Scientific American takes a look at the best way to select a winner:
Given the prevalence of betting and the money at stake, it is worth considering how we pick sides. What is the best method for predicting a winner? One might expect that, for the average person, an accurate forecast depends on the careful analysis of specific, detailed information. For example, focusing on the nitty-gritty knowledge about competing teams (e.g., batting averages, recent player injuries, coaching staff) should allow one to predict the winner of a game more effectively than relying on global impressions (e.g., overall performance of the teams in recent years). But it doesn’t.
In fact, recent research by Song-Oh Yoon and colleagues at the Korea University Business School suggests that when you zero in on the details of a team or event (e.g., RBIs, unforced errors, home runs), you may weigh one of those details too heavily. For example, you might consider the number of games won by a team in a recent streak, and lose sight of the total games won this season. As a result, your judgment of the likely winner of the game is skewed, and you are less accurate in predicting the outcome of the game than someone who takes a big picture approach. In other words, it is easy to lose sight of the forest for the trees.
So often people that consider employing relative strength strategies, which measure overall relative price performance of securities rather than delving into the weeds with various accounting level details, feel like they must not be doing an adequate job of analyzing the merits of a given security. As pointed out in this research, the best results came from focusing on less data, not more.
Whether trying to select a winner in sports or in the stock market, it is important to remember that “detailed analysis fog the future.”
