Art De Vany: Comments and Random Thoughts

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Comments and Random Thoughts

September 16, 2005 07:20 PM

1. The evidence cited in the article I posted on forecasting errors shows clearly that financial analysts do not get it right. What they do is to follow the actual earnings sequence over time, adjusting their forecasts to follow the actual earnings sequence. So, they are better at postcasting than forecasting. The lag is about 3 months. Weathermen get it right far more often because they know that nobody can forecast the weather. The research shows that doctors are the absolute worst at forecasting and seem to be incapable of recognizing their own fallibility.

2. The feeling of superior knowledge is a curse. You may think you know a lot, but you don't know anything. Nor do I when it comes to forecasting. I did only it once in my research and I was looking for patterns rather than outcomes. And, I got this right as I was the only economist to forecast the coming of the hub and spoke flight pattern that evolved in airline travel. But, that wasn't hard, all I had to do was to see the constraints on the existing pattern and where it would break as the jumbo jets came into the fleet.

3. God laughs when you make plans. This is a playful kind of wisdom that I like. It is a mischievous concept of God as chance. Far better than any organized religion's view of God. If you have to evoke God to believe in chance, then fine. But, it is more beautiful and inspiring to think of chance for what it is: an irreducible limit to our finite knowledge.

4. Men who can't cook are doomed to obesity and malnourishment. They will be lacking in fundamental nutrients and phyochemicals and will rely on fast foods which are devoid of nourishment and high in calories. Cook by color, texture and variety. Browns are to be avoided. They are a sign of oxydation, the Amadori reaction that browns a cut apple and carmelizes foods through the oxydation of sugar and protein. It does the same thing to the proteins in your body. Colorless foods like rice are devoid of nutrients.

5. New Orleans was a swamp before hurricane Katrina. It was a city version of the modern welfare state. The floods might have been prevented but for the environmentalist law suit that stopped the raising of the levies in 1996. The Sierra Club brought the suit and was successful. Or were they? The environmental disaster from Katrina is of a greater magnitude than even the fanciful stories they told of the consequences of raising the levees.

6. "Journalism" of the kind we have seen is abysmal. But, it is driven by the need for a story. Many are interviewed about their plight and the actions of city, state, and federal governments. Only those interviews that contain a "story" make it through the process to reach the printed page. Reporters want their stuff printed and they have to find a story. So, even though many flood victims are grateful and no verified rapes occurred in the holding facilities (though at least one was attempted), what is selected in the editorial process is completely unrepresentative of the situation. Of course, nothing is representative unless things are normal; that is, unless the individual outcomes are normally distributed. They never are. So, reporters look for what I have called tail events; outcomes far from the typical outcome. I have been through this myself. Reporters call me and several other economists and then pick the economist whose views fit the story. I have stopped doing interviews for the press because I know that it will only be reported truthfully if it fits the reporter's "take" on the story.

7. How do you shape the traps? Remember adaptation is highly specific. You cannot change the overall architecture of the muscle, but you can do moves that require it to adapt to a specific load. So, look in the mirror, something I do not like to do (believe it or not) and watch how the load of the specific move you are doing affects the loading on the muscle. Know whether it is primarily a FT or a ST muscle and work accordingly.

8. A guy in the gym today was doing cable exercises in front of the mirror. He ties up the cables for an hour doing many sets on chest, deltoids and triceps. He looks awful and he is turning himself into a wholly ST kind of guy. I think he likes to see himself in the mirror, a vain and hopeless attitude. I was in and out of the gym and he was still on the cables. He has no symmetry and he has very thick skin. His muscles will never show doing this. He has a bit of bulk, but it is all ST fiber. Worthless in the shoulders and chest. No shape, no calves or quads and all ST.

9. The same process I noted about stories that filter through the editorial process for reporters holds for financial reporters. Is it news when the forecasted earnings are equal to the realized earnings? Any editor would turn the story down. But, if forecasting were accurate (it is not, it is a postcast not a forecast) then this would be the norm. It would not be reported. If forecasting were unbiased and converged on the realization of earnings and if errors were normally distributed (they are not) then about half the earnings realizations would be above the forecast and half below. All they have to do to forecast earnings is to have some idea of the change from prior earnings. You might think they could get this right, but they can't even do that. So, reporters pick a stock where earnings are below the forecast (even when statistically they are within the error region and, therefore, not below the forecast). Then they check to see if the stock fell and then it becomes a story. But, there are equally many where the earnings fell below the forecast, but the stock price went up. If forecasts are unbiased, then this has to be true. Thus, because of the selection process we only hear about stocks whose prices fall when their earnings are below the forecast. Pure selection to find a story.

