Your reading
Three questions. One reading. How well does it fit you?
Pick a colour, a season and the time you think best. You get a short personality reading. Rate it. Then an analyst writes a note on four stock charts, and you see what each stock did next.
The analyst's note
Why the reading fit
In 1949 the psychologist Bertram Forer gave his class a personality test. A week later each of 39 students got a typed sketch of their personality, and was asked to rate it from 0, poor, to 5, perfect. Every student got the same 13 statements. Forer had put them together partly from a horoscope book. The average rating was 4.26. Only one student rated it below 4.
The six lines in your reading are Forer's own words. Your answers were never used: every one of the 64 ways to answer gives the same reading. The lines fit because they fit nearly everyone. Who has never doubted a decision? Who is not sometimes outgoing and sometimes reserved? This is now called the Forer effect, or the Barnum effect, and it has been repeated many times since.
The same game in a trading room
The analyst's note works the same way. One line says up, one says down, one says sideways, and two say nothing at all. Whatever the stock does, one line called it. A note like that cannot be wrong, so it cannot tell you anything.
Market forecasts that do commit are wrong about as often as a coin. CXO Advisory graded 6,582 public forecasts made by 68 market experts from 2005 to 2012. The average expert was right 47.4% of the time. 42 of the 68 scored below 50%.
The vague forecast survives because it feels clever when you read it and right when you look back. The firm one gets graded.
Before you trust a reading or a market call, ask: what result would have proved it wrong?
Sources
- Bertram R. Forer, "The fallacy of personal validation: a classroom demonstration of gullibility", Journal of Abnormal and Social Psychology 44 (1949), 118–123.
- CXO Advisory Group, "Guru Grades" (2005–2012 forecasts).
- The charts are made fresh in your browser: fair daily coin flips whose size follows a GARCH(1,1) rule, so calm and stormy spells cluster. "Up" or "down" means a move bigger than half of the chart's own typical one-month move; anything smaller is sideways.