Blog - Investing Notes

April 19, 2006 - Classic Article: Seer-Suckers, or the Efficient Everything Hypothesis

In our blog entry of 3/31/06, we conclude from a wide range of research that the typical "expert" has little to offer individual investors/traders. In our blog entry of 4/18/06, we summarize Philip Tetlock's exploration of forecasting skill and his findings that there are some consistent differences between the best and worst forecasters of complex events. Before shifting focus from the subject of experts, we consider Scott Armstrong's article entitled "The Seer-Sucker Theory: The Value of Experts in Forecasting" from the June/July 1980 issue of Technology Review. Based upon his survey of decades of research in multiple fields (including financial markets, psychology, health care, politics, sports), he concludes that:

• Expertise, above a minimal level, and forecasting accuracy are unrelated, and accuracy may even drop after a certain level. Most people can attain this minimal expertise quickly and easily. (See the figure below.)
• Because improved forecasting accuracy for experts shows up only in some studies with large samples, claims of accuracy by a single expert are of no practical value. No studies show an important advantage for expertise.
• These results come in spite of a possible bias in favor of publishing research that supports conventional wisdom (in this case, that experts are expert).
• People may pay big bucks for expert forecasts not because the forecasts are accurate, but because the buyers want to avoid responsibility for their own decisions.
• The higher (lower) an individual's self-assessed level of expertise, the less (more) likely the individual is to use disconfirming information to alter beliefs.
• Experts are often unaware of how they make predictions.
• The key to improving forecasting accuracy is probably an active search for disconfirming evidence. Rather than an advocate of a belief, be an arbiter of alternative beliefs.

The following figure, taken from the paper, illustrates that attaining even a relatively low level of expertise offers a relatively high level of accuracy in forecasting change; beyond this minimal level, additional expertise does not improve forecasting accuracy and may decrease it.

In summary, "No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers."

Consider the following broad lessons that investors/traders might infer from empirical evidence:

1. Uncritical guru-following, like casual stock-picking, is a seer-suckers's game. [For example, see the Guru Grades section.]

2. A relatively short burst of diligence can boost a novice's forecasting performance to that of an "expert." [See above and see our blog entry of 4/18/06.]

3. There are research practices and thinking styles that one can consciously (if painfully, for some) apply to achieve above-average forecasting performance, or use to identify above-average gurus. [See above and our blog entries of 3/29/06 and 4/18/06.]

4. The drumbeat of expert commentary on all topics from news sources is mostly noise, and in fact probably leans the wrong way on prognostication because the media gravitates toward the experts least skillful in forecasting. [See our blog entry of 4/18/06.]