‘Human beings poorer forecasters than dart-throwing monkeys’

Little inconsistencies do not seem to bother forecasters. They are never wrong, they just change their mind

It is often traditional for commentators at the end of the year to make predictions about the coming year. Since I was not born with the gift of prophecy and cannot see the future, I have decided to do the next best thing. Rather than make predictions myself, I'm going to examine other predictions.

No analysis would be complete without a review of predictions from the most influential analysts and economists at international banks. These banks, including Goldman Sachs, Credit Suisse, UBS and Morgan Stanley, Bank of America, JPMorgan Chase, Citigroup and Deutsche Bank among others, employ vast armies of experts trained to read the entrails of the global economy and predict the future.

It is not surprising that many other predictions are heavily influenced by the present. For example, 2010 has been an excellent year for commodities and emerging markets. Goldman Sachs feels that these trends will no doubt continue. Last year a weak US economy moderated global demand. "This is likely to change in 2011 with a stronger US that is likely to bump up against a China that is consuming dramatically more commodities than pre-crisis." Logically they predict that "the raw materials most affected will be those with the tightest supply, including crude oil, copper, cotton, soybeans and platinum." Of course, gold is included in this prediction. It is supposed to rise to a new high of $1,690.

One major element of this prediction is that China will continue to grow and its demand for commodities will continue. In the past, this has been a relatively safe prediction, but it may not be true this time. For example, Morgan Stanley predicted that Chinese inflation would be moderate in 2010. Instead it has grown rapidly. From 3% it is now above 5%. The voracious demand for commodities from China in 2010 has increased their price which has increased Chinese inflation.

To deal with that inflation will require substantial tightening and slowing of the Chinese economy. The Shanghai Composite Index has been expecting this Sword of Damocles to fall for most of the second half of 2010. As a result, despite the predictions, it has performed poorly. It is down over 10% in 2010 in contrast to US markets, which are up about 10%. This is a dramatic contrast to an 80% spike for the Chinese market in 2009.

The expectations of the Chinese markets were satisfied by the Christmas Day hike in interest rates. While the interest rates themselves may not yet have the effect on the Chinese economy that one would expect in a Western market, it does send a powerful signal.

Getting China wrong is not that uncommon. Goldman Sachs predicted that the Chinese economy would grow by only 6% in 2009. In fact it grew over 9.3%. One of the reasons for inaccurate predictions has to do with the expert's cognitive bias of anchoring. They have a stake in seeing their past predictions come true. As a result they may not want to consider information that contradicts their forecast.

The changes are evident to Yu Yongding, former head of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences and Chinese central bank's monetary policy committee, who wrote that "[China's] growth pattern has now almost exhausted its potential. So China has reached a crucial juncture: without painful structural adjustments the momentum of its economic growth could suddenly be lost."

For the US market, forecasters are predicting "a low US real interest-rate environment will continue in 2011, particularly given the resumption of quantitative easing measures in the US."  The problem with this forecast is that quantitative easing has not resulted in low real interest rates in the US. When first announced, interest rates for 10-year US treasury bills were below 2.5%. Now they are above 3.5%.

Little inconsistencies do not seem to bother forecasters. They are never wrong, they just change their mind. In October 2010, Goldman Sachs predicted that the US economy would slow to 1.8% from 2.6%. By December, they had a change of heart. The forecast has increased almost 40% and they now predict that the US will grow at 2.5% through early 2011 and then almost double to a 4% annual growth rate.

The reality is that the predictions by these experts are basically worthless. Professor Philip Tetlock from the University of California did a study of 82,361 forecasts by 284 people who made their living making forecasts. What he found was that "Human beings who spend their lives studying the state of the world, in other words, are poorer forecasters than dart-throwing monkeys."

So why bother with predictions at all? Investors do not need to know whether the prediction is right or wrong. To profit, it is important to understand the extent a prediction influences the market, so they can profit when the truth finally becomes known.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])



Joy Bhart

6 years ago

A 20 Billion Rupee day-light robbery indeed.. and there is not one thief.

Tax payers money..

Deepak K Rao

6 years ago

“In fact, I will go out on a limb and tell you that the experts have no idea what stocks you should buy to provide superior future returns. A blindfolded chimpanzee throwing darts at the stock pages can select individual stocks as well as the ‘experts’.” Burton G Malkiel

From: ‘ The Random Walk Guide to Investing: Ten Rules for Financial Success’

TVS Shriram Growth Fund invests Rs50crore in Indian franchisee of International Restaurants

TVS Shriram Growth Fund has invested Rs50 crore in Om Pizzas & Eats Pvt Ltd, which holds franchise rights in India for multiple brands such as Papa John's Pizza, Chili's Grill & Bar and The Great Kabab Factory. Om Pizza is promoted by Bahrain-based Jawad Business Group, which has the franchise for several global restaurant and retail brands, and operates over 650 restaurant and retail outlets across the Gulf Cooperation Council States.

