The 40% Rule in Forecasting

 A recent article in The Wall Street Journal discusses the 40% rule, which it describes as “a favorite forecasting tactic of Wall Street analysts and other prognosticators trying to make a bold call without being too bold.”

The article offers comments by Peter Tchir, a market strategist at Academy Securities, who explains that a 40% forecast means you never have to say you were wrong. “Get it right and you can say ‘see, I was telling everyone it could happen.’ Get it wrong, and you can weasel your way out” by saying it was just a strong possibility.

The article cites several examples of notable predictions, including those by election forecaster Nate Silver and British Prime Minister Tony Blair, adding how pundits often hedge to protect their reputations. “They often ‘cluster’ forecasts together with other analysts around a ‘consensus’ figure,” the article points out, “so that everyone will probably be the same amount of wrong.”

Philip Tetlock, who has built a career evaluating forecasters, is quoted in the article: “Pundits and gurus master the art of going out on a limb without going out on a limb,” adding that they will often use vague expressions like “distinct possibility” to describe probability rather than use percentage odds.