Beware the Financial Soothsayer…

…he can’t even match P. Phil’s record

Base Case, noun phrase, the most likely or expected scenario when forecasting corporate financial performance.

Usage Note: Financial desk jockeys from buy-siders to investment bankers to corporate CFO’s use this term as part of their regular business of prognostication.  It’s especially relevant during the grind show where the bankers and companies shamelessly stump for money to run their business (or rather, to waste on pet projects, diversifying acquisitions with “synergies”, or to pay a dividend to their Private Equity owners).

In the realms of High Finance, the business of forecasting is part and parcel of the job.  Either you’re a CEO trying to convince investors your company will never see a downturn and can only grow year after year; or a banker trying to bamboozle the syndicate of “accounts” into thinking it’s normal that the company you’re hawking has an EBITDA forecast that looks like a “Hockey Stick”; or you’re a money manager trying to convince clients you can read the tea leaves and spot the canaries dying in the coal mine to ensure you make the best picks at the best times.

In all these cases, financial soothsayers are trying to sell their ability to fortune tell and predict the future.  ‘Base Case’ is a term that’s used to lend credibility to all this crystal ball gazing.  It conveys a false sense of security in the mean observation of a normal bell-curve distribution (See notes from your Stats 101 class). The problem with all this, of course, is that people are incredibly bad at predicting the future and incredibly confident while doing it.  And, it turns out that the distribution of outcomes is not as normal as people think- there’s usually enough outliers to make “fat tails” (see any of Nassim Taleb’s books to learn how people are regularly ‘fooled by randomness’).  This is well documented, but conveniently disregarded by most in the finance and investment industry.  On top of all this, to add insult to injury, most Base Case scenarios issued by the rose-color bespectacled capital raising crowd are more than a tad optimistic. It’s no surprise then that the companies and bankers who represent them never stick a slide in the bank book or roadshow presentation entitled “Down Side Case”.

Bud Fox News reporter Silence Bellows asked Sir Harbinger Oracle, the Nostradamus Professor of Clairvoyance and Prophecy at the Technical Institute of Mediums and Diviners what he thought of all the fortune tellers in finance today. Said he:

“Well to tell you the truth Silence, the financial augurs – all these economists, money managers, and talking head pundits couldn’t predict rain in a rain storm.  Their record of failure to predict recessions is unblemished.  Let me put it this way: They’re less accurate than Punxsutawney Phil, which is pretty bad.  It’s not my area of expertise, but Behavioral Finance research has proven that most of what passes for financial acumen is just a bunch of psychological biases. If these people really want to learn how to see the future, I suggest they enroll in our program. Just ask Warren Buffet or Mark Zuckerberg how they’ve done since graduating.”