Condemned to Repeat Finance Past

Those who cannot remember the past, are condemned to repeat it. Santayana

I once said:

I’d guess you can get 80% of the improvement that predict markets offer by using a much simpler solution: collect track records.

Case in point – stock investors:

Based on the answers of 215 online broker investors to an Internet questionnaire, we analyze whether investors are able to correctly estimate their own realized stock portfolio performance. We show that investors are hardly able to give a correct estimate of their own past realized stock portfolio performance and that experienced investors are better able to do so.

It is hard to learn from experience if you don’t remember what you did and how well that worked. 

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  • Bob

    Robin, you might be interested in what this start-up is doing: http://www.covestor.com

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  • http://profile.typekey.com/halfinney/ Hal Finney

    This is great advice and I hope those who have been asking for more practical ideas for overcoming bias take it to heart. BTW I found a downloadable version of the paper available from SSRN. A couple of other results from the paper:

    “The correlation coefficient between return estimates and realized returns is not distinguishable from zero. Furthermore, people overrate themselves. On average, investors think, that they are better than others. The correlation between self ratings and actual performance is also not distinguishable from zero.” Actually the overconfidence result was quite mild in their data: 53% thought they did better than average.

    In terms of practical consequences, Robin’s earlier post proposed keeping track of how various pundits and forecasters have performed, to allow judging the quality of subsequent analyses and predictions. I interpreted that idea as being something of a collective effort, but perhaps it would be possible to apply this concept immediately, in today’s environment of bloggers and online columnists with histories going back several years.

    One source I have found is that some bloggers make predictions every year, and then grade themselves at the end of the year. They tend to grade rather easily but an external observer could decide for himself. Google on “predictions for 2007” and such and you get quite a few hits.