Can You Outsmart a Chimp?

by The Algonquin Team, Algonquin Capital

Whether they like it or not, every investment professional knows of the great dart-throwing chimp. The one that beats the experts at everything from picking stocks to forecasting geopolitical events. He is our punch line reminder that the future is unpredictable.

The difficulty with this predicament is that we are constantly required to make judgements about the future. Is this the right time to buy a house? Will we survive a five-hour plane ride with the kids? If I take the QEW will I get to my meeting on time?

While accurately predicting Toronto traffic is a fantasy, it would be nice to outperform a monkey with a dartboard.

So how can we make better forecasts?

This is the question that Dr. Philip Tetlock and the folks at the Good Judgement Project set out to answer. Through extensive tournaments, they were able to identify a group of ‘Superforecasters’ (also the name of Tetlock’s latest book). These individuals consistently outperformed intelligence experts, betting markets, the wisdom of the crowd, and yes, the chimp.

Their hard work begins by decomposing the problem into the ‘known’ and the ‘unknown’, fleshing out the blind spots, biases and assumptions. They then attack from the outside in, formulating an estimate with generic data and then making adjustments based on the particulars of the situation (not the other way around). This probability estimate is then updated with new developments, being careful not to either under or overreact to the information.

It is also worthy to note that their performance improved when they worked in teams where they were comfortable openly challenging each other’s assumptions and conclusions.

Overall the common thread to their accuracy was resisting the urge to jump to conclusions and balancing different, and even clashing, perspectives. And as with so many things, the best way to improve this skill is with loads of diligent practice, where successes and failures are critically analyzed.

Last but not least, it doesn’t hurt to have a bit of luck on your side. After all, each of us has been on the wrong side of chance at some point, and when dealing in probabilities with uncertainties, we can do with all the help we can get.

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