Monthly Archives: January 2016

Superforecasters, value investors and the (less than) ten commandments of value investing

 

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This is a follow-up on my previous post, where I dealt with the latest Tetlock-Gardner’s book, Superforecasting: The Art and Science of Prediction. As I mentioned there, there are several valuable lessons to learn. Although the best way to hone our forecasting abilities is obviously getting some practice in prediction tournaments, it would be wrong to think that this is the only field where we will be able to apply our new knowledge. As long as we try to answer very specific questions with a reasonable time spam, we keep record of our initial forecasts and we commit to update our beliefs on a regular basis, then this routine qualifies as a useful exercise to improve our forecasting abilities. And it seems that investing in equities meets these requirements.

In particular, I realised on further reflection that there are many similarities between the way superforecasters make their predictions and the way value investors select their investments. So I was wondering whether superforecasters can give us some insights for value investors or not. And indeed they can. Although the comparison may seem a bit awkward at first, we should remember that the purpose of the book is how we can improve the way we make our forecasts, and in this regard value investors have to make forecasts as everyone else. Therefore, although the most succesful value investors already incorporate many of the procedures regularly used by superforecasters, it is worth attempting to make a systematic comparison in order to see what parts of the value investing approach can benefit from superforecasters’ abilities.

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Superforecasting: the Art and Science of Prediction

 

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New year, new predictions. Or at least that’s what many economists are doing during these weeks. But it turns out this year that a couple of months ago was published the book Superforecasting: The Art & Science of Prediction by Philip Tetlock and Dan Gardner, and I wanted to start the year with the topic of predictions. So economic forecasters, beware.

One reason to read the book is because Kahneman says to do so in the book cover (well, that’s enough reason for me). If for you that’s not enough, then you may be thinking that the whole topic of forecasting the future is a bit fanciful and it should not deserve any serious attention – and even more in economics. After all, one could argue that we have the overwhelming daily evidence of so-called experts making their predictions and failing spectacularly most of the time. If they are experts and cannot get it right, who could? It seems then that since Cassandra’s time, Homer’s Iliad character, forecasting has been an elusive activity for the mankind.

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Cassandra and the fall of Troy

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