One of the great problems with forecasting is the fallacy of extrapolation. Forecasters love to believe that tomorrow will be like to today and head in the same direction. Whatever is the trend today will continue tomorrow to the exclusion of other alternatives. There is over-extrapolation.
We don’t see change from the status quo. Now, this may be a good naive forecast and naive forecast have been successful in the short run versus other alternatives. In fact, forms of extrapolation are a good starting point for discussion, but it is not the end. If economic growth is increasing this quarter, it will continue next quarter. A failing economy will continue to fail. This extrapolation view generally creates overshooting with forecasts.
A fallacy of extrapolation with respect to forecasting is different, however, from trend-following albeit they are connected. Trend-following is the use of past prices to determine or measure a signal for price direction. There is an understanding that when the trend changes there will be a change in view. There is no remorse from change and there is no extrapolation beyond what the immediate forecast is. In fact, although they are, a trend-follower is unlikely to even call his decisions forecasts.
Forecast extrapolation is an inertia with not being able to see anything but current behavior as future behavior. It is a deficiency of imagination with respect to what is possible. Beating the fallacy requires more choice of alternative economic realities.
After finishing off one of the wildest quarters of my trading career, April managed to take the cake. For those that missed it (not sure how you possibly could have), oil settled negative $37. The effects of this were immediate: risk barometers had to be recalculated, option models switched, and most importantly was the immediate […]
I am not a football fanatic, but I picked up this book on a recommendation and was amazed by Lombardi’s insights on leadership and management. Mike Lombardi is long-time football executive and media analyst. The book focuses on Bill Belichick and the New England Patriots, but his conclusions could apply to any money management firm. A good money management firm is successful because it acts like a well-disciplined organization with a common purpose. That is no different than a competitively run sports organization. Lombardi finishes his book with five key recommendations for firm success that are worth presenting in bold.
After hundreds of discussions with hedge fund managers, I am still surprised that there is a fear of revealing investment processes under the assumption that someone will steal their ideas and intellectual capital. There are few investment styles that are truly unique and special. What is special is still strategy execution – the practical process of delivering returns. Skill is with the decision-making execution of information and strategy.