Accelerating Learning in Active Management : The Alpha-Brier Process

Forecasting tournaments have shown it is possible to improve the accuracy of forecasts of real-world events that sophisticated observers often supposed are too idiosyncratic to be pinned down by numerical probabilities. Building on this research program, the authors propose the Alpha-Brier process to help firms improve forecasts guiding investment decisions. Alpha-Brier offers four major benefits: (1) It reduces the noisiness of vague-verbiage forecasts, such as X “might” or “could” happen, that are open to varying interpretations; (2) it makes it easier to distinguish skill from luck as drivers of portfolio performance; (3) it gives investors faster feedback on the accuracy of their probability judgments; and (4) it lets managers test which methods of training, incentivizing, and aggregating judgments deliver the biggest boosts to accuracy. Paradoxically, the more pervasive the skepticism toward the core premise of Alpha-Brier that probability judgments can be extended to superficially unique events, the more opportunities there will be for firms to exploit market inefficiencies linked to overreliance on vague-verbiage forecasts