Weather Forecasters are Better Forecasters than Stock Market Experts

Weather forecasters are said to have markedly better batting average making predictions or are far more accurate prognosticators than most stock market experts. (Well this applies to foreign private weather forecasters and not the Philippine government counterpart.)

Justin Rohrlich at the Minyanville writes,

According to New York Times statistical wunderkind Nate Silver, the National Hurricane Center’s accuracy has improved 250% over the last 25 years.

More accurate weather predictions benefit the economy, boosting the efficiency of businesses like FedEx (FDX), which employs 15 in-house meteorologists, as well as companies working offshore, like BP (BP) and Transocean (RIG). Weather is such an important factor in financial markets that Goldman Sachs (GS) employs staff meteorologists, as do Citigroup (C) andJPMorgan Chase (JPM).

While meteorologists have improved, other analysts -- specifically financial ones – are still off the mark more often than not.

“In November 2007, economists in the Survey of Professional Forecasters -- examining some 45,000 economic-data series -- foresaw less than a 1-in-500 chance of an economic meltdown as severe as the one that would begin one month later,” Silver writes.

“Why are weather forecasters succeeding when other predictors fail? It’s because long ago they came to accept the imperfections in their knowledge. That helped them understand that even the most sophisticated computers, combing through seemingly limitless data, are painfully ill equipped to predict something as dynamic as weather all by themselves. So as fields like economics began relying more on Big Data, meteorologists recognized that data on its own isn’t enough.”

So the admission of the knowledge problem is one crucial factor contributing to the weather forecaster’s edge.

I’d add that the unwillingness to think outside the box has been another key variable to why stock market experts underperform.

More…

In a slightly larger than usual nutshell, the crux of the issue was this: Weather forecasters have an “awareness of uncertainty” about the natural world that “causes these experts to manifest a lower overconfidence effect than experts from the other domain.”…

Further, financial analysts were also found to be unwilling or unable to be self-critical after a failure -- something that Raymond Dacey, Professor of Finance and of Statistics and Adjunct Professor of Philosophy at the University of Idaho, suggested to the authors “could pertain to the clients.”

Simply put, the “Disposition Effect” has to do with risk attitude and what Shefrin and Statman colloquially term “get-evenitis” -- an aversion to loss realization.

Another major obstacle is the overconfidence bias

I’d add that egotism has always been a hurdle to self discipline.

Here is a relevant investment ‘war’ tip from Sun Tzu’s Art of War

If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle