Planners can learn from handicappers
Financial planners could take a lesson from meteorologists and horse racing handicappers when it comes to avoiding overconfidence, according to recent analysis published by FinaMetrica.
The analysis drew on research conducted at Sydney’s University of Technology by Gerhard van de Venter in which planners were asked in August 2005 to nominate high and low figures for the S&P/ASX 200 index as at December 31, that year, and the bottom line was that 73 per cent of the planners proved to be wrong.
According to the FinaMetrica analysis, this represented a high error rate given that the planners had been asked to nominate a range in which they had 90 per cent confidence and no constraints were placed on the range.
The analysis concluded that the planners were clearly overconfident in their ability to predict the year-end value of the index and it would be reasonable to expect that they would be similarly overconfident in estimates of other relevant variables.
The FinaMetrica analysis pointed to two groups of professionals found to be reasonably well ‘calibrated’ when making predictions — meteorologists and horse race handicappers.
It said these people learned to be well calibrated because of three characteristics of their occupations — they faced similar problems every day, they made explicitly probabilistic predictions and they obtained swift and precise feedback on outcomes.
The FinaMetrica analysis suggested that planners wishing to avoid overconfidence could, as a learning exercise, make monthly estimates of 90 per cent confidence intervals for a range relevant variables and track their performance over time.
AUTHOR
Mike Taylor
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