Goldman Sachs to embrace evidence-based investing

Goldman Sachs, the leading investment bank, has taken a bold step to differentiate itself from its competitors that could revolutionise the financial industry as we know it. The bank says evidence-based medicine has become the norm in healthcare over the last decades but that the financial industry has lagged behind. Now, the bank wants to fully commit its brokerage and asset management divisions to evidence-based investing.

Goldman’s CEO David Solomon said in a statement: “We have always been famous for putting our clients first and it is time we act on that motto once again.” Quoting research from Markus Spiwoks, a professor at the University of Gottingen in Germany, who showed that more than 98.5% of the interest rate forecasts of research analysts reflect the present rather than the future of interest rates. In previous work, Spiwoks showed that more than 95% of analyst forecasts in bond, equity, and currency markets can be improved by simply forecasting that the asset price in one year is going to be where it is today, rather than relying on the analysts’ forecasts.

Solomon continued: “We have been very impressed by Spiwok’s work and continue to work with him and his team to assess the forecasts of our research analysts around the globe. We will examine their forecasts and stock recommendations over the last five years and will keep the analysts who have a proven track record of outperformance vs. the market. Analysts that have not added value to investors will be terminated and replaced by an algorithm that forecasts share prices in one year to be the same as they are today. We will be looking for replacements for these underperforming analysts and if we can identify skilled forecasters we will hire them. But if there are none, we will be happy to let the algorithm do the work.”

Goldman expects that this announcement will be welcomed by its clients and shareholders alike since cutting the number of analysts will likely lead to cost reductions in the order of several hundred million dollars per year while improving the quality of the firm’s recommendations.