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Japan: A laughing stock trade
By Chris Johnson
TOKYO - The trader was supposed to sell one share for 610,000 yen ($5,065). Instead, 610,000 shares valued at $3.1 billion were offered for 1 yen each.
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Somebody made a typing mistake, said the brokerage unit of Mizuho Financial Group, Japan's second-largest bank. The error set off a frenzy of trades, and cost the unit at least 27 billion yen ($224 million) as it tried to buy back the shares, the bank said.
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Louis Menand reviews Philip Tetlock’s Expert Political Judgment: How Good Is It? How Can We Know? for the New Yorker.
Excerpt:
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It is the somewhat gratifying lesson of Philip Tetlock’s new book, “Expert Political Judgment: How Good Is It? How Can We Know?” (Princeton; $35), that people who make prediction their business—people who appear as experts on television, get quoted in newspaper articles, advise governments and businesses, and participate in punditry roundtables—are no better than the rest of us. When they’re wrong, they’re rarely held accountable, and they rarely admit it, either. They insist that they were just off on timing, or blindsided by an improbable event, or almost right, or wrong for the right reasons. They have the same repertoire of self-justifications that everyone has, and are no more inclined than anyone else to revise their beliefs about the way the world works, or ought to work, just because they made a mistake. No one is paying you for your gratuitous opinions about other people, but the experts are being paid, and Tetlock claims that the better known and more frequently quoted they are, the less reliable their guesses about the future are likely to be. The accuracy of an expert’s predictions actually has an inverse relationship to his or her self-confidence, renown, and, beyond a certain point, depth of knowledge. People who follow current events by reading the papers and newsmagazines regularly can guess what is likely to happen about as accurately as the specialists whom the papers quote. Our system of expertise is completely inside out: it rewards bad judgments over good ones.
“Expert Political Judgment” is not a work of media criticism. Tetlock is a psychologist—he teaches at Berkeley—and his conclusions are based on a long-term study that he began twenty years ago. He picked two hundred and eighty-four people who made their living “commenting or offering advice on political and economic trends,” and he started asking them to assess the probability that various things would or would not come to pass, both in the areas of the world in which they specialized and in areas about which they were not expert. Would there be a nonviolent end to apartheid in South Africa? Would Gorbachev be ousted in a coup? Would the United States go to war in the Persian Gulf? Would Canada disintegrate? (Many experts believed that it would, on the ground that Quebec would succeed in seceding.) And so on. By the end of the study, in 2003, the experts had made 82,361 forecasts. Tetlock also asked questions designed to determine how they reached their judgments, how they reacted when their predictions proved to be wrong, how they evaluated new information that did not support their views, and how they assessed the probability that rival theories and predictions were accurate.
Tetlock got a statistical handle on his task by putting most of the forecasting questions into a “three possible futures” form. The respondents were asked to rate the probability of three alternative outcomes: the persistence of the status quo, more of something (political freedom, economic growth), or less of something (repression, recession). And he measured his experts on two dimensions: how good they were at guessing probabilities (did all the things they said had an x per cent chance of happening happen x per cent of the time?), and how accurate they were at predicting specific outcomes. The results were unimpressive. On the first scale, the experts performed worse than they would have if they had simply assigned an equal probability to all three outcomes—if they had given each possible future a thirty-three-per-cent chance of occurring. Human beings who spend their lives studying the state of the world, in other words, are poorer forecasters than dart-throwing monkeys, who would have distributed their picks evenly over the three choices.
Tetlock also found that specialists are not significantly more reliable than non-specialists in guessing what is going to happen in the region they study. Knowing a little might make someone a more reliable forecaster, but Tetlock found that knowing a lot can actually make a person less reliable. “We reach the point of diminishing marginal predictive returns for knowledge disconcertingly quickly,” he reports. “In this age of academic hyperspecialization, there is no reason for supposing that contributors to top journals—distinguished political scientists, area study specialists, economists, and so on—are any better than journalists or attentive readers of the New York Times in ‘reading’ emerging situations.” And the more famous the forecaster the more overblown the forecasts. “Experts in demand,” Tetlock says, “were more overconfident than their colleagues who eked out existences far from the limelight.”
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much more
The Dow jumped closer to that glowing orb of 11,000 today, and the S&P 500 enjoyed its own surge, surpassing last week's multi-year high.
It has been a big week for economic numbers, and a lot of money is probably playing the December rally game (Charles Biderman says a lot of money has been flowing into US stock funds, at any rate), but Bill Bernstein tells me to follow financial news only enough to learn to ignore it, so I'll do that, at least for the length of this post, and will run down the economic outlook as the numbers call it another day.
The valuation worksheet for today's close shows that even at 1264, the S&P 500, from a price-to-earnings perspective even using conservative earnings metrics, is within a broad "fair value" range.
Calculating multiples at this level of the stock market, the 2005 earnings multiple slide in below the average since 1960, and anticipating a 7% growth in corporate earnings for next year, the multiple nears the post-1935 average. A lower multiple, for fundamental buyers, is a better multiple, though trend traders and the like probably don't care.
So US stocks are not a screaming bargain given a longer historical perspective, but are not terribly highly priced, especially for a period of relatively low inflation and of rather unrewarding bond yields. Dollar-cost-averaging long-termers can probably still smile about their monthly allocations to US stocks.