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Financial Predictions without Skin in the Game

So the folks over at Freakonomics did a Podcast on the Folly of Predictions where they pointed out the obvious. Humans are lousy at Predicting future events (no matter what models and heuristics that are used). In a follow-up post More Predictions, From Bad to Worse another very good point was made:

Fact: Because the incentives to predict are quite imperfect bad predictions are rarely punished this situation is unlikely to change.

Freaknonomics Podcast September 2011

Excellent point! If someone makes predictions in the media, they should then be forced to prove that they are backing up this prediction with either money of their own, or give a punishment that they will take if they are wrong. This could make Stock Predicting a much more exciting game to watch.

Think of it, if I stood up and stated:

The Eternal Flame in Ottawa (not the Olympic flame)
The Eternal Flame in Ottawa

I think Internationl BuggyWhip Megabrand (IBwM) is a great investment, and they will beat the market, and to show my commitment to this statement here is a link to prove my purchase of 2000 shares of this fine stock AND if I am wrong (and the stock goes down in the next 3 months), I will personally stand naked on Parliament Hill next to the eternal flame on January 15th for 2 hours, as penance for being wrong.

You would think that either:

  1. I’ve lost my mind and need to be institutionalized. -or-
  2. This is a great stock tip

Would it make me any better at stock prognostication ? No, but it might stop me from making outlandish predictions that I have little (or no) data to support my statements.

The next time someone predicts something, ask them what they are willing to do to back up their claim, then you’ll know how confident they are in their statement.

If anyone goes to the eternal flame on January 15th don’t expect to see me standing there.

Canajun Finances Home » Financial Predictions without Skin in the Game

Feel Free to Comment

  1. But… But… ??? No butt… At the Eternal Flame??? (grin)

    Agreed that it is too easy that a stock tip would get things to change and throw the market off…

  2. I like the idea of them actually having skin in the game. And my guess is if they did that, the stock would rise because people would think they knew something, so then their predictions would come true.

  3. Ok, but professional money managers shouldn’t get to stand near a fire, no matter how small, if they make a bad prediction.

    Personally I always remember one of Gordon Pape’s anecdotes where he explains how the CEO of a company who is settling a nasty third divorce needs to raise money in a hurry so he “tips” an acquaintance by email, accidentally sending it to someone else’s address, and waits for the shares to climb a bit, exercises his options, pays off his lawyer’s bills, and does absolutely nothing differently at the company so eventually the stock plunges again. We never know who is manipulating us or why so taking “tips” could be disastrous.

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