Forecasts Show: Every Year is Above Average

Forecasts Show:

Every Year is Above Average

difficult negotiation

Many of us have a strong tendency to miss looming problems.  We do not like to acknowledge that things may go wrong.  This can be a real shortcoming when negotiating an agreement, because we make think that everything is going to work out great without being realistic about problems that may arise.

Salil Mehta

Salil Mehta

Few people are as bad about overlooking problems as stock forecasters.  Each year, the major Wall Street investment houses issue predictions about what the next year holds for the stock market.  As statistician Salil Mehta is quoted saying in the New York Times, “It is not easy to be as bad as they [the forecasters] are.  They are much worse than random chance alone would predict.” In a December 18, 2016 article by Jeff Sommer: “Forecasts that are Bullish, and Often Wrong”

Naturally, they wrongly expect the market to go up all the time – people are inherently optimistic about the outlook for the business they are in.  The consensus forecast for every year since 2000 has been for the Standard & Poor 500-stock index to rise, when in fact it has fallen in five years. In years when the market fell, only 9 percent of forecasts predicted that. 

Wall Street investment houses are especially badly at foreseeing just how far the market can decline when times are poor.  Case in point: for 2008, the consensus forecast was for an 11 percent increase, when the reality was a 38 percent decline.  The consensus forecast was off by 49 percent.  That’s not just “oops” – that’s stunningly wrong.

financial forecast

It is easy to make fun of these predictions, but more important is to learn a lesson, namely, our natural tendency is to minimize problems and to expect the best.  This is increasingly a problem for negotiators, because so many negotiations in today’s economy are about agreements that will unfold over time, rather than a transaction which is complete as soon as the product is delivered.  Think of buying software services compared to buying paint, or entering into an extended agreement to work together rather than making a one-time purchase.  These sort of ongoing relationships rarely work perfectly: something unexpected will happen.  We should count on glitches.  Just as not every year can be a winner on the stock market, so too not every agreement is going to be wonderful.

That said, we should keep our eye on the long-run, not the day-to-day problems.  Again, we can learn from Wall Street investment firms.  True, they are overly optimistic about the short-term gains, but they are absolutely correct that over time, the market generally rises.  Sommer notes that he was skeptical in late 2011 about the forecast by Seth Masters of Bernstein Private Wealth Management that the Dow Jones industrial average would reach 20,000 within a decade, an increase of roughly 50 percent.  Well, the Dow is awfully close to that record a mere five years later.