Our Own Worst Investing Enemy: Forecasting Should Be Left to the Astrologers

Last Updated Jul 9, 2010 10:14 AM EDT

As I have said before, you're best served by ignoring forecasts when making investment decisions. Today, my Buckingham Asset Management colleague Kevin Grogan will take a look at the reliability of forecasts.

Gustav Torngren and Henry Montgomery studied behavioral biases in forecasts in their study, "Worse Than Chance? Performance and Confidence Among Professionals and Laypeople in the Stock Market." Participants in the study were asked to select the stock that would outperform each month from a pair of stocks. All of the stocks were well-known names, and players were given the company's name, industry and trailing 12-month performance for each stock. There were two groups of people that participated in the study:

  • Undergraduates in psychology
  • "Experts" such as portfolio managers, analysts, and brokers
The results? Both groups would've done better flipping a coin and letting luck decide their selection. The students tended to rely on past performance for their choice, while the professionals relied on their expertise. The professionals actually underperformed the students. From the study: "The results suggest that a chimpanzee, a symbol of randomness in economic contexts, could have outperformed the stock market professionals in this study. And chimps do not possess cognitive advantages."

Follow the series: Our Own Worst Investing Enemy

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.