Monday, October 26, 2015

Hedgehogs and Foxes - Forecasting skill not always with the experts

Archilochus: “The fox knows many things; the hedgehog one great thing.”

Experts are not all of the same. The differ not only in skill,  but how they look at the world, or more importantly, their cognitive style for making forecasts. This idea of two different cognitive styles base don the type of expertise employed has been developed by Philip Tetlock, the expert on forecasting. Tetlock has been tracking the ability of experts to make predictions for decades and has come up with some very interesting results. His conclusions are not what you would think.

Tetlock finds that we can classify forecasters on a continuum between those who act like hedgehogs and those that behave like foxes. The hedgehog forecaster is an expert in one area. The fox may not be as strong an expert in one single area but has knowledge that is more diffuse. The hedgehog likes to develop his forecast through a single unified idea. He like a unified theme to justify his forecast based on his deep knowledge. The fox is more willing to try different ideas or call upon different information. He is willing to present competing ideas to generate his forecast.  

There is no question we respect the expert hedgehogs albeit they may be a tad insufferable given their focus and knowledge. The fox is willing to change his mind and may provide multiples explanations for a forecast. They may be madding to be around since they may be holding onto multiple ideas. Still, the issue is whether one approach is better than the other for forecasting.

So which cognitive style is better? Tetlock finds that foxes do better with both short-term and long-term forecasting. Not being wed to a single way of thinking seems to have significant advantages over one idea or theory. This seems to be especially the case when there is a high degree of uncertainty with the forecasting problem. The "experts" often are unable to see beyond their current thinking, so they miss big changes. Hedgehogs provide knowledge but often miss the changes. The foxes are more open or accepting of change. 

The hedgehog and fox construct can even be used with discussing systematic trading. The hedgehog is the trader who employs one big unified model to make his decisions. The manager who is a fox is likely to use multiple models and have a weighing scheme between them. He is unlikely to rely on a single model for decision-making. 

The Tetlock work does not suggest that you should avoid becoming an expert or doing you homework for any forecasting project. It does suggest that being open to multiple ideas is important and a style of singular thinking is not effective. 

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