Here’s a link to a nice Nate Silver interview at Index Universe. Nate Silver is now a celebrity statistician due to his accurate election forecasts, although he started by doing statistics for baseball. In the interview, he discusses some of the ways that predictions can go wrong. In general, human beings are completely wrong about the stock market!
The typical retail investor frankly does things exactly wrong—they tend to buy at the top and sell at the bottom. Theoretically, you make this long-run average return, but a lot of people are buying at the market peaks. For many years, the Gallup Poll has periodically been asking investors whether it’s a good time to invest or not. There’s a strong historical negative correlation between when people think it’s a good time to invest and the five- or 10-year returns on the S&P 500.
Overconfidence can also kill predictions. Other studies have found that the more confident the forecaster the worse the forecast tends to be, something that makes watching articulate bulls and bears on CNBC particularly dangerous!
It’s worth a read.