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« The Quest For Yield (Part 5): Building Your Income Portfolio | Main | Reader Help Sought »

October 20, 2011


Angel Martin

I wanted to add to my previous comment specifically on the assessment of experts. Jeff produced a list of good questions:

"With all of this in mind, here is my summary of how to evaluate forecasters:

Is the forecaster an expert in the subject at hand?
Does the forecaster have a track record?
What model is being used?
What assumptions have been made?"

...but here is the problem. In 4th quadrant situations, (where both the probability of outcomes and the consequences of outcomes are very difficult to estimate), experts have a very poor track record of predicting low probability/high consequence events. Some typical examples are the "Arab spring", fall of the berlin wall, 1929 crash, World war I, etc.

Which brings me to the europe situation, which is deep into quadrant 4. If europe does turn into a disaster, it will be against the predictions of people who are truly experts on europe (by the criteria of Jeff's list).

Now, just because real experts don't predict some disaster doesn't mean that every wacko doomsday prediction will come true! But it does mean that some unexpected and high consequence events will happen that are not predicted by experts.

One last point about europe. We don't know much about what the consequences of various "bad" outcomes might be. But what we do know is that if there is a "bad" outcome, the larger the amount of eurozone debt that goes into default, the more damaging for the world economy and financial system it will be.

As all of the "solutions" in europe, so far, involve loading up the weakest debtors with more debt, i think the potential damage from a "bad" outcome is getting larger, even if the probability of a "bad" outcome is not.

Angel Martin

Jeff, thanks for this article.

It's an important reminder for us to look again at the forecasts we make or use, what we have done ourselves vs what we use from others, what the model is, what is being assumed, what the track record is, how solid it is...etc



A very good post today Jeff. Thanks...


Brian -- It is pretty easy.

No one believes the people whose entire careers are involved in forecasting earnings -- the people you are citing.

Instead the choose to believe some guy who says "earnings estimates are too high" even though there is no evidence and no method for this opinion.

So it is a simple choice: believe the equity strategists who you cite or believe some pundits who say they are wrong.

I am curious. How do you choose?

Thanks for joining in.



I don't see how you can argue that most forecasters are pessimistic when almost all equity strategies from asset firms and banks predict robust double digit earnings growth next year and year end forecasts 10+ percent higher from here.

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