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  • The Superstition Known as Economic Forecasting and the Trophy Wife Metric

    Posted by Joseph Fouche on January 18th, 2010 (All posts by )

    Deuteronomy 18:10-12 (KJV):

    10. There shall not be found among you any one that maketh his son or his daughter to pass through the fire, or that useth divination, or an observer of times, or an enchanter, or a witch.

    11. Or a charmer, or a consulter with familiar spirits, or a wizard, or a necromancer.

    12. For all that do these things are an abomination unto the LORD: and because of these abominations the LORD thy God doth drive them out from before thee.

    If an economic forecaster found himself plying his trade in ancient Israel, it wouldn’t be long before an outraged community dragged him kicking and hollering to the outskirts of the village and stoned him to death.

    Especially if they followed his investment advice.

    Economic forecasting has not covered itself in glory the past few years. For a profession focused on predicting the future, few professional economic forecasters came close to foreseeing the coming economic cataclysm. Yet the most unlikely of people, even my friend Drunken Haiku Lawyer, saw it coming.

    Drunken Haiku Lawyer is a self-declared Enemy of Capitalism. Starting out as a junior Fascist in high school (“speed limits enforce public order”), he morphed into a Libertarian as an undergraduate (“speed limits are oppression”) and then hardened into a Bolshevik in law school (“speed limits save the whales”). Many are the times I heard him openly thirst for Milton Friedman’s blood and long to gnaw on Hayek’s bones. “Austrians are particularly tender” said Drunken Haiku Lawyer. One day, he reflected that it would be nice to napalm the University of Chicago, dig up the campus, napalm the dirt, grind the alumni of the University of Chicago School of Business into a fine mulch, and sow the campus with salt and ashes so that no economic theory would ever emerge again from its barren, accursed soil. Chicago delenda est.

    Yet he can’t fill the void in his soul where the burning embers of the University of Chicago should go. You see, Drunken Haiku Lawyer sold out. After law school, instead of becoming a penniless crusader for justice, he became a well-compensated plaintiff’s attorney for the very soulless corporations he swore to destroy. Choke chain held tightly by the Man, Drunken Haiku Lawyer can do little to indulge his urge to purge. All that remains is the burning shame of knowing he is a certified class traitor. Drowning that eternal flame is what all the whiskey is for.

    I started a stock market simulation in mid-2006 so I could experiment with value investing strategies. On a lark, I invited the frustrated commissar to play as well and, much to my surprise, he actually played. By the end of its run a year and a half later, my various strategies had fizzled out but Drunken Haiku Lawyer had returned just over 100%. He had shorted Fannie Mae, Freddie Mac, Wells Fargo, Washington Mutual, the home builders, and other heroes of the housing bubble. He generated a massive paper profit. So what, besides the inevitability of dialectical materialism, had given Drunken Haiku Lawyer novel insight into the workings of our capital markets?

    It turns out, most of the senior partners in the law firms he worked with had trophy wives. Living in southern California, most of those trophy wives were normally aspiring actresses. At the height of the southern California housing boom, suddenly they all wanted to be realtors. He reasoned that if trophy wives wanted to be realtors instead of actresses, the housing market was horribly overvalued and the end was near. All that remained was going to the Finland Station and waiting for the Revolution.

    Despite being shown up by the Revolutionary Vanguard and other amateurs, economic forecasters continue to forecast. Worse than that, people continue to believe them. Billions of dollars move on the strength of this prediction or that prediction. Yet the chance that an economics degree confers the ability to predict economic growth in 201o, 2011, or 2050 is just about zero. You could predict alien invasion for November 2012 and have just as good a chance of your prediction coming true as an economic forecaster has of successfully predicting the ups and downs of the market.

    Nassim Nicholas Taleb made this simple proposal: every professional prognosticator should have his prediction success rate clearly posted for public reference. If your favorite economic pundit is hitting .001, it’s time to find something more reliable. Plenty of dartboards and Ouija boards are on sale. Just remember to count the trophy wives.

    Cross-posted on the Committee for Public Safety.

     

    10 Responses to “The Superstition Known as Economic Forecasting and the Trophy Wife Metric”

    1. Fat Man Says:

      I had the same epiphany when Tommy from the butcher’s shop and Steve from the Bagel Bakery both took out real estate licenses. But I don’t short with real money, so I am not rich.

    2. Whitehall Says:

      That brings up a question I’ve long had – how does one go short on residential housing?

      The financing and construction stocks were one way but is they a method to play even closer to the market?

