"The “Versus Expectations” Fallacy

"Friday, the 2nd day of May, brought two important pieces of government reported information: The April unemployment report came in much better than expected, or “blows pasts forecasts“ as USA Today reported, and initial Obamacare enrollment included more of the previously uninsured than expected, something that Mother Jones says is “far far higher than previous estimates.”

Both pieces of information are a good way of looking at an analysis pitfall common in the world of Wall Street and now being increasingly ported over to the rest of the news cycle: the fallacy of mistaking how something does vs expectations with whether its good or bad.

Imagine for a moment a hypothetical public company that is in the midst of a long business decline to oblivion. Every quarter the company has lower income and lower revenue until eventually it goes out of business. But at the same time every quarter the company makes such dire forecasts for the future that it gets the Wall Street analyst community to make very low forecasts for the immediate future. It’s possible that on its way to bankruptcy this company manages to report earnings (or losses) that are not as bad as predicted.

Given the industry’s obsession with making future forecasts, and the media’s obsession with reporting how events turned out “versus expectations,” its possible and even likely that such a company generates positive news headlines right up to the day it files for bankruptcy. Such is the danger of comparing data versus meaningless expectations.

It would be one thing if “the experts” were good at making forecasts, as then a number coming in much higher or lower than expectations would reveal something significant.

...if someone was good at forecasting any of these numbers, they probably wouldn’t be wasting their time making public forecasts for ours and the media’s consumption. Instead they would either be running their own Hedge Fund making a trillion dollars predicting the future, or being paid handsomely running the actuarial department of a health insurance company. The absence of trillionaires in our midst is evidence of how hard it is to forecast anything on a regular basis.

...As for the media, comparisons to expectations is an easy way of creating fake context, saving them the trouble of doing the harder work of creating real context...

When you hear that a report came out much better or worse versus expectations, all you are learning is that the expectations were inaccurate..."

http://omidmalekan.com/the-dangers-of-the-versus-expectations-fallacy/