Without a doubt, I can safely say that the forex market has taught me a lot about life. Recently, I had
another “A-Ha!” moment, when I gained a crucial insight about human relations from forex.

Curious?

Some background first, though. Please be with me through this, because it is important. Crucially
important.

As regular Readers you know that we have been tracking our forecast reliability for the last 20 years
and that our overall reliability is 60%. You might also know that we track our error percentage as
well. You also know that we provide hard number Open-High-Low-Close forecasts for each month
for 1-2-3---12 months.

So, we know that we are right 6 times out of 10 and we also know what percentage our forecasts
tend to miss the actual by in each of the 1-2-3---12 month periods. Putting these together, we
thought we would make something quite sophisticated, which would possibly give us much better
hedging results.

The thought process was as follows:
1) Let us start with the Kshitij forecasts for each month for the next 1-2-3---12 months.

2) Give each a weightage of 60%, which is our overall forecast reliability.

3) Build an alternative forecast series going in the opposite direction of the stated forecast for each
month, taking it away from the forecast by the average % error for each month. For instance, if our
forecast for the 6th month is that USDINR will rise to 96.00 and our average % error for the 6th month
is 2%, then the “alternative” forecast would be 94.08, being 96.00 x (1-0.02)

4) Give this alternative forecast of 94.08 a weightage of 40%.

5) Combining the two would give us a right/ wrong weighted average forecast of 95.23 (being
96.00x0.6 + 94.08x0.4). Let us call this an RWWA forecast.

6) This right/ wrong weighted average (RWWA) forecast of 95.23 ought to be superior to our normal
forecast of 96.00 because it takes alternative possibilities and probabilities into consideration.
Accordingly, we calculated a RWWA forecast for each of the 1-12 months.

Good so far? Great.

Given that the RWWA forecast seemed to be more scientific and sophisticated than the usual 60%
reliable forecast, we started using these RWWA forecasts in REAL hedging decisions for a client for
a full year. After that we compared the real results that we obtained against the results that would
have occurred had we used the 60% reliable original forecast in our hedge decisions.

To our chagrin we found that the obtained hedging profit/ loss were inferior to what we could have
got through our original forecasts! How come?

Then it dawned on us. While we knew we were right 6 times out of 10 and wrong 4 times out of 10,
we could never know WHEN we were going to be right or wrong. This being so, by applying a 60%
weight to our original forecast and a 40% weight to an opposite-direction forecast, while trying to
protect ourselves against the 4 times we were likely to be wrong, we were dragging down all the 6
times that we were going to be right! This gave us a result that was inferior to the one we would have
got if we had naturally taken the rights and the wrongs as they came.

Obviously we’ve never used RWWA forecast since then. Experiment done. Mistake made. Lesson
learnt.

Now comes the interesting part.

In our closest relations – with our spouse, children, siblings, and with junior team members – we
are painfully aware of their propensity to disappoint us in a million and one ways, with no end to
their innovation and inventiveness in this regard. However, if we keep reminding them ALL THE TIME
of how they are likely to mess things up again like they did on some previous occasion, we are
helping no body. We are only making things worse for both of us.

We must remind ourselves that our closest relations are also dealing with entropy in their own lives
– bad health, bad moods, lack of knowledge or training, lack of motivation, and crazy sets of unideal
circumstances. Even after this, if they are doing good, delivering and coming through well 60%
of the times, then they are doing way better than the cheetah, Sachin Tendulkar, Roger Federer, the
well trained commando.

Even in Indian marriage match making, it is said that although there are 36 traits or “gunas” that
should ideally match between a boy and a girl, even if 21 (58% of 36) of the gunas match, then the
prospective alliance is a good one, and the parents on both sides can proceed with confidence.

In short, it is not only that if the KSHITIJ forecasts are right 60% of the times, it is a good
performance. If our spouse, children, siblings and juniors are messing up 4 times out of time, we
should be happy that they are delivering the goods 6 times out of 10. They are doing pretty darned
good, and we should thank our lucky stars that we’ve got star performers in our lives.

Amen.