Thursday, May 19, 2011

Of Hedgehogs and Market Seers

Michael Shermer's February 2011 article in Scientific American entitled "Financial Flimflam" reviews some already widely disseminated studies of Wall Street prognosticators that consistently show how "a dart-throwing chimpanzee" can predict future market moves just as well as the "experts".  Shermer believes Philip E. Tetlock may have discovered why Foxes Are Better Forecasters Than Hedgehogs.  "There was one significant factor in greater prediction success, however, and that was cognitive style: "foxes" who know a little about many things do better than "hedgehogs" who know a lot about one area of expertise."  Low scorers on predictions were those who know one big thing, aggressively extend the explanatory reach of that one big thing into new domains, display bristly impatience with those who "do not get it", and express considerable confidence that they are pretty proficient forecasters.  High scoring predictors were generalists who know a little about a wide variety of things (the proverbial "jack of all trades", no pun intended), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in "flexible ad hocery" that require stitching together diverse sources of information - and are rather diffident about their own forecasting prowess.  "Being deeply knowledgeable on one subject narrows focus and increases confidence but also blurs the value of dissenting views and transforms data collection into belief confirmation."  If so, why can't I - the ultimate generalist - ever predict anything?