…believers mistake chance events for feats of amazing forecast accuracy and find – or look for – validation of their existing beliefs.
The desire to know the future is a deep psychic need.
A look at the prediction industry would not be complete without the news media, which flood us every day with forecasts of all types. Daily newspapers contain predictions about the weather, economy, stock market, politics, society, science, and geopolitical trends and events. Many routinely include horoscopes. Much of the editorial page is speculation.
No doubt you could name an expert or two who predicted some big, surprising event. But…did they really? It is very hard to distinguish a long-shot direct hit from pure chance. The laws of probability dictate that if thousands of forecasts make thousands of predictions, someone at some time is bound to make a spectacular direct hit. Typically, these lucky few enjoy their fifteen minutes of fame before sinking back into the ranks of mediocrity as they revert to meting out egregiously wrong forecasts.
How can the experts get it so wrong? The prediction industry attracts some of the best and brightest minds, in addition to enlisting the latest technology. The answer is that the experts are trying to do the impossible.
Peter Drucker wrote in his seminal business book, Management, “Forecasting is not a respectable human activity and not worthwhile beyond the shortest of periods.”
Although chaos and complexity theories alone are sufficient to doom prediction, there are other barriers that obscure our view of the future, such as “situational bias”: the phenomenon by which our thinking is so obscured by present conditions and trends that we cannot begin to see the future.”
If they are so smart why aren’t they incredibly rich?
…Instead they make their money selling advice to others on how they should spend their money. Although the experts do not get rich quickly, they are in a much safer business because their clients take all the risk.
We are continuously inundated with doom and gloom predictions because sensationalism sells.
Non-liner relationships greatly amplify mistakes
This is precisely how and why weather forecasts quickly degrade over time.
In the longer term small initial errors snowball.
Lorenz understood this inherent limit and was the first to proclaim that there must be some point in time beyond which weather forecasting is theoretically impossible. Recently, the American Meteorological Society has officially proclaimed that this limit is somewhere between ten and fourteen days. However, it may be economically impossible to achieve this goal.
I found that the Almanac had a 48.99 percent success rate in prediction whether average monthly temperatures were above or below seasonal norms, which is essentially the same fifty-fifty odds of flipping a coin.
It is not at all surprising that all three major long-range weather forecasting almanacs claims accuracy in the 80-85 percent range, given that just using historical seasonal norms as a naïve forecast requiring no skill yields a 90 percent accuracy rate. Any forecaster of long-range weather would be crazy not to rely mostly on historical seasonal norms.
Question: Why did God create economists? Answer: To make weather forecasters look good.
Economics, like meteorology, is heavily involved in forecasting. Among all the science, hard and soft, these two fields are by far the most heavily involved in making predictions for broad public consumption. Nearly every day the media shower us with an economist’s predictions. How often do physicists and chemists make predictions about the future? Hardly ever.
…First Law of Economics: For every economist, there is an equal and opposite economist.
Economists cannot predict turning points in the economy.
Economist forecasts accuracy drops with lead time. Victor Zarnowitz has noted that “the predictive value of detailed forecasts reaching out further than a few quarters ahead must be rather heavily discounted.”
It turns out that most economic forecasts are about as accurate as guessing that next year will be the same as this year – an example of a naïve forecast.
Increased sophistication provides no improvement in economic forecast accuracy. Forecasters using computer models do no better than those relying only on their subjective judgement, and those using large models with over a thousand equations do no better than those using simpler models with only a few…
Commenting on the lack of progress in forecasts accuracy, Paul Samuelson (a Nobel laureate, MIT professor, and father of Economic 101) observed, “I don’t believe we’re converging on ever-improving forecast accuracy. It’s almost as if there’s a Heisenberg …[Uncertainty] Principle.” After many years as a prominent economic forecaster, Michael Evans, founder of Chase Economics, confessed, “The problem with macro [economic] forecasting is that no one can do it.”
Alfred Marshall, an English economist and John Maynard Keynes’s teacher, noted in his 1890 book, Principles of Economics, that economic phenomena “do not lend themselves easily to mathematical expression.”
Complex systems cannot be dissected into their component parts, because the systems themselves arise from the numerous interactions among the parts.
Complex systems are so highly interconnected with numerous positive and negative feed back loops that they often have counter-intuitive cause-and-effect results.
Me: Relationships may have a logic but they may not hold i.e. Phillip’s Curve.
Contrary to traditional economic thought, external shocks are not the major cause of the economy’s calamitous behaviour; it happens all by itself, for the economy is sufficiently unstable to create its own turmoil. The 1987 stock market crash is a good example. It was not caused by any external shock or calamitous sequence of events; it just happened due to the complex nature of the system and the interplay of events that are beyond our current comprehension. The crash came unannounced, and the market soon rebounded, reaching record highs.
A second negative impact of economic forecasts is that they result in faulty decision making by policy makers, business executives, and we as individuals, based on erroneous information. The Economist was right to declare that economic forecaster “are worse than useless: they can do actual long-term damage to the economy.”
How to succeed as an economic forecaster: forecast often and don’t keep records.
…Japan’s Nikkei exchange, which in 1990 lost 91 percent of its value in nine months. Japan’s commercial empire did not lose 91 percent of its earnings power.
Behavioural finance hypothesis include some of the following obviously commonsense notions: “disposition theory” (investors are reluctant to sell shares when they go below their original purchase prices),”barn-door closing” (investors will stick with a current trend even when it is changing – i.e., situational bias), and “anchoring” (investors are reluctant to change their opinions once they have made up their minds). Behavioural finance theorists appear to share some common ground with market technicians, who believe that the stock market is heavily driven by mass psychology.
Speculation and panic are nonlinear forces with positive feedback loops.
As Warren Weaver, author of the book Lady Luck, observed, “The best way to lose your shirt is to think that you have discovered a pattern in a game of chance.”
It took 200,000 years to increase human life expectancy from twenty-five to forty-seven years, and in the last one hundred years, life expectancy dramatically increased from forty-seven to seventy-seven years (in developed countries).
Nathan Keyfitz has concluded from his extensive reviews of US population forecasts that “short-term forecasts, say upto ten or 20 years, do tell us something, but beyond a quarter-century or so we simply do not know what the population will be.”
World population growth is almost entirely a phenomenon of the developing world… Between 1990 and 1995, 88 percent of the people added to the world were in Africa or Asia. Some developed countries already have birth rates that are at or below replacement levels.
The only certainty is that we are destined to live in an unpredictable world filled with endless uncertainty.
Paradoxically our life’s are more influencable than predictable. Although one can never really know how one’s life will evolve, it is surely possible to influence the evolution of one’s life to achieve certain aims. If there is something to be gained by heeding the message “What shall be, shall be,” it is that we should not take ourselves so seriously in the light of the fact that our futures will be filled with uncertainty and, in large part, shaped by chance events and luck. In spite of that, we can chose to lead lives that flexibly adapt to unforeseen changes and ambitious and motivated individuals can influence their futures by striving to make things happen.
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