The problem with headlines, yet again: A correct random prediction does not make a new visionary

IMG_2938

 

Bad headlines do incalculable damage to public discourse, because in the current world of information overload because the torrent is best managed by digesting headlines only. It is understandable that editors then go for a vivacious headline, hey it even happens at this very site, but there should be a reform school or penalty structure for abuse of that privilege.

An endearingly funny yet annoyingly negligent headline recently appeared in the financial media that would, in the ideal world postulated above, yield a stiff and painful penalty. The malarkey in question illuminates a common problem with idiot-level headlines, the illusion of useful information based on testimony from someone who guessed right about something in the past.

A quick primer on forecasting, using concepts illustrated best by Nassim Taleb in “Fooled by Randomness”: For any future activity that warrants media coverage, a spectrum of guesses will be made as to the specifics of that future. Economists are famous for this, offering predictions on anything under the sun based on some model they hold dear. The point to note though is that, no matter what happens in the future, as long as there were enough forecasters one of them will most likely be right. This doesn’t mean he is the smartest or best, all it means is that this year his guess was right. If this person truly is infallible, it would be easy to spot because you could verify if all his guesses were right in past years, not to mention that he/she’d be richer than ten Warren Buffetts.

This phenomenon was best illustrated in a recent Bloomberg article where a headline declared that oil may be bottoming because someone said so, and you should take heed because this someone previously predicted that oil would fall to $25 per barrel (the full headline reading “Oil Trader Who Foresaw Decline Says Price Has Bottomed”).

The initial $25 prediction wasn’t stupid, nor is the person who made it. But thinking this is news is. Probably 6 billion people in the world have in the past year made a prediction on oil prices; is it headline-worthy that someone was right?

What makes the story more perplexing is the stark admissions in the (very short) story that the modern Nostradamus, a hedge fund manager named Pierre Andurand, made 8 percent in his $600 million fund in 2015 and 38 percent in 2014, presumably on his forecasting abilities. But those are actually pretty limp returns for a hedge fund, particularly one that called a major price movement correctly. Given that oil prices fell by 70 percent over that time, it appears that Mr. Andurand wasn’t that impressed with his own forecasting skills, certainly far less so than the Bloomberg reporter. Maybe it’s because, as pointed out at the bottom of the article, Mr. Andurand closed his previous hedge fund in 2012 after losses the year before.

In the end, the article did present all the pertinent information, that Mr. Andurand made a prediction that came true, but that he was ultimately neither very good at forecasting nor confident enough to bet heavily on his opinions. That makes him a normal human being. It’s too bad the headline makes it sound like something else entirely, like this dude was successful at calling the markets. For headline readers, another misconception created and filed away along with lord knows what other errors…

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: