Experts Fail To Predict The Market – Look for Outliers Next Time

Today, I thought I’d take a break from discussing terrorism and focus on other complex challenges – economic markets. In the U.S., we are encouraged to invest in financial markets as a way to plan for retirement. In fact, at one time, a U.S. president proposed the idea of eliminating social security payments for retirees and instead giving Americans a stake in the markets as a substitute. The idea seems sound in theory, and as Dr. Daniel Kahneman pointed out in “Thinking Fast and Slow” and more recently Nate Silver captured in “The Signal and the Noise”, if one invest in the market for the long-run by simply buying index funds tied to the market average, then one is likely to make solid earnings for retirement assuming the market behaves in the future the way it did in the past.

Well, many financial experts work hard to try and beat the market and earn their investors returns greater than the market. Like experts in other fields, namely terrorism, the track record for beating the market is really bad. In 2012, the experts missed the market by a lot. The recent Bloomberg article, “Almost All Of Wall Street Got 2012 Market Calls Wrong”, reinforces why it will be outliers not the majority that will accurately predict the future in complex systems.

“The ill-timed advice [of financial experts] shows that even the largest banks and most-successful investors failed to anticipate how government actions would influence markets. Unprecedented central bank stimulus in the U.S. and Europe sparked a 16 percent gain in the S&P 500 including dividends, led to a 23 percent drop in the Chicago Board Options Exchange Volatility Index, paid investors in Greek debt 78 percent and gave Treasuries a 2.2 percent return even after Warren Buffett called bonds “dangerous.”

Why did they miss the call? Many biases and heuristics emerged to have the experts miss – most notably status quo bias (a belief that tomorrow will be like the past). With economic markets performing poorly in recent years, they continued to predict doom. They also overvalued, unimportant distracting news stories pulling them away from fundamentals.

“They paid too much attention to the fear du jour,” Jeffrey Saut, who helps oversee about $350 billion as the chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said by phone on Jan. 2. “They were worrying about a dysfunctional government in the U.S. They were worried about the euro quake and the implosion of Greece and Portugal. Instead of looking at what’s going on around them, they were letting these macro events cause fear to creep into the equation.”

Essentially, the ‘hedgehog’ experts strayed from the strength of their economic knowledge and drifted into politics. They paid for their drift.

“It’s always more challenging for investors to try and predict political actions,” Khiem Do, the head of Asian multi- asset strategy at Baring Asset Management, which oversees about $50 billion worldwide, said in a Jan. 2 phone interview from Hong Kong. “In general they’re trained to analyze the economic data, balance sheets and so on. They’re not trained to predict political decisions. These factors have ruled the lives of fund managers in a more significant manner than what used to be over the past 20 or 30 years.”

So don’t feel bad political forecasters, the financial experts have trouble predicting politics and international affairs too.

Foxes, Hedgehogs & Confidence – Part 2

Last week, I posted on Daniel Kahneman’s NYT article explaining how confidence and accuracy appear to have little correlation when it comes to forecasting.  Kahneman noted that his forecasts of soldier leadership ability generated from the personal observations of his assessment team were only slightly more accurate than random guessing.

Kahneman’s notion echoes the research of Dr. Philip Tetlock; author of Expert Political Judgement and the basis for much of Dan Gardner’s book Future Babble. Over 20 plus years, Dr. Tetlock surveyed more than 100 experts on a host of different issues building a database of more than 27,000 predictions.  Armed with this data, Tetlock conducted a thorough analysis of expert opinion and, like Kahneman, generally found highly confident experts commonly cited in the media were less accurate than random guessing on any given prediction.  Tetlock labeled these confident but off-based forecasters “Hedgehogs”.  Meanwhile, Tetlock found the more accurate predictors of future outcomes tended to have lower confidence in their predictions.  Tetlock labeled these less confident but more accurate experts “Foxes”. Dan Gardner explains in Future Babble that “Foxes”:

“had no template. Instead, they drew information and ideas from multiple sources and sought to synthesize it. They were self-critical, always questioning whether what they believed to be true really was. And when they were shown they had made mistakes, they didn’t try to minimize, hedge, or evade. They simply acknowledged they were wrong and adjusted their thinking accordingly.  Most of all, these experts were comfortable seeing the world as complex and uncertain—so comfortable that they tended to doubt the ability of anyone to predict the future.”

I believe Tetlock’s research provides valuable perspective for both policymakers and policy advisers.  Policymakers often seek the counsel of experts and routinely put faith in expert analysis depending on the level of confidence expressed by the adviser.  Yet, by Kahneman’s admission and Tetlock’s research, those advisers most confident in their predictions and prescriptions may in fact be less accurate than random guessing.  Likewise, for policy advisers (so-called experts), they often feel pressured to appear aggressively confident when making their predictions to ensure the respect of policymakers and to sustain their status amongst other experts.  Essentially, when policymakers turn to experts, they are seeking certainty about an expert prediction as much or more than the content of the prediction itself.

I’ve lamented many times at this blog my disdain for “Hedgehogs” vaguely predicting every potential scenario with high confidence. I’ll follow up soon with a part 3 related to the polling conducted here in May. Meanwhile, FORA hosts a great series of segments where Tetlock presents some of his findings and I’ll embed his introduction here below.

Why Foxes Are Better Forecasters Than Hedgehogs from The Long Now Foundation on

Anticipating Zawahiri’s Demise

I was surprised the Post UBL Poll collectively estimated so much time until Zawahiri’s capture or death. I’m actually far more bullish in my estimate of when Zawahiri will be snagged.  So here’s some Friday morning speculation while I continue to code poll results for release next week.

I used three different structured techniques to strengthen my guess on Zawahiri’s elimination: Force Analysis, Pair-Wise Comparison and a timeline. (I did these on the back of my plane ticket waiting to get to 10,000 feet.)

First, I narrowed down to 6 key forces, which I believe might influence Zawahiri’s capture.

  1. U.S. intelligence recovered during the UBL raid–  If it’s good, the intel might rapidly snare Zawahiri.  If AQ practiced good operational security, the intel may not be that helpful. I’m guessing the recovered intel is useful but not decisive.  I estimate that really good intel might produce tangible results with regards to Zawahiri in 10-16 weeks.
  2. Pressure on Pakistan for harboring UBL– Pakistan remains under intense pressure for directly or indirectly harboring UBL.  If Pakistan’s ISI knew about UBL, they risk losing U.S. aid.  If Pakistan’s ISI didn’t know about UBL, they are at risk of losing control of their country.  Pakistan can’t turn over Zawahiri inside 8 weeks or it will look like they have always known where he was.  If they can’t land Zawahiri in 20 weeks, then I’m guessing they really don’t know where he is.
  3. Zawahiri movement to insure safety and status- Zawahiri may decide he needs to begin moving 1) to improve his security (in light of recent U.S. intelligence gains) or 2) to shore up support for his leadership post-UBL.  Overall, I don’t think Zawahiri will move in the next 4 to 6 weeks and reporting on AQ’s counter-surveillance suggests AQ will be cautious.
  4. Emerging AFPAK AQ member gets ambitious– Due to limited Pakistan field reporting, we in the West remain fixated on the big fishes: Zawahiri and UBL.  However, ten years of AQ AFPAK operations have been largely carried out by a new generation.  My suspicion is an upstart AQ member somewhere in Pakistan wants to rise up, take over the reigns of AQ Central and focus more on current AFPAK insurgency battles.  An emerging Arab leader might help sustain donations and foreign fighters from the Gulf.  I would not be surprised if the emerging member helps to dethrone Zawahiri through a tip to the Pakstani government.  I have no evidence to support this hunch but if it were to occur, I think it would take the emerging AFPAK AQ leader at least 6 weeks to implement a takeover strategy.
  5. Haqqani support for a Zawahiri-led AQ- The Haqqani network provided much of the safe haven to UBL and AQ.  Will they continue to provide such support to an AQ led by Zawahiri? Do they even have the capacity to provide support for AQ anymore?  The Haqqani network suffered tremendously from drone operations and must decide whether harboring AQ post-UBL is worth the costs.  I’m guessing the Haqqani network will provide support for at least 6 more weeks before changing their position with regards to Zawahiri.
  6. Gulf donor support for AQ led by Zawahiri–  Will Gulf donors continue to support an AQ led by Zawahiri?  I think not.  I suspect the AQ Central gravy train slows rapidly forcing Zawahiri and surviving AQ members to rely on current cash reserves and illicit financing from the Taliban to survive.  I estimate Zawahiri and his core supporters have enough resources to operate for 8 more weeks before taking decisive action to garner resources.

After doing pair-wise comparison of these 6 factors, I identified the most significant factors in Zawahiri’s capture to be the following in order: 1) Pressure on Pakistan for harboring UBL 2) Gulf Donor support for Zawahiri-led AQ 3) Haqqani Protection 4) Emerging AFPAK AQ member ambitions 5) U.S. intelligence recovery and 6) Zawahiri movement to ensure safety and status.

Placing those in a timeline, I have come up with my Zawahiri prediction (so I can end my streak at 1!):

Ayman al-Zawahiri will be captured or killed by the Pakistani government forces on August 14, 2011.

After all this sketching and thinking, I am almost certain to be wrong.  The chances of picking the right day are extremely low. So, I’ll turn it over to the crowd:

What am I missing in my analysis of the forces driving Zawahiri’s capture? I’m not convinced I’m correct in this analysis, so what else should I have considered.  In a bizarre twist, I think the U.S. Congress might be a key lever in getting Zawahiri since they can threaten to withhold Pakistan military aid, thus providing Pakistan extra incentive to find Zawahiri.

In conclusion, I find analyzing the forces influencing Zawahiri’s potential demise useful for 1) anticipating AQ’s near term direction and 2) identifying those actors that can be leveraged to push forward the fight against AQ.  What should the U.S. do to get Zawahiri?  Another military raid is probably off the table.  I’m looking for ideas.

Here’s another wild prediction that I haven’t thought through but figured I’d just throw out.

Adam Gadahn will be killed within 2-4 weeks of Zawahiri’s capture and his elimination will be carried out by a Taliban group or rival AQ member.  (A total guess!)

Last Call for votes: What will terrorism be post Bin Laden?

First, thanks to all those that have voted on the two crowdsourcing polls I initiated the past week: AQ’s Future Strategy and Terrorism post UBL.  An unbelievable turn of events in the past seven days, and I never anticipated running two different polls in the same week.

Second, thanks to those who gave me shout-outs on my 2011 New Year’s CT prediction.  I relied heavily on analysis from the folks on the blogroll (to the right) to shape my assumptions and feed me key information. (More on that next week)

Both polls are still active and I will continue to run them through the end of the week.  So far, the response has been far greater than I expected.  The contrast in people’s opinions between the first time I ran the post-UBL poll in January 2011, last week’s AQ strategy poll and this week’s post-UBL poll appears very interesting.

Staying on top of the coverage has been mind-boggling and I know many have not had the time to cast their votes on the “What will terrorism be after Bin Laden poll?” If you can find 2-3 minutes to vote, here is the link:

Click here to take survey

Additionally, please forward this link to anyone you know that might be interested in taking the poll.  It takes a crowd to crowdsource!

Poll: What will terrorism be post-Bin Laden?


Today is a great day in the history of the United States.  Usama Bin Laden’s death marks a significant victory against al Qaeda and I have great admiration for the military forces that accomplished such a daring raid.

Many of you provided me a great favor last week as I initiated a crowdsourcing poll trying to anticipate AQ’s future strategy.  Your response to this poll was outstanding and far beyond my expectations. The initial results are quite revealing and provide great insight into today’s developments. In January, the first crowdsourcing poll (the predecessor to last week’s) asked the following question:

What will be the chief consequence of Usama Bin Laden’s (UBL) death for the global jihadi movement?

Based on today’s events, I’m relaunching this poll at and asking again for your help in anticipating the ramifications of Bin Laden’s death.  I ask again for your help in two ways:

1)    If you have the time, I ask you to visit the following link and vote as we collectively try to develop a new counterterrorism strategy to exploit this recent success. I deliberately made this poll shorter than last week’s poll so it should take only 2-3 minutes.

Click Here to Vote

2) Please forward this link along to anyone you know that is interested or knowledgeable in the issues of terrorism. Anyone is welcome; students, government, private sector, military, etc.

Here is a link that you can copy and paste:

The results of last week’s poll combined with this new poll provide us a unique opportunity to evaluate how we think about terrorism and counterterrorism and help us develop a strategy to carry the battle against extremism to new heights.  I will work to rapidly publish the results of this poll so all can benefit from our collective insights when thinking through our near-term and long-term policy options.

Thank you again for your support, your votes and your time.  Please forward away.  It takes a crowd to do crowdsourcing.

