The Fortune sellers Aaron Sun & Steve Coulon 11 / 30 / 2005.

The Fortune sellers

Aaron Sun & Steve Coulon

11 / 30 / 2005

1

The Second

Oldest Profession

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

2When Chaos Rains

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…

3

The Dismal Scientist

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)

The market gurus

4

The Market Gurus

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!

5

Checking the

“Unchecked Population”

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

6

Science Fact

And Fiction

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

Technological Darwinism

7

The Futurists

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.

8

Corporate Chaos

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

9

The Certainty of Living in an Uncertain World

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.”

Conclusion

Que Sera, Sera (what will be, will be)

•Future is more influenceable than predictable

•Life is full of chance events

•Semper Gumby