Gopal Srinivasan, chairman & managing director of TVS Capital said, "Om Pizza's focus on organised food services industry fits well with the fund's focus on consumption driven opportunities and provides us exposure to significant macro driven opportunities in the eating out market. We are keen to partner with JBG to scale their outlets across India over the next four years. JBG has strong expertise of operating international brands and brings over 10 years of relationships with several of these brands."

Om Pizza currently operates 28 restaurant outlets across India. Papa John's Pizza outlets are based in NCR, Mumbai, Bengaluru and Pune. The company has Chili's Grill & Bar restaurants in Mumbai, Bengaluru and recently opened in Hyderabad.

Suresh Raju, executive director, TVS Capital said "The total eating-out market in India is nearly Rs1,00,000 crore, with less than 10% of that being penetrated by organised branded vendors. The organised branded food services industry is expected to see strong growth in the future with increase in propensity to eat out, nuclear families, working women, growing disposable incomes and urbanization. We are very excited to have Hemu provide operational & strategic support to Om Pizza."

Lodha Capital Markets acted as exclusive advisors to Om Pizza & Eats in this transaction.



sudarsanam g

6 years ago

pl give oppurtunity for franchise

Weekly Closing Report: Sensex will be on a firm uptrend only above 20,200

The domestic market witnessed lacklustre trade in the week ended 24th December on unsupportive global cues, which saw low volumes ahead of the holiday season in the West, and lack of major domestic economic triggers, and ended with modest gains.

With foreign fund inflows at record levels of Rs58,982.38 crore in 2010, the economy growing at 8.9% in the fist half of the current fiscal and the market closing 13% higher in the calendar year so far, investors are hopeful of a continuation of the trend. However, factors like risks of rising inflation and a possible hike in fuel prices are likely to put some pressure.

The market opened in the red on Monday, However, profit booking after the indices touched the day's high, pulled the indices down to the neutral line, where they closed with a mixed bias. Strong global cues enabled the local market log in with gains on Tuesday. Across-the-board buying kept the indices in the positive terrain throughout the trading session and helped them end above their crucial levels.

The market witnessed a gap-up opening supported by good global cues on Wednesday. The benchmarks touched the day's highs in early trade and were in a narrow range after that, ending lower at the end of the session. The steep rise in the weekly food inflation numbers put the indices under pressure on Thursday, and kept them in a narrow range on both sides of the neutral line till the end of the session.

The last trading day of the week saw the indices climbing into the positive zone, from a negative opening. Support came from consumer durables, metals and fast moving consumer goods stocks, helping the key benchmarks to end above their psychological levels.

The market closed the week with a modest gain of 1%; the Sensex gained 208.81 points and the Nifty rose 62.85 points.

Among the Sensex toppers, Hero Honda jumped 15%, Reliance Communications surged 10%, Sterlite Industries, Hindalco Industries advanced 7% each and Jindal Steel & Power rose 4% on a weekly basis. Standing at the bottom of the list were Tata Motors and ONGC which declined 3% each, Reliance Infrastructure that fell 2%, and Larsen & Toubro and Jaiprakash Associates which shed 1% each.

The BSE Metal index (up 4%) and BSE IT index (up 2%) were the noteworthy gainers, while the BSE Capital Goods index and BSE PSU index (down 1% each) were the laggards this week.

Fuelled by soaring onion prices, the food inflation after a gap of one month re-entered the double-digit zone at 12.13% as on 11th December, raising fears of another key policy rate hike by the Reserve Bank of India (RBI) in January.

Official data showed that for the week ended 11th December, food inflation rose by 2.67 percentage points, from 9.46%, touching a six-week high. It was 10.15% for the week ended 13th November.

In a bid to cool skyrocketing retail prices, the government has abolished import duties on onion and banned its exports for an indefinite period even as wholesale prices started showing signs of decline.

Agriculture secretary PK Basu expressed confidence that retail prices would come down in seven to 10 days with the expected arrival of fresh crops. Deputy chairman of the Planning Commission Montek Singh Ahluwalia said the spike in onion prices was only a temporary phenomenon due to unseasonal rains.

On the corporate front, JSW Steel announced that it will acquire a controlling stake in Ispat Industries-with an enterprise value of around $3 billion-for a consideration of Rs2,157 crore. The deal envisages Ispat Industries to issue 108.66 crore equity shares on a preferential basis at Rs19.85 per share. In addition, JSW will make an open offer to minority shareholders of Ispat as per SEBI guidelines.

In international news, South Korea on Sunday announced plans for a levy on foreign borrowing by banks, in an attempt to curb potentially destabilising capital inflows. The move is the latest in a series of measures by emerging markets to curb a flood of capital from the US and elsewhere, which is pushing up the value of their currencies.

Reports from China indicate that government authorities are considering enhancing provisioning requirements on local government financing vehicle loans. Besides a probable rate hike also put pressure on the regional bourses during the week.

Analysts are optimistic of the markets doing better in the New Year.


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