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Alpha Theory Blog - News and Insights

« Noise: The Maker of Markets and Madness | Main | The Difference between Intrinsic and Extrinsic Value – A Case Against WACC »

September 19, 2019

Superforecasting and Noise Reduction in Financial Analysis

 

Alpha Theory and Good Judgement Inc. hosted a Superforecasting workshop this week with several Alpha Theory clients attending and learning about noise reduction techniques. Warren Hatch, President of GJI, led the discussion on how to reduce noise in forecasting. Warren began the discussion with an overview of the characteristics of Superforecasters and what leads to good individual forecasts. We then shifted to how we can use team dynamics to improve forecast accuracy.

 

Warren started with examples pulled from other noise reduction workshops and showed how the team methods reduced noise (measured by the standard deviation of estimate) and increased accuracy (measured by Brier Score). We did our own example using Good Judgement Inc. software to ask questions of our group that led to a valuation of NFLX:

How many subscribers will Netflix have at the end of 2020?

What will be Netflix's revenue per subscriber in 2020?

What will be Netflix's net margin in 2020?

What will be Netflix's PE multiple in 2020?   

 

We compiled the initial results and compared them to current. We then had a chance to review other contributors forecasts and rationales and vote on the ones we thought were best. Next, the “team” discussed the highest vote-getting rationales and quickly identified an expert in the room. Through the noise reduction exercises and discussion, we narrowed our forecast range (reduced noise) and hopefully improved accuracy. We’ll know in a year when we see if NFLX is at $296.00.

 

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Thanks to Warren and team for putting on a great workshop for Alpha Theory clients. Please contact us with any questions.

info@alphatheory.com

 

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