Fade the experts

This is an interesting chart for anyone who wants to follow the talking heads of Wall Street. They are an optimistic lot with most of their forecasts fall below their consensus. In fact, if you fade Wall Street you may have a winner. Experts, as usual, get it wrong and you are at risk when you follow their advice. This is another clear reason for doing your own work and following systematic models which do not have the biases of qualitative forecasts.

Impact bias and learning to be dispassionate

The impact bias is significant. We overestimate the length and strength of feelings we will have about an event. This effects our overall happiness. We can not effectively forecast our emotional reaction to events. We end up more often than not disappointed after some positive event and realize that we were too morose concerning negative events. The cause could be focalism whereby we place too much emphasis on a single event. It is also based on rationalization. We talk ourselves out of both good and bad states.

 For forecasting, we overestimate what our reaction will be to any large positive or negative event. The result is that we can take action too large relative to what we will feel after the fact. We mispredict our pleasure from any event. This places any forecaster on a emotional roller coaster.Take out the emotions and you will be better at forecasting. Put less emotional investment in a forecast and you will feel better, or at least you will not have the emotional highs and lows.

Herbert Simon's scissors

Herbert Simon developed an analogy based on a pair of scissors. One blade is cognition and the other is the structure of the environment or the task to be done. You can understand human behavior only if you look at both blades of the scissors. 

Our cognition will change with the environment faced. More uncertainty and volatility will affect how we make decisions. Every decision may slow as we wait for confirming information. Decisions will change based on where you are in the business cycle for the market to be traded. The systemic risk of an asset will change with the macro environment. Context is everything.

Weather still issue with crops

The best agricultural forecasts can always go wrong for one simple reason, the weather. With a combination of rains and early frost, the corn and soybean crops may not meet the yield expectations of just a few weeks ago. A light frost can cut yields by about 5% and will reduce denting. A hard killer frost will cut yields by 10-12 percent. Rain will slow the harvest which will also affect yields. The high numbers from the South will not hold in the upper Midwest.

 The current weather patterns are not enough to change the overall direction of price but it will add volatility and cut the downward momentum in these markets. A period of consolidation will occur as the harvest numbers come in and validate earlier forecasts.