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The Dangers Of The "Versus Expectations" Fallacy
Submitted by Omid Malekan via Visual Stories blog,
Friday, the 2nd day of May, brought two important pieces of government reported information: The April unemployment report came in much better than expected, or “blows pasts forecasts“ as USA Today reported, and initial Obamacare enrollment included more of the previously uninsured than expected, something that Mother Jones says is “far far higher than previous estimates.” Both pieces of information are a good way of looking at an analysis pitfall common in the world of Wall Street and now being increasingly ported over to the rest of the news cycle: the fallacy of mistaking how something does vs expectations with whether its good or bad.
Imagine for a moment a hypothetical public company that is in the midst of a long business decline to oblivion. Every quarter the company has lower income and lower revenue until eventually it goes out of business. But at the same time every quarter the company makes such dire forecasts for the future that it gets the Wall Street analyst community to make very low forecasts for the immediate future. It’s possible that on its way to bankruptcy this company manages to report earnings (or losses) that are not as bad as predicted. Given the industry’s obsession with making future forecasts, and the media’s obsession with reporting how events turned out “versus expectations,” its possible and even likely that such a company generates positive news headlines right up to the day it files for bankruptcy. Such is the danger of comparing data versus meaningless expectations.
It would be one thing if “the experts” were good at making forecasts, as then a number coming in much higher or lower than expectations would reveal something significant. But history has shown most people are not good at forecasting anything. Forecasting complicated events with significant short term variation is hard. A company’s earnings, an economy’s jobs creation or a radical healthcare overhaul’s signups are based on a myriad of complicated factors, many of which are hard to measure after the fact, never mind forecast in the future. For evidence, look no further than the Labor Department’s own revisions of numbers it already reported months ago. These revisions can be so drastic that even if some expert accurately predicts a specific month’s jobs figures when they are released, he will still be proven off in the future once those numbers are revised.
Furthermore if someone was good at forecasting any of these numbers, they probably wouldn’t be wasting their time making public forecasts for ours and the media’s consumption. Instead they would either be running their own Hedge Fund making a trillion dollars predicting the future, or being paid handsomely running the actuarial department of a health insurance company. The absence of trillionaires in our midst is evidence of how hard it is to forecast anything on a regular basis.
So why do so many people report and discuss how something did versus expectations? For some, its a way of scoring political brownie points while distracting from a larger success or failure. The roll-out of the Affordable Care Act has been fraught with so many missteps, from crashing websites to people losing preferred coverage, that today’s news can be seized upon as a much needed success story. It should be noted that the whole point of the ACA, and its primary sales pitch, was to bring coverage to people who didn’t have any. In other words, if we compare the recent reports to the original promises made by the law’s architects, an honest headline today would read “Obamacare is happening.” But by comparing the results to predictions made either a few years ago or a few months ago, both opponents and supporters can claim they were right.
As for the media, comparisons to expectations is an easy way of creating fake context, saving them the trouble of doing the harder work of creating real context. To the average reader job creation of 288,000 in a month is not obviously good or bad, and could mean everything from employment is on fire to not keeping up with population growth. Going into great detail about the trajectory of the numbers, how they compare with historical averages or a qualitative breakdown of the kinds of jobs created makes for better journalism than “blows pasts forecasts,” but it doesn’t make for a better headline.
When you hear that a report came out much better or worse versus expectations, all you are learning is that the expectations were inaccurate. To understand whether the report itself was actually good or bad, you’ll have to dig deeper.
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That which cannot be sustained, won't be, period.
Hedge accordingly (It's all any individual can do anyway).
There are lies, damn lies and then there are statistics. -Mark Twain
boko harem...there i said it
Boko does not translate to "Western Education" as it has been said in the media. Haram is obviously "forbidden" in Islam; However, Boko has been mistakely assumed to be derived from the word "Book". It is from the Hausa language to mean "Fraud".
We cannot question the need for Nigerians should learn about Johny Appleseed and Christopher Columbus sailing the ocean blue in 1492 to "Discover" America (Amerigo Vespucci was nobody). Our solar system is 2-Dimensional, the earth is round, 2+2=4.
I am not saying that kidnapping 100 girls is justifiable, but put in in context of Pop Culture and Miley Cyrus (Corrupting all western youth and indocrinating them to beta mind control) this criminal act in Africa sounds like a local police matter.
Now who would expect that?
King Digital (KING) hits the skids at a low of $16.09 today whereas Burger King (BKW) is still riding high at $25.60.
There is only one King!
Market flying upwards!
Wednesday is the new turn around Tuesday.
Wednesday shall now be known as "Wack a Bear Wednesday"
Excellent article. But society today is based on this concept. Politicians are elected because they are deemed the "lesser of two evils." Shitty education is accepted because having no "accredited" education is worse. People submit to groping at airports because of the fear that "terrorism" is worse. The list is endless and there are no positives on it.
I have had this argument several times with members of my family. They keep justifying voting for Obama by saying how much worse Romney is. How many times can you say: "Don't vote for EITHER of them!"? People seem incapable of conceiving of what they actually want (in my case, a government or business elite committed to leaving me and the rest of the world alone rather than inserting itself further and further into EVERY possible decision EVERYWHERE around the world) and then doing our small part to work for that. Instead, they take the script given and work from that. Anyone on here have any strategies for successfully weaning people off this habit of accepting either of two horrible options provided? It's a serious question.
Can a third party candidate run on a simple, grassroots internet based platform:
Prosecute the elite
Get serious about education while
Slowly unwinding the massive worldwide government spending web
?????
Its that or continue eating a shit sandwich for eternity or all out revolt. Yes of course they will try to assasinate this candidate if they were to get any visible traction.
Expectations = Resentments about 99% of the time.
AOL just reported a Q1 earnings EXPECTATIONS miss of 22% citing, gulp, "seasonality" which I assume they mean "bad weather"? Really? BWAHAHAHAHAHAHAHA!!!!!
So by this logic, Zerohedge readers would be able to conclude that Yellen is an oustanding steward of monetary, fiscal, and social policy versus expectations. Might as well add that Barack is a compelling, confident and effective leader versus expectations.
http://en.wikipedia.org/wiki/List_of_fallacies
Traffic on ZH for today misses expectations by most in 2 weeks!!! Read all about it at ZH!
Different strokes for different folks. I'm a permabear, so I buy stocks based on last 3 year average if the company is cyclical or trailing 12 months if the stock is noncyclical. Permabulls buy stocks based on projected future earnings. There's nothing wrong with doing that.
In all though the S&P is trading at less than 15 times next years earnings. The high flyers crashing have done wonders for the shrinking of that forward PE. Fed rates are at 0%. Seeing some sensibility in the market is somewhat refreshing and makes me think the bear case is overrated at this point. A 3.5 sigma rise from the bottom puts the S&P at just shy of 3000. I'm thinking there won't be much of a correction by the S&P.
It's called an 'appeal to figures'. This is by design. Set the spread in a fixed game and beat it as much as you want.
i want to focus on the jobs report. How do we reconcile the April jobs report that showed 288,000 jobs being created and 806,000 people dropping from the work force with economic reality? The question then arises as to how this will spill over to economic policy.
My take on the recent jobs report is that as spring comes upon us ever optimistic and more desperate Americans are being pushed into making a decision as to whether to leave the work force or take a lower paying job that is often part time. Yes, people are busy scurrying around, but it should be clarified not at a fast pace. More on why we should not be overly excited about this report in the article below.
http://brucewilds.blogspot.com/2014/05/reconciling-april-jobs-report-wit...