FT.com: Bring out the dart-wielding monkey

....sell-side stock analysts, who spend 50-80 hours a week on research and presumably have loads of information at their fingertips, are no better than a monkey with a dart at predicting a company’s five-year earnings growth rate. In fact, they are actually worse than a monkey with a dart because they tend to project the recent past into the distant future, rather than assuming growth will revert to the mean. If the analysts’ projections were simply random, the results may have been closer to reality

Malthus’s book is well known because it gave Darwin the idea of natural selection. Reading of the struggle for existence that Malthus predicted, Darwin wrote in his autobiography, “It at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. ... Here then I had at last got a theory by which to work.”

A good example of moral hazard is a nuclear power station built by former Philippine president Marcos that was constructed on an earthquake fault line in the province of Bataan in the Philippines. EXIM, a U.S. government backed Export Credit Agency, began negotiations with the Filipino government about a nuclear power plant that would be built by Westinghouse. Westinghouse won the contract by bidding $500 million. EXIM guaranteed the loan, ensuring that no matter the result, Westinghouse would be paid, removing any risk for Westinghouse. The actual project cost was $2.3 billion. Westinghouse was paid even though the plant could never go on-line as it was built on an earthquake fault line. Marcos, a known dictator, received $80 million commission from Westinghouse on the plant that he authorized, but did not pay for. The Filipino people pay this debt at a rate of $170,000 a day in interest and will continue to do so until 2018, even though they have not received even a single watt of energy. This project alone accounts for more than 5% of the country’s total debt