Expert Predictions

The consensus of Wall Street strategist’s at the beginning of each year has been quite mixed when compared to actual market returns for the year. For example, the S&P 500 was expected to up 10% for 2008 but had actual returns of -36.7%. At the beginning of 2013, the forecast was for an 8% total return; the S&P returned 32.4%. For the 2013 calendar year, the Russell 1000 (mid caps) had a total return of 34.8% the Russell 2000 (small caps) had a total return of 38.8%, and the iShares Micro-Cap ETF was up 45.6%.

Since 2005, the beginning-year forecasts have sometimes underestimated returns while overestimating gains in other years. Still, the percentage difference between actual and forecast returns has consistently been huge. For example, consensus forecast for 2011 was ~ 10% while actual returns were just 0.1%, a 100-fold difference. For 2012, consensus forecast was for an 11% return while actual return was 16.2%, a difference of almost 50%.

A 1980 classic economic paper from J. Scott Armstrong, The Seer-Sucker Theory: The Value of Experts in Forecasting, found a small degree of expertise in any subject is useful. However, the accuracy of predictions actually declines slightly when the prognosticator has a great reputation.