A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

WHY THE CRYSTAL BALL IS
CLOUDED
It is always somewhat disturbing to learn that highly trained

---

and well-paid professionals may not be terribly skillful at
their calling. Unfortunately, this is hardly unusual. Similar
types of findings exist for most groups of professionals.
There is a classic example in medicine. At a time when
tonsillectomies were very fashionable, the American Child
Health Association surveyed a group of 1,000 children,
eleven years of age, from the public schools of New York
City, and found that 611 of these had had their tonsils
removed. The remaining 389 were then examined by a group
of physicians, who selected 174 of these for tonsillectomies
and declared that the rest had no tonsil problem. The
remaining 215 were reexamined by another group of doctors,
who recommended 99 of these for tonsillectomies. When the
116 “healthy” children were examined a third time, a similar
percentage were told their tonsils had to be removed. After
three examinations, only 65 children remained who had not
been recommended for tonsillectomies. These remaining
children were not examined further, because the supply of
examining physicians ran out.
Numerous studies have shown similar results. Radiologists
have failed to recognize the presence of lung disease in about
30 percent of the X-ray plates they read, despite the clear

---

presence of the disease on the X-ray film. Another
experiment proved that professional staffs in psychiatric
hospitals could not tell the sane from the insane. The point is
that we should not take for granted the reliability and
accuracy of any judge, no matter how expert. When one
considers the low reliability of so many kinds of judgments, it
does not seem too surprising that security analysts, with
their particularly difficult forecasting job, should be no
exception.
There are, I believe, five factors that help explain why
security analysts have such difficulty in predicting the future.
These are (1) the influence of random events, (2) the
production of dubious reported earnings through “creative”
accounting procedures, (3) errors made by the analysts
themselves, (4) the loss of the best analysts to the sales desk
or to portfolio management, and (5) the conflicts of interest
facing securities analysts at firms with large investment
banking operations. Each factor deserves some discussion.