10. When do you change from being a carb burner to a fat burner? Eventually. So do it. It happens when your insulin levels finally fall into the range that is typical of hunter gatherers and the evolved human physiology. Somewhere below an insulin level of 8 (mine is 3.4). But, you never are a pure fat or carb burner. Every process in the human body is a matter of distributions. Every hormone is always present in some amount. It is concentration of one or some over the others that constitutes a signal. So, a fat burner has relatively low insulin and higher glucagon and other hormones compared to a carb burner. No one knows how long it takes to alter the distribution to a more favorable profile, but it does happen. Would not knowing how long it will take, which is highly individualized, prevent you from going the right way? We should recognize the limits of knowledge and just get on the path that favors better outcomes.

11. There are a lot of people living in circumstances as risky as those who drew a bad outcome from Katrina in New Orleans. Some 3 million or so live in and around Naples below Vesuvius which earlier wiped out an entire city. About 12 million live along the faults in California. There are ocean front homes along every coast. Many people are obese and playing the same risky game as these people. Every disaster relief effort that pours money and resources to these people taxes us all for their choices. The price they pay for their choices does not encourage forethought. Private insurance knows how to price these risks far better than politicians who fall all over themselves in the rush to "help" the victims. We are up around 250 billion now in promised aid, with no end in sight. This is poor public policy.

12. One of the great mysteries is how the US government can create and sustain such a remarkable military fighting machine and do almost everything else so poorly. If only the "war on cancer", the "war on drugs" and the "war on poverty" were equally effective as the war we fought in Afghanistan or Iraq. War is such a poor model for any government program but war. Governments cannot seem to run good schools but they are good at creating programs that create and reward victims.

13. Race is such a slippery concept; there are sub-populations within the human populations. And they do differ a bit in their genetics. But, that doesn't tell us much. Yet, these gene frequencies must be recognized because, among other things they tell us something of the susceptibility of sub-populations to diseases and of the efficacy of drugs for genotypes. It is subcultures that more strongly affect behavior. And these have next to nothing to do with race. Yet, it is possible to create a subculture through discrimination or through rewards for particular behaviors. Or lack of punishment. I was particularly struck when I read of the behavior of the sight-disabled or nearly blind. Many with poor vision make their way in life. But, some become "blind" when they accept the aid that is available for vision below the threshold for legally blind. This is just a number, but it had a profound effect in the aid programs. When an otherwise functional person accepts aid and becomes legally blind they change their behavior and begin to act less capably. This is like the story I told in my previous post, What Hump. If Marty Feldman, Mel Brook's Igore in Young Frankenstrein, had accepted the offer of the operation to fix his hump he would have accepted an altered vision of himself and his capabilities. Instead, he said, "What hump"? and retained his personal vision of his own capabilities and "normality."

14. We passed 1.5 million hits today.

15. I have been working on the Mike Austin golf swing this week. What fun to explore a new swing and how effective I think it is. The PGA swing, with all its rotation of torso and forearms, is too hard to keep together without the practice that pros do. And, it is hard on the back with all the twisting it places on the spine. I haven't got it yet, and never will fully, but I like it. I was already "long" in my driver and irons, because I was a baseball player and I retain my FT fibers. But, I have gotten wild from working on shoulder rotation (and playing infrequently and almost never practicing). The Austin swing is not PGA approved; in fact in order to get a PGA card Austin had to demonstrate he could do the PGA swing. Sounds like doctors getting their card and following other association recommendations that are not so good, like the ADA diet.

16. Stretching, as I noted in my recent post, is far over-rated. What else can practitioners of healthful activities do but recommend things that they develop and promote? Never stretch a muscle that has a knot in it. It is already so tight that further stretching can only stress tendons. Unless the trigger point is loosened, there can be no Golgi organ relaxation response; it is already pulled so tight that it cannot respond effectively.

17. There is no religion of peace. All organized religions promote their own existence and further their own survival. They break people off into groups and create an "us and them" attitude. Much research shows that when people are so-grouped they do strange things. I am a human being first and a husband and father and grandfather next. And I am a citizen of this country. I am spiritual, but I will not be a member of a religion. My beliefs and attitudes are my own and completely independent of any religion.

