{"id":61236,"date":"2022-01-02T13:06:19","date_gmt":"2022-01-02T18:06:19","guid":{"rendered":"https:\/\/olduvai.ca\/?p=61236"},"modified":"2022-01-02T13:06:19","modified_gmt":"2022-01-02T18:06:19","slug":"how-to-make-better-predictions","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=61236","title":{"rendered":"How To Make Better Predictions"},"content":{"rendered":"<header class=\"ArticleFull_header__11o5_\">\n<h3 class=\"ArticleFull_title__2cUI6\"><a href=\"https:\/\/www.zerohedge.com\/markets\/how-make-better-predictions\">How To Make Better Predictions<\/a><\/h3>\n<\/header>\n<div class=\"NodeContent_mainContent__38L44\">\n<div class=\"NodeContent_body__2clki NodeBody_container__1M6aJ\">\n<p><em>By <\/em>Tis the season of Wall Street predictions. How will US, European and Asian stocks do next year? How many times will the Fed increase interest rates? Where will the 10-year Treasury trade in 2022? All this got us to thinking about the process of making predictions, and that is the subject of this week\u2019s Story Time Thursday.<\/p>\n<p>We\u2019ll start with some wisdom from Daniel Kahneman and Amos Tversky, who coauthored a paper they called \u201cOn the Psychology of Prediction\u201d in 1973 (<a href=\"http:\/\/faculty.econ.ucdavis.edu\/faculty\/nehring\/teaching\/econ106\/readings\/kahneman-tversky-on%20the%20psychology%20of%20prediction.pdf\">link here<\/a>). Despite the title, their approach to making useful predictions is math- (not psychologically-) based:<\/p>\n<ul>\n<li>Any prediction should start with the statistical base rate associated with a given outcome. For example, if we\u2019re trying to predict where the S&amp;P 500 will be at year-end 2022 then the index\u2019s long run annual rate of return should be our starting point. Let\u2019s call that 10 percent.<\/li>\n<li>Then we ask the question \u201chow representative will 2022 be of the general environment that created that base rate?\u201d In the case of the S&amp;P, we might make a list of plusses and minuses with \u201cstrong earnings\u201d in the first camp and \u201cpossible Fed policy mistake\u201d in the latter. Let\u2019s say the bias is to the bearish by 2-3 points.<\/li>\n<li>That would leave us with a predicted return of 7-8 percent for the S&amp;P 500 next year, which is what our DataTrek Look Ahead Survey reported was the plurality of readers\u2019 expectations. Given the answers to several other questions in that survey (notably the coin-flip odds respondents gave to a Fed policy mistake), the \u201cwhat\u201d and the \u201cwhy\u201d of the survey\u2019s output lines up very well.<\/li>\n<\/ul>\n<p><strong>Now, if one has a profoundly bearish outlook, this approach also allows you to consider that view in a statistical framework:<\/strong><\/p>\n<ul>\n<li>Let\u2019s say we want to predict that the S&amp;P 500 will be down 10 percent or more next year.<\/li>\n<\/ul>\n<p>\u2026click on the above link to read the rest of the article\u2026<\/p>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>How To Make Better Predictions By Tis the season of Wall Street predictions. How will US, European and Asian stocks do next year? How many times will the Fed increase interest rates? Where will the 10-year Treasury trade in 2022? All this got us to thinking about the process of making predictions, and that is [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[27509,27508,10693,4318],"class_list":["post-61236","post","type-post","status-publish","format-standard","hentry","category-economics","tag-datatrek-research","tag-nick-colas","tag-prediction","tag-zerohedge"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/61236","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=61236"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/61236\/revisions"}],"predecessor-version":[{"id":61237,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/61236\/revisions\/61237"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=61236"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=61236"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=61236"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}