Forecast wrong, or materialisation?
Want to exchange thoughts on a simple process that I've followed for a long time.
Say you map out your forecast (probabilities), and attach a low probability event. Say 80% bull case (e.g., company beats earnings, whatever), 20% bear case (e.g., company misses). If the low probability event materialises, which one do you usually think -
i) The low probability event just happened to materialise. (If you re-ran the trading day a 100 times, the company actually misses earnings ~ 20 times). Basically your forecast was correct
ii) Or do you wonder if your forecast was actually inaccurate, and you should have assigned a higher probability to the bear case.
And for fun's sake - discretionary investing aside, I like to draw links with academic finance/ asset pricing - change in expectations vs surprises, but let's just leave it there for now.
Never thought about it like this would like to hear what others have to say.
Cool. Basically, a binary bull case that I had forecasted 30% probability over the past week materialised this Monday, and I made money on the position. But I suddenly wondered whether I was actually mistaken and should've judged it as a likelier outcome. First time I thought of this, after having done this for some time - courtesy of Mauboussin, Philip Tetlock, Taleb, Kahneman & Tversky etc who taught me so much about the game.
Obviously no one can know, and the only way you can 'know' is to keep track of your forecasts over the long run. Just curious what people think of their own forecasts
From a Bayesian standpoint you now have new information so yes your model / outlook should change
If the low prob case happened, for the reasons I laid out in the low prob case, and I was pretty close on the magnitude /share px impact than that’s the ideal way to be “wrong”. As reps collect over time and the sample size grows I’ll measure my hit rate. If my hit rate is going quite well, I am comfortable saying “good bet, bad outcome”. Some things are unknowable, dealing with uncertainties is the game. This is one of the benefits of starting at a podshops, the number of reps and at-bats you get are much higher and you have plenty of good performance attribution to audit yourself and see what parts of the process you’re doing well or bad at and address them
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