The two typical replies I face when I question forecasters’ business are: “What should he do? Do you have a better way for us to predict?” and “If you’re so smart, show me your own prediction”. In fact, the latter question, usually boastfully presented, aims to show the superiority of the practitioner and “doer” over the philosopher, and mostly comes from people who do not know that I was a trader. If there is one advantage of having been in the daily practice of uncertainty, it is that one does not have to take any crap from bureaucrats.
One of my clients asked for my predictions. When I told him I had none, he was offended and decided to dispense with my services. There is in fact a routine, unintrospective habit of making businesses answer questionnaires and fill out paragraphs showing their “outlooks”. I have never had an outlook and have never made professional predictions – but at least
There are those people who produce forecasts uncritically. When asked why they forecast, they answer, “Well, that’s what we’re paid to do here”.
My suggestion: get another job.
This suggestion is not too demanding: unless you are a slave, I assume you have some amount of control over your job selection. Otherwise this becomes a problem of ethics, and a grave one at that. People who are trapped in their jobs who forecast simply because “that’s my job”, knowing pretty well that their forecast is ineffectual, are not what I would call ethical. What they do is no different from repeating lies simply because “it’s my job”.
Anyone who causes harm by forecasting should be treated as either a fool or a liar. Some forecasters cause more damage to society than criminals. Please, don’t drive a school bus blindfolded.
Caravaggio’s
At New York’s JFK airport you can find gigantic newsstands with walls full of magazines. They are usually manned by a very polite family from the Indian subcontinent (just the parents; the children are in medical school). These walls present you with the entire corpus of what an “informed” person needs in order “to know what’s going on”. I wonder how long it would take to read every single one of these magazines, excluding the fishing and motorcycle periodicals (but including the gossip magazines – you might as well have some fun). Half a lifetime? An entire lifetime?
Sadly, all this knowledge would not help the reader to forecast what is to happen tomorrow. Actually, it might decrease his ability to forecast.
There is another aspect to the problem of prediction: its inherent limitations, those that have little to do with human nature, but instead arise from the very nature of information itself. I have said that the Black Swan has three attributes: unpredictability, consequences, and retrospective explainability. Let us examine this unpredictability business.[32]
Chapter Eleven: HOW TO LOOK FOR BIRD POOP
Popper’s prediction about the predictors – Poincare plays with billiard balls – Von Hayek is allowed to be irreverent – Anticipation machines – Paul Samuelson wants you to be rational – Beware the philosopher – Demand some certainties.
We’ve seen that a) we tend to both tunnel and think “narrowly” (epistemic arrogance), and b) our prediction record is highly overestimated – many people who think they can predict actually can’t.
We will now go deeper into the unadvertised structural limitations on our ability to predict. These limitations may arise not from us but from the nature of the activity itself – too complicated, not just for us, but for any tools we have or can conceivably obtain. Some Black Swans will remain elusive, enough to kill our forecasts.
HOW TO LOOK FOR BIRD POOP
In the summer of 1998 I worked at a European-owned financial institution. It wanted to distinguish itself by being rigorous and farsighted. The unit involved in trading had five managers, all serious-looking (always in dark blue suits, even on dress-down Fridays), who had to meet throughout the summer in order “to formulate the five- year plan”. This was supposed to be a meaty document, a sort of user’s manual for the firm. A five-year plan? To a fellow deeply skeptical of the central planner, the notion was ludicrous; growth within the firm had been organic and unpredictable, bottom-up not top-down. It was well known that the firm’s most lucrative department was the product of a chance call from a customer asking for a specific but strange financial transaction. The firm accidentally realized that they could build a unit just to handle these transactions, since they were profitable, and it rapidly grew to dominate their activities.
The managers flew across the world in order to meet: Barcelona, Hong Kong, et cetera. A lot of miles for a lot of verbiage. Needless to say they were usually sleep-deprived. Being an executive does not require very developed frontal lobes, but rather a combination of charisma, a capacity to sustain boredom, and the ability to shallowly perform on harrying schedules. Add to these tasks the “duty” of attending opera performances.
The managers sat down to brainstorm during these meetings, about, of course, the medium-term future – they wanted to have “vision”. But then an event occurred that was not in the previous five-year plan: the Black Swan of the Russian financial default of 1998 and the accompanying meltdown of the values of Latin American debt markets. It had such an effect on the firm that, although the institution had a sticky employment policy of retaining managers, none of the five was still employed there a month after the sketch of the 1998 five-year plan.
Yet I am confident that today their replacements are still meeting to work on the next “five-year plan”. We never learn.
The discovery of human epistemic arrogance, as we saw in the previous chapter, was allegedly inadvertent. But so were many other discoveries as well. Many more than we think.
The classical model of discovery is as follows: you search for what you know (say, a new way to reach India) and find something you didn’t know was there (America).
If you think that the inventions we see around us came from someone sitting in a cubicle and concocting them according to a timetable, think again: almost everything of the moment is the product of serendipity. The term
In other words, you find something you are not looking for and it changes the world, while wondering after its discovery why it “took so long” to arrive at something so obvious. No journalist was present when the wheel was invented, but I am ready to bet that people did not just embark on the project of inventing the wheel (that main engine of growth) and then complete it according to a timetable. Likewise with most inventions.
Sir Francis Bacon commented that the most important advances are the least predictable ones, those “lying out of the path of the imagination”. Bacon was not the last intellectual to point this out. The idea keeps popping up, yet then rapidly dying out. Almost half a century ago, the bestselling novelist Arthur Koestler wrote an entire book
