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The second oldest profession
Most successful prediction business: Oracle of Delphi
700 B.C. ~ A.D. 300
Written records from 5,000 years ago
Ba Gua
What will the future bring?
What will the future bring?
-- A deep human psychic need
-- Material benefits allurement
If I were asked to guess what people are generally most insecure about, I would say it is the content of the future. We worry about it constantly.
-- Isaac Asimov
Today prediction industry
WeatherNational Weather Service
EconomicsFederal Reserve banksCongressional Budget Office
BusinessStock market
DemographyPersonal services
Weather forecasting
Evaluation
-- Forecasts within one- to two-day range lead time are reasonably accurate -- Long-range prediction remains the voodoo aspect of weather forecasting
-- only forecasting profession that has shown clear signs of improvement
-- most successful of all the future-predicting professions examined in this book
From Meteorology to Economics
Why did God create economists?
In order to make weather forecasters look good…
Economic forecasters
Who are they?
-- Most influential economists in the US
Federal ReserveCouncil of Economic Advisors (CEA) Congressional Budget Office (CBO)
-- International
International Monetary FundWorld Bank
-- Others
Hundreds of private organizations
Media
Misleading Indicators
Conflicting economic religionsKeynesians – government spending
Monetarist – supply of money
Neoclassicists - laissez-faire commerce
Marxist economists - controlled economies
First law of Economics:
for every economist, there is an equal and opposite economist
Misleading Indicators
Why economy is “predictable” – Theory of General Equilibrium
economy is inherently stableeconomy has natural forces to restore to its equilibrium
Is this sound logic or wishful thinking?
Five sins
Economists cannot predict the turning points in the economy
GNP growth and inflation from 1970 ~ 1974
1970 mild recession
1972 recovery 1973 sharp increase1974 deep recession
FRCEA
CBO
GE
BEANBER
Five sins
Result:
Among forty-eight predictions, forty-six missed the turning points in the economy.
Accuracy: < 5%
Five sins
Economic forecast accuracy drops with lead time
The average forecast errors percentages for real GNP growth are 45% at the beginning of the year being forecasted and 60% six months in advance of the year being forecasted.
The average forecast errors percentages for inflation are 30% at the beginning of the year being forecasted and 40% six months in advance of the year being forecasted.
Five sins
Economists’ forecasting skill on average is about as good as guessing.
-- Naïve forecast, best prediction is to assume no change
-- better in accuracy when predicting highly volatile economic statistics, like interest rates
-- worse in accuracy when predicting highly stable economic statistics, like government spending
-- as accurate as economists when predicting a middle ground of important statistics, like GNP growth and inflation
Five sins
Increased sophistication provides no improvement in economic forecast accuracy
Large models with over a thousand equations do no better than those using simple models
Educational and professional sophistication have little to with economic forecasting prowess….
There is no evidence that economic forecasting skill has improved over the past three decades
Five sins
Forecasts may be affected by psychological bias
Overly optimistic & Overly pessimistic
Economists’ forecasts merely reflect their own psychological outlook on life.
Reason 1 -- Complexity
Complex Systems:
• No natural laws governing their behavior
• Numerous interactions among the parts
• Unexpected moments of self-generated turmoil
• Adaptation to environments and evolution
• No fixed cycles
Reason 2 – Erroneous data
Crude, approximate, guessing data:
Irrelevant data
Questionable survey data
Inaccuracy of statistics
(Unemployment rate, how many people are seeking employment)
Random harvest
The others are July, January, September, April, November, May, March, June, December, August, and February
-- Mark Twain
October is one of the dangerous months to speculate in stocks.
Three strikes 1 -Stock prices
Historical patterns – technical analysis
Pattern Double Top
Pattern Pennant Pattern Trend Up Pattern Trend Down
Pattern Flag
Pattern HS Bottom
Three strikes1- Stock prices
More elaborate methods –
Dow theory
Elliot Wave theory
….
Astrology!!!
“Planetary alignments and lunar cycles influence investor psychology”
Three strikes1- Stock prices
However:
Past stock prices are useless in predicting the stock market.
“Only 3 percent of the total variation in daily stock prices is explained by historical patterns, and the rest is pure noise”
Millions of investors can respond almost immediately to conduct online transactions. The stock market is much more dynamic and complex than the economy.
Three strikes 2 – future earnings
Corporate earnings growth:
In a logical sense, share prices are random, then their key determinant – future earnings – should be random as well
Three strikes 3 - EMH
EMH:
Efficient Market Hypothesis
What is it:
the stock market knows everything that is knowable about future corporate earnings thus prices all stocks at their true values
Three strikes 3 - EMH
Result:
Enormous amount of competition drive the prices toward their true value.
You cannot find over or undervalued stocks ,and you can never beat the market or predict it!
Return to glacier?
The ice age:
The ice age come in predictable cycles and that we are overdue for one.
On the contrary:
Global warming caused by the “greenhouse effect”
Malthusian
Most famous doomsayer - T.R.Malthus
Population, when unchecked, increases in a geometrical ratio, while subsistence increase only in an arithmetical ratio.