    3. John Says:

      An even better verse might be:

      Deuteronomy 18:22
      When a PROPHET speaketh in the name of the LORD, if the thing follow not, nor come to pass, that [is] the thing which the LORD hath not spoken, [but] the PROPHET hath spoken it presumptuously: thou shalt not be afraid of him.

      Regards
      JJ

    4. Dan from Madison Says:

      Very entertaining post.

    5. Shannon Love Says:

      Economics is our civilizations version of witchdoctors the only difference is that witchdoctors occasionally actually knew something useful.

      I believe that when something is very important to us, we grab up any information we can get about it regardless of the quality of that information. We seem to be hardwired to believe dubious information is better than no information at all.

      I have always been struck by how much faith people invested in pre-scientific medicine. Prior to the mid-1800s, the medical practices of all cultures were a danger to most patients. In the west, there is significant historical evidence that people who shunned doctors had far better outcomes than those who paid for the best treatments available. In retrospect, pre-scientific doctors had no clue what was causing diseases and with the exception of surgeons (who were considered low class tradesmen) they could do nothing to treat the vast majority of diseases. Yet, people flocked to them and paid a lot of money for worthless and counterproductive treatments that were usually extremely painful. Even today, sick people flock to various quack remedies in cases were scientific medicine offers no quick and easy cure.

      I think we do the same thing with economics. Economics is at best an embryonic science with no predictive value but we alter the entire planetary economy based on their reading of the tea leaves. Our economy ends up like a pre-scientific patient, undergoing competing rounds of bleedings, vomiting, purging etc as different political elements debate over which imbalance of which economic humors has rendered the economy so ill.

      We just don’t have the collective will to say, “We don’t understand the economy.” Like people of old, we will try something dangerous and counterproductive rather than just letting nature take its course.

    6. Alan K. Henderson Says:

      Economics is the study of how humans behave regarding the allocation of resources. How’s the predictive powers of other branches of sociology?

    7. Joseph Fouche Says:

      Good point. They shouldn’t be predicting either.

    8. veryretired Says:

      While I agree with Shannon to a cetain extent, I also see the appearence of scientific methodology as a significant factor in the modern infatuation with experts of various sorts.

      As religious justifications began to be discredited in the modern era, and the success of various scientifically based proposals, especially in engineering and medicine, began to demonstrate itself, anything that could be deemed “scientific” gained an enormous amount of prestige and influence.

      Remember how, in the 19th and early 20th centuries, discoveries such as electricity, magnetism, and the function of the nervous system all led to hordes of quacks promoting “miracle cures” with machines that ran electic charges through the body, or magnets, (still selling that one), or spinal manipulation to realign the nerves touted as a cure for everything from liver trouble to cancer.

      Socialism was sold as “scientific materialism”. As the research principle became more widespread and influential, every social science became more and more reliant on mathematical models and, eventually, computer models. It is the latter which have so seduced everyone that even marginal applications, such as pretending one is able to model a multi-trillion dollar economy, or the infinite variables in the make-up of the earth’s climate, are accepted and treated with reverence.

      The recent crash, which was a political collapse with economic consequences, not the other way round, was, to me, at least, and I believe many others, the death knell for this bizarre belief that a fancy degree and some exalted titles could bestow on the resultant “experts” the right to attempt to control and manipulate extraordinarily complex economic and social systems with the crude tools of political dictates.

      Why do I, and others, question and challenge the enacting into law of this experts’ theories, or that academician’s latest model of how everything works?

      Because, for all their titles, and endowed chairs, imposing degrees, and awards from fawning admirers, they don’t know what they are talking about. They can’t predict, they can’t control, and they can’t even pretend anymore to understand.

      An entire world economy devastated because academic experts, political cadres, and corporate gamblers decided they could model, and manage, the trillions of elements that go into the buying and selling and trading of an entire global system.

      And now, refusing to even confront, much less comprehend, what has just happened, these same “experts” are determined to cripple an entire century of humanity’s potential development on the basis of another set of models, even as the information comes out that the models are so flawed and chaotic that a diligent, three year effort to reconcile them was abandoned in despair and frustration.

      This is not expertise—it is madness.

    9. davidbaer Says:

      The Center for Media Research has released a study by Vertical Response that shows just where many of these ‘Main Street’ players are going with their online dollars. The big winners: e-mail and social media. With only 3.8% of small business folks NOT planning on using e-mail marketing and with social media carrying the perception of being free (which they so rudely discover it is far from free) this should make some in the banner and search crowd a little wary.

      http://www.onlineuniversalwork.com

    10. Ralf Goergens Says:

      The really sad part is that most economic forecasters can’t even draw any useful conclusions from the past.