Value Ideas Blog
My best book of the year: Superforecasting – The Art and Science of Prediction

On October 12, 2004 Yasser Arafat, the 75 year old leader of the Palestine Liberation Organization, became severely ill with vomiting and abdominal pain. Over the next three weeks his condition worsened. On October 29, he was flown to a hospital in France where he fell into a coma. On November 11, 2004 Yasser Arafat, who survived several Israely attempts on his life, died. What killed him was uncertain. But even before he died there was speculation that he had been poisoned.

 

In 2012 researchers at the Lausanne University announced that they had tested some if Arafat’s belongings and discovered unnaturally high level of polonium-210, the same radioactive element that was found in the body of Alexander Litvinenko in 2006.

 

In August 2012, Arafat’s widow gave the permission for his body to be exhumed and tested by two separate agencies, in Switzerland and France.

 

Now the question which you have to answer before you continue:

 

Will either the French or the Swiss inquiries find elevated levels of polonium in the remains of Yasser Arafat’s body?

 

The average person would probably start with the hunch that came to them the moment they read the question. Or they start to make the question to: “Did Israel poison Yasser Arafat?” If you already hold a particular view, the answer to the second question may seem easy: “Yes, 100% they did it!” This is a hunch which is the tip-of-your-nose perspective or System 1 thinking. But this is not a way to make accurate forecasts. If your tip-of-your-nose perspective contains a error, you won’t catch it.

 

To make a better forecast / and improve you thinking process is exactly what Phil Tetlock’s and his co-written Dan Gardner explain, in their excellent book. For me it was the best book which I’ve read in 2015 and I only can recommend it for everyone in 2016. It is thought-provoking and relevant for value investors, and it’s also quite entertaining. In my view, it is a perfect addition to  the book “Thinking, Fast and Slow”.

 

The book focuses on one issue: how we form theories of what will happen in the future.  Tetlock analyzed 82,361 predictions made by 284 experts in fields like political science, economics and journalism. He found that about 15 percent of events they claimed had little or no chance of happening did in fact happen, while about 27 percent of those labeled sure things didn’t. Tetlock concluded that the experts did little better than a “dart-throwing chimp.”

 

The author illustrates that by pointing out the inaccuracy of financial “gurus” at CNBC, whose performance prompted Jon Stewart to remark, “If I’d only followed CNBC’s advice, I’d have a million dollars today — provided I’d started with a hundred million dollars.”

 

The book describes the findings of the Good Judgment Project, which was started in 2011 and which was funded by the American intelligence community. The Project used the Internet to recruit 2,800 volunteers, via blogs, newspaper announcement etc. The volunteers were ordinary people with an interest in current affairs and are featured in the book. Over four years, the researchers asked them to employ public news and information sources to estimate the probability that various events, such as the above mentioned question, would occur. At the end the participants answered nearly 500 questions of the sort intelligence analysts must answer every day. The volunteers were also asked to reaffirm or adjust those probabilities daily, until a question “expired” at a pre-­announced closing date.

 

The outstanding thin was, that some of the volunteers performed strikingly better than the rest. After every year, Tetlock and Mellers studied their strategies, and what they learned about the thinking and methodology of these “superforecasters” is the heart of what is presented in the book.

 

The key learnings of the book can be distilled into a handful of directives:

  1. Base predictions on data and logic, and try to eliminate personal bias.
  2. Keep track of records so that you know how accurate you (and others) are.
  3. Think in terms of probabilities and recognize that everything is uncertain.
  4. Unpack a question into its component parts, distinguishing between what is known and unknown, and scrutinizing your assumptions.

If you like to read the full story and improve your thinking you should by the book, which I can only recommend. The following link gives you more insights as it features a discussion of the author.

 

As always thanks for reading and your feedback, have a great year 2016! Cheers and stay tuned,

Nils

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