Global Famine
hunger -> starvation -> widespread famine
Feast or famine?
Will there be feast or famine?
For: the productivity of modern agriculturegenetic engineering
Against: cropland is shrinking
pollution is poisoning aquifers
insects are becoming resistant to the chemicals
breeding created farm animals and plants are more genetically alike
No one knows …
The Easter Island tragedy
Societal Collapse:
Mysterious stone heads
Polynesian on the Easter Island
Are we repeating the mistakes?
our planet’s ecosystem has obvious limits that cannot support the exponential growth in human activity forever
W have no place to go unless escaping the earth
Science Fact or Fiction
There would be flying machines and car like devices that were “made so that without animals they will move with unbelievable rapidity.” –Roger Bacon, 1260
Leonardo da Vinci’s Helicopter - 1500
Science Fact or Fiction
Inventions inspire authors:
Hot Air Balloon = Around the World in 80 Days
Genetic Engineering = Jurassic Park
Science Fact or Fiction
Media
FuturistsWall Street AnalystsIndustry Associations
Government AgenciesForecasting Firms
Think TanksHigh-Tech Firms
Flow of Technological Forecasts
US Government invests $160 Billion a year in technology research (Size of Sweden’s economy)
Science Fact or Fiction
Analytical Technology Forecasting Tools:
•Delphi
-“Bullheaded scientists with situational bias”
•S-Curve
-Forecasts wrong 80% of the time
Out of the Blue
Scientists dismiss the really big technologies
•Telephone - Western Union 1876
•Electricity (light bulb) - British 1883
Industry, manufacturers do not invent the technology
The Futurists
Infirm Foundations of Social Science
•Greatest number of methods and the least results
•Society is complex and influenced by unpredictable things
•History does not repeat itself
Newtonian Socialists
•John Stuart Mills – Socialism possible
•Karl Marx – Socialism inevitable
-Failed to predict that working class conditions would improve
The Futurists
From Utopia to Techno-Totalitarianism
•H.G. Wells – A Modern Utopia (1905)
•Voluntary Nobility(Aristotle?)
•Edward Bellomy – Looking Backward from the Year 2000 (1887)
•All countries socialist
•Everyone vegitarian
Then WWI…
•Guns, tanks and bombs…oh my!
The Futurists
Futurology
1. There is no single future
2. We can see those alternative futures
3. We can influence the future
4. We have a moral obligation to anticipate and influence the future
-Wells, Ford, Keynes, Freud, Churchill…
Trend Spotters
• John Naisbitt’s Trend Letter – Megatrends – Top 10 Trends (3 already existed, 7 never materialized)
• Faith Popcorn (IQ 180?) – Cacooning, 1990’s =Environment, Education and Ethics
The Futurists
Excuse to do the inexcusable
“Self-interest and the quest for power: this, of course, is what false prophecy is and always has been about.” – Max Dublin
• Marx’s prophecy with Lenin, Stalin, Mao and Pol Pot
• Hitler’s Mein Kampf
• Manifest Destiny
• Domino Theory of Vietnam
Have a firm understanding of history, as false prophesy typically takes its form as distorted facts.
Corporate Chaos
Corporate and Government Planning
• Kennedy’s McNamara
-Planning, Programming, Budgeting System
• Boston Consulting Group
-Greater market share = lowest cost producer
Mar
ket G
row
th
Market Share
Corporate Chaos
The Management Science Myth
•Founded in 70’s, Japan destroyed in 80’s
Management Fads•1980 Porter’s Competitive Advantage Model
•1982 In Search of Excellence (14 out 43 companies bankrupt 2 years later)
•1990 HBR “Re-engineering Work: Obliterate Don’t Automate” – Michael Hammer
•1996 HBR “What is Strategy” – Porter Again…
Corporate Chaos
The Illusion of Control
“Power is concentrated at the top, but the top doesn’t actually exercise control”
-Ideas spring up from individuals within the organization
The Future Does Not Exist
• Future – Infinite possible paths
• Opportunity – advantages relative to competitors
– Small mountain, big mountain
• Vision – Being able to see opportunities
Corporate Chaos
Thriving in the future
•Self-Organization – empowerment, guiding principles
•Intelligence – know your organization, get the right info to the right people
•Natural Reflexes – muscle memory
•Mutation – hire outside industry, allow mutinous behavior
•Symbiosis – work with other organizations
•Competitive Challenges – FedEx vs. US Postal Service
Corporate Chaos
Murky World of Leadership
•Be responsive to the future
•Make things happen
•Know your people
•Home Depot
•Intuit
•Leverage points
•Small changes
The Certainty of Living in an Uncertain World
How to cope:
How can we sort the wheat from the chaff in terms of evaluating predictions?
What lessons does complexity theory offer on how to live in this uncertain world?
Think Critically
•Science – Making laws out of theories
•Methods – Trends only work in very simple situations
•Credentials – Browning’s Earthquake prediction
•Track Records – Look for vagueness in previous “successful” predictions
•Personal Biases – Barnum effect: “have a little something in it for everyone.”