There is a common theme at the start of each year – market predictions.
Analysts offer their forecasts on where the market will end up in the new year. Advisers are not left out too. Some predict funds or sectors that are going to do well in the year ahead, suggesting that investors should pile in high into the funds or sectors.
A recent study, ‘Expert Judgments: Financial Analysts vs. Weather Forecasters’, compared the accuracy of predictions made by financial analysts and weather forecasters.
Both groups were asked to predict corresponding events (the value of the stock exchange index and the average temperature of the next month). The results show that only about one third of the analysts were accurate, compared to roughly two thirds of the weather forecasters.
But when asked how confident they were about their predictions, the average was 58 per cent for financial analysts and 50 per cent for weather forecasters. These results are corroborated by several other studies.
The moral of the story is most market predictions aren’t worth diddly. And the more confident the individual is about their own predictions, the less accurate they are likely to be. The problem with all this is that there is very little by the way of organised data to track how often they are wrong, which means that forecasters will continue to get away with it.
Abraham Okusanya is principal at FinalytiQ