· Everything

Comments

Posted by: outsider at May 17, 2007 1:26 PM

Posted by: Flower Online at September 12, 2006 3:24 AM

Regarding points 1 and 9, I think you have to be careful with your definition of financial analysts, their accuracy and the resulting effects of their forecasts on the market.

The Montier report you cite is not clear, but what I think he has done to demonstrate the inaccuracy of the financial analysts is to compare the actual growth in total S&P earnings to the macro analysts estimates of the same (and I think the lag he gets looks like 12 months rather than 3 months). This is quite different from what the company analysts are doing: they are forecasting results for individual companies and the results they produce are very heavily steered by the companies themselves. (It's probably wrong even to call them forecasts!) That is why the consensus analyst forecasts for a company are often uncannily close to the real figures - Cisco used to beat the consensus forecast by exactly 1c quarter after quarter. In effect the analysts are one of the prime means for a company to get information into the market, and everyone (company, analysts and investors) knows the it's a fix. Hence when the results differ markedly from the analysts forecasts the price usually changes dramatically.

The journalists are keying off the individual company forecasts and results, not the lagging aggregate forecasts that Montier graphs

If you were to take the individual company profit forecasts for earnings growth and aggregate them on the same weighting as the S&P you would get a different chart from the one shown by Montier. From direct experience this is certainly the case with the Australian market indices, and I suspect the same would hold in the US. Whether it would be more accurate reflection of the actual earnings growth, I don't know!

When a company misses its earnings target it is not usually because the analysts has made a bad forecast (although it may be), but because the company has been misleading the market.

However, when the forecasts cover periods longer than a couple of quarters in the future (the period when the companies themselves have the best visibility of their prospects), their accuracy really does drop off alarmingly... But this was not your point, I think.

Finally, weather forecasters may be 'more accurate' not just because they have a better appreciation of their own falibility, but because the weather really is easier to forecast - in the US you can get about 75% accuracy in weather forecasting by saying that the weather tomorrow will be the same as today.

Posted by: Edward at September 17, 2005 1:12 PM

Point 11. The implications for future disasters are not promising. I obviously agree that the government shouldn't even be providing insurance. If people value living in these places more than the costs, fine let them live there (though there is the issue of the costs of government rescue operations, etc.).

But there are other issues:

1) The Federal government is going to provide full government flood insurance coverage for people who didn't even buy the heavily subsidized government insurance. It is going to be difficult to be able to enforce making sure that people buy insurance in the future.
2) The notion of Federalism seems completely dead. If the Federal government is going to be expected to step in and fill in when the local governments don't do what they are supposed to do, there is going to be no incentive for local governments to do anything.

Point 6. Journalism is entertainment. As to your other point about journalists calling people until they get the position that they want, I have several times run into a different variant of that. When I was at the Yale Law School, NPR's All Things Considered interviewed me a couple of times about a year apart. The first of those two interviews they deliberately edited what I said so that it seemed like I was saying the opposite of what I was saying. The second time they called I said that I was very upset about the previous interview that they had done and that I wanted their promise that they wouldn't edit like that again. They apologized and the person that I was talking to said that they didn't know who had done that, but that there was no way that they would do it. The interview proceeded where they would ask me similar variations of the same question for hours over two different days and I would keep on giving them the same answer back. The last time that they said well if this were true wouldn't this follow, and I said its not true, but I suppose if it were true that would happen, but it wasn't true. They ended up picking out and using just the middle of the sentence. The only other place that I have dealt with that was about as bad was the CBC in Canada.

Point 12. Congratulations!

Posted by: John Lott at September 17, 2005 11:44 AM

re: Point 6 - "Reporters look for tail events"

This brings up an interesting notion. Would reporters, as a class, make good "Taleb"-style investors, willing to wait for the market's inevitable tail events?

re: Point 12 - "war on cancer"

This is an easy problem to solve. Institute a stable monetary policy and stick to it. Wipe out the cap gains tax, and stick to it. Wait 25 or so years. Maybe a bit longer. Done.

re: Point 11 - "New Orleans"

Your general conclusions here are well taken, but the fact is that if New Orleans didn't exist we'd have to invent her. The middle third of the country depends greatly on a working Port of NO. By tonnage it is the 5th largest port in the world. The efficiencies available by taking advantage of the Mississippi are enormous, and would be most costly to re-engineer our logistics networks to operate without it.

Posted by: dfobare at September 17, 2005 8:21 AM

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September 16, 2005 07:20 PM

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