I’ve never made a secret of my opinion that acting on market forecasts is destructive to investors. Nate Silver’s fascinating new book, The Signal and the Noise: Why So Many Predictions Fail—But Some Don’t includes some telling examples from the world of finance, but he drives home this idea even more forcefully with his insights about the weather.
Silver explains that meteorological forecasts are quite accurate if they’re made just a few days in advance, but the further out you go, the less helpful they become. Forecasts made eight days in advance are useless, and beyond that they’re actually harmful: “They are worse than what you or I could do sitting around at home and looking up the table of long-term weather averages,” Silver writes. Yet despite being aware of this evidence, The Weather Channel and AccuWeather make forecasts for 10 days and 15 days into the future, respectively.
The book also describes how for-profit weather services are more concerned with the perception of accuracy than with accuracy itself. This gives them an incentive to be bolder than they should be. If their models forecast a 50% likelihood of rain,