It’s that time of the year again – the time when pundits make predictably erroneous predictions about the coming year.
The Age-SMH has just run its annual survey of economists’ predictions for 2012 and, as usual, looked back on how well the panel did in getting 2011 right. As usual the panellists didn’t do well with no-one getting anything right although a few managed to get in the general ball-park. In the economists’ defence it was a difficult year full of unpredictable events such as floods, earthquakes, tsunamis and assorted other acts of nature but then that’s the nature of predictions, possibilities and guesses.
All in all a proverbial dart throwing monkey would have done as well as the experts even if not as well as FT Money’s famous Dr Fox. Tim Harford (Financial Times 24-25 December 2011) reported on an FT Money year-end competition to forecast some key financial indicator, ‘and easily the most distinctive competitor is a fox in the garden of columnist Kevin Goldstein-Jackson, who (the fox that is) gives forecasts by consuming one of a variety of appropriately labelled pieces of chicken.” Harcourt says the fox was the most accurate forecaster in 2008 and 2009 and was on track to be the 2011 winner as well. You may recall that an octopus had an equally good track record in the most recent football World Cup.
The real questions, however, are why experts are so wrong and why they keep making predictions even though their track record is so bad? The answer to the first question is a result of a complicated mixture of human psychological traits and some assumptions about our universe and existence. In a coming week Come in Spinner will talk about some of these in the context of Nobel Prize Winner, Daniel Kahneman’s brilliant new book Thinking, fast and slow.
But as far as the second question is concerned, why the experts are usually wrong but keep trying, is well-known even without comparing their predictions with random outcomes, foxes and octopuses. The most far-reaching study of expert option was Phillip Tetlock’s 2005 study Expert Political Judgement: How Good is it? How Can we Know? Tetlock gathered some 80,000 predictions each based on rating the probabilities of three alternative outcomes. Analysing the predictions against the actual outcome Tetlock found the experts’ predictions were no better than if they had just randomly chosen across the options. What was also interesting was that “Experts in demand were more over-confident than their colleagues who eked out existences far from the limelight.” Incidentally, in anticipation of online comments, Tetlock is not necessarily evidence for the validity of the wisdom of crowds thesis – particularly in its US Forrest Gump version.
But Tetlock’s view of pundit over-confidence does provide part of the answer to the second question. Harford says: “Professional pundits are not usually paid to make correct forecasts. They are paid to sound convincing.” This is why some predictions are totally predictable. Pundits employed by stock broking firms will always predict either rising markets or exceptional trading opportunities – irrespective of any objective factors – because that drives trades and revenue. The predictions of the most confident forecasters are also predictable – they will be generally outrageous claims most often driven by the need to feed the media’s insatiable need for bad news and the desire to raise the profile of the pundit and his/her employer.
In this field of over-confidence, there is of course, yet another explanation to which Harford, Tetlock and Kahneman all refer. This stems from the competing world-views described by Isaiah Berlin, and derived from the Greek poet Archilochus, which divide the world into ‘hedgehogs’ and ‘foxes’, with the hedgehog having a theory which explains everything and gives them the illusion that they understand the world.
Nevertheless, what is certain among all these errors is that in the next 12 months we will all be exposed to thousands of predictions about politics, the economy, share prices, the Euro, football matches, world events and the vast majority of them will be wrong. Where they are right it will be more a result of luck than talent.
What is also certain is that the predictions will be based less on any spectacular foresight or sophisticated probability analysis but more on the urgings of a PR person (or an editor) to come up with something that will promote the forecaster’s think tank, university, company, firm, group or circulation or audience share.
So, with all that is the author brave enough to make some predictions for 2012? Of course! First, that most of the pundits will be wrong most of the time. Second, being a contrarian and given that everyone seems to be forecasting more doom and gloom, that the world will muddle through and things will probably get better – just as they have for most of human history. Third, that this prediction will probably be wrong too although one pundit, the only one the author has seen so far, also adopts (with somewhat more analytical under-pinning than my contrarian guess) the optimistic view that the news is actually getting better all the time. This Beatles’ inspired forecast is from the Institute of Public Affairs, Chris Berg, as to why “there’s still every reason to be optimistic.” (Sunday Age 1 January 2012). It won’t make you money on the stock exchange but it will provide a pleasant contrast to all the other stuff you will see, read and hear about what 2012 will bring.