The Fortune sellers

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The Fortune sellers
Aaron Sun Steve Coulon 11 / 30 / 2005
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1 The Second Oldest Profession
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The second oldest profession
Written records from 5,000 years ago Ba Gua
Most successful prediction business Oracle of
Delphi 700 B.C. A.D. 300
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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
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Today prediction industry
Weather National Weather Service Economics Feder
al Reserve banks Congressional Budget
Office Business Stock market Demography Personal
services
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2 When Chaos Rains
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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
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From Meteorology to Economics
Why did God create economists?
In order to make weather forecasters look good
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3 The Dismal Scientist
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Economic forecasters
Who are they? -- Most influential economists in
the US Federal Reserve Council of Economic
Advisors (CEA) Congressional Budget Office
(CBO) -- International International Monetary
Fund World Bank-- Others Hundreds of private
organizations Media
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Misleading Indicators
Conflicting economic religions Keynesians
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
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Misleading Indicators
Why economy is predictable Theory of General
Equilibrium economy is inherently
stable economy has natural forces to restore to
its equilibrium
Is this sound logic or wishful thinking?
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Five sins
Economists cannot predict the turning points in
the economy
CEA
CBO
FR
GNP growth and inflation from 1970 1974
1970 mild recession1972 recovery 1973 sharp
increase1974 deep recession
GE
NBER
BEA
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Five sins

Result Among forty-eight predictions,
forty-six missed the turning points in the
economy. Accuracy 15
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.
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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
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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
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Five sins
Forecasts may be affected by psychological
bias Overly optimistic Overly
pessimistic Economists forecasts merely reflect
their own psychological outlook on life.
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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

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Reason 2 Erroneous data
Crude, approximate, guessing data Irrelevant
data Questionable survey data Inaccuracy of
statistics (Unemployment rate, how many people
are seeking employment)
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The market gurus
4 The Market Gurus
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Random harvest
October is one of the dangerous months to
speculate in stocks.
The others are July, January, September, April,
November, May, March, June, December, August, and
February -- Mark Twain
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Three strikes 1 -Stock prices
Historical patterns technical analysis
Pattern Flag
Pattern HS Bottom
Pattern Double Top
Pattern Pennant
Pattern Trend Up
Pattern Trend Down
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Three strikes1- Stock prices
More elaborate methods Dow theory Elliot
Wave theory .
Astrology!!! Planetary alignments and lunar
cycles influence investor psychology
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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.
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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
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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
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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!
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5 Checking the Unchecked Population
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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
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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
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Feast or famine?
Will there be feast or famine? For the
productivity of modern agriculture genetic
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
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The Easter Island tragedy
Societal Collapse Mysterious stone
heads Polynesian on the Easter Island Are we
repeating the mistakes? our planets ecosystem
has obvious limits that cannot support the
exponential growth in human activity forever W
have no place to go unless escaping the earth
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6 Science Fact And Fiction
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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 Vincis Helicopter - 1500
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Science Fact or Fiction
Inventions inspire authors
Hot Air Balloon Around the World in 80 Days
Genetic Engineering Jurassic Park
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Science Fact or Fiction
US Government invests 160 Billion a year in
technology research (Size of Swedens economy)
Flow of Technological Forecasts
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Science Fact or Fiction

• Analytical Technology Forecasting Tools
• Delphi
• -Bullheaded scientists with situational bias
• S-Curve

-Forecasts wrong 80 of the time
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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
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Technological Darwinism
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7 The Futurists
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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

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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 bombsoh my!

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The Futurists

• Futurology
• There is no single future
• We can see those alternative futures
• We can influence the future
• We have a moral obligation to anticipate and
  influence the future
• -Wells, Ford, Keynes, Freud, Churchill
• Trend Spotters
• John Naisbitts Trend Letter Megatrends Top
  10 Trends (3 already existed, 7 never
  materialized)
• Faith Popcorn (IQ 180?) Cacooning, 1990s
  Environment, Education and Ethics

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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
• Marxs prophecy with Lenin, Stalin, Mao and Pol
  Pot
• Hitlers Mein Kampf
• Manifest Destiny
• Domino Theory of Vietnam
• Have a firm understanding of history, as false
  prophesy typically takes its form as distorted
  facts.

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8 Corporate Chaos
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Corporate Chaos

• Corporate and Government Planning
• Kennedys McNamara
• -Planning, Programming, Budgeting System
• Boston Consulting Group
• -Greater market share lowest cost producer

Market Growth
Market Share
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Corporate Chaos

• The Management Science Myth
• Founded in 70s, Japan destroyed in 80s
• Management Fads
• 1980 Porters Competitive Advantage Model
• 1982 In Search of Excellence (14 out 43 companies
  bankrupt 2 years later)
• 1990 HBR Re-engineering Work Obliterate Dont
  Automate Michael Hammer
• 1996 HBR What is Strategy Porter Again

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Corporate Chaos

• The Illusion of Control
• Power is concentrated at the top, but the top
  doesnt 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

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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

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Corporate Chaos

• Murky World of Leadership
• Be responsive to the future
• Make things happen
• Know your people
• Home Depot
• Intuit
• Leverage points
• Small changes

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9 The Certainty of Living in an Uncertain World
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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 Brownings Earthquake prediction
• Track Records Look for vagueness in previous
  successful predictions
• Personal Biases Barnum effect have a little
  something in it for everyone.

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Conclusion

• Que Sera, Sera (what will be, will be)
• Future is more influenceable than predictable
• Life is full of chance events
• Semper Gumby