Date:08/01/2006 URL: http://www.thehindubusinessline.com/bline/iw/2006/01/08/stories/2006010800871300.htm

Back Seersucker theory

B. Venkatesh

MY FRIEND subscribes to seven newsletters that provide him with trading ideas on a daily basis. He buys a stock only if three or more of these newsletters recommend the same stock on a given day. He does this because one newsletter is no better than the other in forecasting price movements, though these newsletters are a lot costlier than the rest. My friend refuses to discontinue subscription to these newsletters. His behaviour may appear rational if you agree with the seersucker theory. What is this theory?

In 1980, Scott Armstrong, professor at the Wharton School, University of Pennsylvania, published a paper in which he concluded that it does not pay to hire the best expert for forecasting changes. The reason?

Studies have concluded that expertise above a certain level does not really add value to forecasting changes. You do not really need to hire a PhD or a person with 20 years of market experience to forecast price changes. You may be better off hiring a person who understands the market and charges one-tenth the fees.

My friend knows this. After all, evidence shows that one newsletter is no better than the other. Yet, he did not stop subscription to the costlier newsletters. Why?

Prof Armstrong argues that such behaviour helps in avoiding responsibility. What if my friend stops the costlier newsletters and that decision leads to more loss-making trades?

Hiring well-known experts in a field may prove costly but also helps my friend avoid responsibility for a bad decision.

This is the seersucker theory. It is so called because no matter how the much evidence that seers do not exist, suckers (like my friend) will pay for the advice.

(The author is Head, Research, Navia markets.)