Are You a Superforecaster?

 | Feb 23, 2016 | 11:00 AM EST
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One of the most successful hedge fund managers on the planet for the last 30 years is making his investment team read the book, Superforecasting: The Art and Science of Predicting, by Phillip Tetlock and Dan Gardner. The manager hopes this exercise will enhance his team's risk assessment, help them focus better on certain investment themes and outcomes and, ultimately, increase returns. It's another way that he is trying to gain an edge.

Think of superforecasting as another layer of assessment: measuring everything from national intelligence projections to investment theme projections. What was the risk-adjusted best guess given all the information available that Osama Bin Laden, for example, really would have been found in the that house in Pakistan, or that WMDs would have been found in Iraq? What is the likelihood that new cancer drug will prove effective? Is it 50%, 70%, 90%?

It turns out, Tetlock asserts, that certain people are superforecasters. They are not the hosts of TV talk shows and famous columnists. They are people like Bill, living in Kearney, Nebraska, or Doug, in Santa Barbara, California, who like to "try, fail, analyze, and try again." They are probably a little nerdy. They are constantly reading and updating, pragmatic, open minded, comfortable with numbers, cautious, humble, introspective and self-critical. They usually like math and science, and they are news junkies. When facts change, they change their minds. They probably think about risk like a poker player. 

If you want to find out if you are a superforecaster, go to Good Judgement is a consultancy born out of an annual academic forecasting competition that several thousand people have participated in annually since 2011. The best of this group—several hundred so far—can apparently produce accurate predictions rivaling anything coming from the hundred thousand people in our intelligence agencies backed by billions of dollars.

Superforecasting is another extension of the trend towards more-scientific analysis of day-to-day life. For instance, medicine was doled out somewhat willy-nilly until the beginning of the twentieth century. Very scholarly doctors used to bleed people, for instance. Then came some courageous doctors who decided to challenge conventional thinking and began to measure results and test certain medicines using control groups. Information got better, outcomes got better and medicine got better.

That same spirit is behind the superforecasting trend. Technology has advanced such that we are awash in information. Those who can handicap event outcomes better than others have an edge. They are the superforecasters. In a way, it's sort of like the minds behind Moneyball, plus these people know how to assess risk better than others using numbers, facts and intuition. If you can become 5% to 10% more accurate in your forecasting, then there's a good chance that you can make much better returns. "Never forget that even modest improvements in foresight maintained over time add up," Tetlock notes.

Aaron Brown, chief risk officer of hedge fund AQR Capital Management, with $140 billion in assets under management, adds, "It's so hard to see because it's not dramatic, but it's the difference between the consistent winner who's making a living and the guy who's going broke all of the time."

In any case, I suggest you read the book. Your competition is. The markets are increasingly going to reflect this type of thinking, and perhaps you can discover if you are a natural superforecaster, or whether you need to hone your skills. Plus, if you are part of a team of superforecasters, your predictions will very likely become even more accurate.

It's not hard to see why some of the most successful investors in the world are digging into the world of superforcasting.

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