well-defined questions and are kept score of. Groupthink, which can lead to inaccurate predictions, is a significant issue, and tournaments encourage independent judgments. The sole objective of these tournaments is minimizing the gaps between probability judgments and reality over the long term. Despite the unusual social environment, this focus on accuracy is essential for effective forecasting.
Leaders who are open to being wrong set the tone for accurate forecasting: Good forecasters are adaptable, able to make small, rapid adjustments based on new evidence and distinguish among more degrees of uncertainty than others.
Fostering a culture where more people feel they're in the accuracy business starts from the top. Leaders who are open to being wrong set the tone for their teams. A case study of a forecast that went wrong was the prediction of the Soviet Union's future in the 1980s. Despite everyone having different views, no one was close to predicting the actual outcome. However, those who were able to make small, rapid adjustments in response to incoming evidence were considered good forecasters. The best forecasters are more granular and can distinguish among more degrees of uncertainty than normal people. The Soviet Union's transformation under Gorbachev was a hard thing to forecast, but there were clues that suggested a different style and substance of leadership. The key factor was the willingness to change your mind in response to new evidence.
Effective Forecasters Assess Probabilities and Recognize Tail Risks: Good forecasters are calibrated, decisive, and adapt to tail risks, improving overall accuracy and value.
Good forecasters, whether in poker, geopolitics, or economics, share the ability to assess probabilities effectively. Nate Silver, known for his political forecasts, is an example of a well-calibrated forecaster, meaning his predictions align with reality about 70% of the time. However, being well-calibrated isn't enough. Forecasters should also be decisive, assigning higher probabilities to likely events and lower probabilities to unlikely ones. This combination of humility and decisiveness makes for a "superforecaster." Regarding tail risk events, it's essential to recognize that not all risks are black and white. Instead, there's a continuum of predictability. The best forecasters acknowledge the existence of tail risks and adapt their strategies accordingly, understanding that even the most unlikely events can still occur. By acknowledging the gray areas and preparing for potential tail risks, forecasters can improve their overall accuracy and value to their audiences.
Predicting Future Events: Intuition vs. Mathematical Models: The best forecasters, or 'superforecasters,' use a deep understanding of probability calculations to make accurate predictions intuitively, but this doesn't equate to extrasensory perception.
Making predictions about future events, whether it's war, disasters, or market trends, involves making probability judgments and dealing with false positives. Some people rely more on intuition, while others use mathematical models. The best forecasters, or "superforecasters," may have developed a deep understanding of probability calculations through experience, allowing them to make accurate predictions intuitively. However, this doesn't mean they're using extrasensory perception. The debate between relying on intuition (Blink) and deliberate thinking (Think) continues in the field of forecasting. I, for one, lean towards the deliberate thinking approach. Despite not being a forecaster myself, I will give you a forecast: I don't believe forecasting practices will change significantly in the near future.
Forecasting for Avoidance or Entertainment: Forecasting tournaments and prediction markets may become more common ways to resolve disagreements, while human psychology influences forecasting and remembering accurate predictions is essential.
While many people make forecasts, the primary goal is often not accuracy, but rather avoiding offense or entertainment. However, forecasting tournaments and prediction markets may become more common ways to resolve disagreements in the future. In the investment industry, some individuals may give bearish forecasts without aligning their positions, and it's essential to consider the rarity of significant market shifts and inflection points before making investment decisions. Human psychology plays a role, as people are more likely to remember those who correctly predict major events, rather than those who consistently call the status quo. Thus, it's crucial to start with an assumption of stability but be prepared to adapt when significant changes occur.
Lessons from Warren Buffett's investment strategy: Warren Buffett's success in the stock market comes from buying and holding stocks for the long term. This approach may not work for everyone, but it serves as a reminder of the potential rewards of keeping things simple in investing.
While many investors try complex strategies to beat the market, Warren Buffett's success comes from simply buying stocks and holding them for the long term. This was a recurring theme in the latest episode of the Odd Lots podcast, featuring guest Philip Tetlock. Buffett is an exception, and not everyone can follow his approach. However, his success serves as a reminder that sometimes, keeping things simple can lead to significant returns. Additionally, the hosts of the Odd Lots podcast, Tracy Alloway and Joe Weisenthal, announced a new podcast called Money Stuff. Hosted by Matt Levine and Katie Greifeld, Money Stuff will bring the popular Money Stuff newsletter to life, providing insights into Wall Street finance and other topics every Friday. Listeners can tune in on Apple Podcasts, Spotify, or wherever they get their podcasts. In conclusion, the episode of Odd Lots emphasized the importance of a long-term, simple investment strategy, and the upcoming Money Stuff podcast promises to deliver valuable insights into the world of finance.