Poll: Crowdsourcing AQ’s Strategy


Since joining the blogosphere last fall, I’ve been amazed by the overwhelming amount of alternative information and thought provoking analysis available on terrorism issues.  I’ve also heard repeated calls for national security crowdsourcing.  On this issue, I oscillate back-and-forth between, “It’s possible, there are tons of smart people out there” to “it’s not feasible, terrorism is too complex an issue to predict.”  I want national security crowdsourcing to work, but can it really happen?  Thus a challenge, an experiment, a poll!

On Monday, I asserted that al Qaeda must develop a near term strategy to remain relevant. While I have my own opinions on AQ’s strategy, the only thing I am certain of is that I alone will not correctly predict AQ’s plans.  So today, I ask the smartest folks in terrorism, you the “crowd”, can we collectively anticipate what AQ will do during this critical period?  The question:

“What will be al Qaeda’s strategy from the summer of 2011 through the end of 2012?”

I ask for your help in two ways:

  1. Take three minutes and answer 11 questions. Click on the following link and answer these questions on AQ’s strategy.
    Click here to take survey
    I timed the poll to take less than three minutes. Don’t think to hard, go with your gut, and fire away.
  2. Forward the link to anyone you know interested in terrorism issues. After voting, please forward the poll link to anyone you know that is interested in terrorism.  Here is the direct web link for those that might want to copy and paste: ( All are welcome, the more that answer the better.  Experts, novices, government folks, military, private sector, you name it.  I need everyone’s input.  Crowdsourcing can only be effective if there’s a “Crowd” providing answers.

What do you get for participating?  The collective insights of all those that vote.  I designed the poll in hopes of illuminating what we agree on, where we disagree, and how we might collectively determine the best way to defeat AQ. Here’s some past poll results as an example.

Thanks in advance to all those that voted and forwarded the link!  I hope to start publishing the results in about 10 days.

I don’t want to wear out readers.  But for those that are interested, here’s a little more background on my goals in the poll’s design.

  • Try to capture all major possibilities- I wanted the responses to be as broad as possible.
  • Examine all of AQ’s major factors- Ideology, safe havens, leaders, affiliates, financing, CT options.
  • Design the survey for everyone- No one should be excluded.  All are welcome and eligible to vote.  I want the opinions of anyone willing to take 3 minutes or less. Crowdsourcing asserts that collectively we will all average each other out.  So more voters equals better results.
  • Capture where people agree and where they disagree- At the end of the poll, I ask some questions related to education, profession and international experience.  I don’t want nor need people’s personal information.  However, if I can collect enough responses, I would like to see if experts vote differently than non-experts, if government folks agree with academics, if those with international experience and backgrounds have a different perspective from those based strictly in the U.S, etc.  The goal is that we all learn from each other.

Al Qaeda’s Strategy: 2011-2012

The summer of 2011 through the end of 2012 will be the most important period for al Qaeda (AQ) and Western Counterterrorism (CT) efforts since 2002-2003. A plethora of different factors suggest that Bin Laden and AQ Central based in Pakistan must act soon or risk becoming irrelevant. Here are some key issues which make me believe the next 12-18 months will be truly decisive for AQ:

