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December 22, 2014 at 07:00 PM
In the Star Trek universe, the Kobayashi Maru is a Starfleet Academy training exercise for future officers in the command track. It takes place on a replica of a starship bridge with the test-taker as captain. In the exercise, the cadet and crew receive a distress signal advising that the freighter Kobayashi Maru has stranded in the Klingon Neutral Zone and is rapidly losing power, hull integrity and life support.
The cadet is seemingly faced with a decision: (a) to attempt to rescue the freighter’s crew and passengers, which involves violating the Neutral Zone and potentially provoking the Klingons into an all-out war; or (b) to abandon the ship, potentially preventing war but leaving the freighter’s crew and passengers to die. As the simulation is played out, both possibilities are set up to end badly. Either both the starship and the freighter are destroyed by the Klingons or the starship is forced to wait and watch as everyone on the Kobayashi Maru dies an agonizing death.
The objective of the test is not for the cadet to outsmart or outfight the Klingons but rather to examine the cadet’s reaction to a no-win situation. It is ultimately designed as a test of discipline and character under stress.
However, before his third attempt at the test while a student, James T. Kirk surreptitiously reprograms the simulator so that it is possible to rescue the freighter. When questioned later about his ploy, Kirk asserts that he doesn’t believe in no-win scenarios. And he doesn’t like to lose. So he changed the game. Thus for Trekkies, the test’s name is used to describe a no-win scenario as well as a solution that requires that one change the game in order to jerry-rig a solution to the proffered problem.
For would-be market experts, their Kobayashi Maru is a public market target, most often included in an annual market preview publication. It’s an expected part of the gig. Similarly, when a Wall Street strategist, economist or even run-of-the-mill investment manager or analyst gets a crack at financial television, he or she is routinely asked, often as almost an afterthought, to give a specific target forecast for the market. Instead of thinking like Captain Kirk and wisely objecting to the premise of the question, the poor schlemiel answers and, once matters play out, is shown to have been less than prescient. Indeed, as I often say, one forecast that is almost certain to be correct is that market forecasts are almost certain to be wrong.
Every December I take a look at these predictions for the year that’s ending and they are almost always uniformly lousy. Moreover, when somebody does get one right or almost right, that performance quality is not repeated in subsequent years. That’s because, at best, complex systems—from the weather to the markets—allow only for probabilistic forecasts with very significant margins for error and often seemingly outlandish and hugely divergent potential outcomes. Chaos theory establishes as much. Traditional market analysis has generally failed to grasp the inherent complexity and dynamic nature of the financial markets, while chaotic reality goes a long way towards explaining highly remarkable and volatile outcomes that seem inevitable in retrospect but were predicted by almost nobody.
The 2014 expert predictions held true to form. I performed a survey of published 2014 year-end target forecasts for the S&P 500 from 50 very prominent investment strategists and money managers. It tracked their “achievements,” using forecasts from the beginning of 2014. Results:
Median forecast for year-end 2014: 1,950 (up 6.44 %).