  1. Ten years later, actions speak louder than words– AQ’s senior leadership (AQSL) has not produced a major terrorist attack in years. Western CT efforts have foiled many a plot. Those plots AQSL has taken credit for were largely accomplished by upstarts not directly under their command (Examples: Zarqawi and the Madrid bombers). UBL may have played the information war well, but he and his sidekicks have not been operationally successful in a long while. Actions speak louder than words. AQAP and al Shabab increasingly attract as many or more recruits than AQ Central because they fight as much as they talk.
  2. Absent from the Arab uprisings– Despite their ideological banter about removing apostate regimes, AQ missed out on all the current revolutions. Terrorists groups must retain popular support to remain relevant. While AQ toiled away in its global jihad against the far enemy, their base of popular support shifted to something attainable; liberation at home. AQ must immediately find a way to assert itself within these revolutions or risk being overshadowed by new Arab movements and leaders.
  3. UBL is moving– After sitting tight for ten years, several reports suggest UBL is energized and on the move. While I think its highly unlikely he will try to move from his Pakistan safe haven, UBL must be concerned about his long-run preservation and AQ’s future to take such operational risks to sustain relationships.
  4. Pro-AQ Taliban losing groundTaliban commanders in Pakistan have taken a beating in recent months. Pakistani security forces, targeted assassinations and drone strikes have finally taken their toll. AQ doesn’t have time to waste.
  5. Yemeni instability and opportunity– The Yemeni security vacuum created by recent rebellions and the violent government crackdown provide opportunities for both AQ and the West.  In recent weeks, AQAP has reportedly conducted several ambushes and seized several townsThis rebellion is likely the most challenging for Western CT efforts.
  6. Fighters heading home– AQ members from North Africa and the Arabian Peninsula must wonder, “why should we stay in Afghanistan and Pakistan?” If AQ foreign fighters can choose between fighting jihad abroad or fighting jihad at home, I believe they will choose their homeland first. Yemeni, Egyptian, Libyan, Syrian and Tunisian foreign fighters within AQ must be seeking an opportunity in their homelands. I imagine the peak flow of foreign fighters to Afghanistan has passed.
  7. New Statements from all AQ leaders– UBL, Zawahiri, Libi, Adl and Awlaki have all issued propaganda citing the recent revolts as sign of AQ’s coming domination. AQ must redirect the discussion of revolution to include them. The only way to make these statements seem credible is to actually join one of the current rebellions and begin executing attacks.  Additionally, Adl recently criticized AQ’s strategic direction and identified some shortcomings. Will there be dissension or unity moving forward?
  8. US CT efforts spread thin– Recent uprisings and the fall of U.S. counterterrorism partner regimes has temporarily blinded CT efforts. Partner CT relationships maintained accountability of AQ movements throughout North Africa and the Middle East. Weak state emergence throughout these regions provides AQ a permissive environment.
  9. Pakistan conundrum- The Pakistani ISI versus CIA battle suggests to me that the U.S. may finally be on the doorstep of UBL. Destroying the Haqqani Network remains the decisive point for eliminating AQSL.  Threats have been made on both sides.  Can the U.S. finally go for the deep attack on UBL?  Is UBL preparing for his death?

I could probably write more but I will stop here for now.

Bottom line:  AQ must do something soon to remain relevant.  The U.S. should begin anticipating what AQ will do.  Don’t let recent uprisings become a distraction.  Instead, recognize them as a potential opportunity against AQ in both the near and long term.  All we have to do now is think through what AQ is most likely to do, and then adapt.

Great Comments from Secretary Gates

Secretary Gates spoke at West Point on Friday further illustrated how a career intelligence officer might very well end up being the best Secretary of Defense in U.S. history. (The full speech is here.) Secretary Gates put some sanity into the rapidly escalating pundit talk of new military action in North Africa, Yemen and Iran. Here are some highlights from his West Point talk:

“In my opinion, any future defense secretary who advises the president to again send a big American land army into Asia or into the Middle East or Africa should ‘have his head examined,’ as General MacArthur so delicately put it”

“The odds of repeating another Afghanistan or Iraq — invading, pacifying, and administering a large third-world country — may be low,” Mr. Gates said, but the Army and the rest of the government must focus on capabilities that can “prevent festering problems from growing into full-blown crises which require costly — and controversial — large-scale American military intervention.”

I think he put COINdinista’s on notice.  I agree the era of regime change, wars of preemption and large-scale counterinsurgency are over.  Of course, I hear the reverse from COINdinista’s who routinely reiterate that recent past wars (Iraq and Afghanistan) will be all we face in the future.  As long as its an option, I vote no to COIN and no to regime change.  I understand COIN was a means to an end in Iraq.  But, I’ve always been highly skeptical of COIN as a solution to Afghanistan.

“As the prospects for another head-on clash of large mechanized land armies seem less likely, the Army will be increasingly challenged to justify the number, size, and cost of its heavy formations,”

“Men and women in the prime of their professional lives, who may have been responsible for the lives of scores or hundreds of troops, or millions of dollars in assistance, or engaging or reconciling warring tribes, may find themselves in a cube all day re-formatting PowerPoint slides, preparing quarterly training briefs, or assigned an ever-expanding array of clerical duties,” Mr. Gates said. “The consequences of this terrify me.”

Translation:  Prepare for a rotation in Iraq and Afghanistan, but expect a career that looks very different.  The Captain’s War will come to a close in the next two years.  The Army’s mission, resources, and future will be different from the recent past.  Army officers be prepared to reinvent yourself and your mission.

An excellent, honest speech from a Secretary of Defense handed one of the greatest challenges in the history of military conflict.  I feel for whomever replaces Secretary Gates.  The bar has been set very high.