I had a professor that told me it's actually a good strategy to make wild predictions far in the future. If you're right, you look like an oracle. If you're wrong, nobody remembers to go back and dig up "he predicted this on this date", primarily because they're already focused on the next predictions. Most of the time it's a win-win; the farther out in the future the better.
It's not just wild predictions far in the future; even next year will usually do you more good than harm. Published predictions aren't meant to have anything to do with the future, they're for your enjoyment here and now[1].
Seth Godin makes a similar point to be unafraid of "claim chowder" - what happens when you make a prediction about the future and you end up being totally and tragically wrong. No one remembers!
But an end to the housing bubble was hardly a wild prediction, just common sense.
Either some new law that would let bubbles go on forever had just appeared or the bubble would end in a bit. You just didn't know exactly which bit.
Indeed, in any bubble, some percentage are fooled by the argument du jour that "this time it's different" and another percentage are simply trying to find the bigger fool. Sure, a lot of people know the bubble will pop but without knowing exactly when, they don't really an incentive to do anything.
A lot of this has to do with the way we "score" forecasts. Applying some kind of uniform weighting over forecasts is the natural, and wrong, way to think about things.
Nassim Nicholas Taleb (black swan, fooled by randomness) has written about his trading strategy. At his fund, he consistently takes positions that predict extreme events, and he's wrong almost all the time, consistently producing grinding, negative returns. He's only been right a couple times, but when he's right he's really right, making enough money that he doesn't need to make money anymore.
he's wrong almost all the time, consistently producing grinding, negative returns. He's only been right a couple times, but when he's right he's really right, making enough money that he doesn't need to make money anymore
AFAIK his hedge fund haven't been right "big" even once so far and clients are only withdrawing money with a loss after few years...
Perhaps you should invest the extra 19 seconds between typing "AFAIK" and actually, you know, Knowing.
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"founder of Empirica Capital, after which Taleb retired from trading and became a full-time author and scholar in 2004.[33] Taleb is currently Principal/Senior Scientific Adviser at Universa Investments in Santa Monica, California, a tail protection firm owned and managed by former Empirica partner Mark Spitznagel.
Taleb reportedly made a multi-million dollar fortune during the financial crisis that began in 2007, a development which he attributed to the failure of statistical methods in finance.[34]
Universa is a fund which is based on the "black swan" idea and to which Taleb is a principal adviser. Separate funds belonging to Universa made returns of 65% to 115% in October 2008.[20][35] In the wake of the economic crisis that started in 2008, Taleb has become an activist for a "black swan robust society""
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> Taleb reportedly made a multi-million dollar fortune during the financial crisis that began in 2007
"Reportedly". Also, "multi-million dollar fortune" is really vague.
Sorry to spoil a good story, but the entire Taleb thesis is just a very entertaining way to say : "Shit happens". There is absolutely nothing new that he has to add, other than the entertainment and sheer drama. If there was, he would be able to publish it as a paper in a journal, not merely as a popular paperback. As an analogy, Taleb's position is akin to a religious zealot shouting, "Science dosen't know everything". Science's response is : "Sure, we know that. Why don't you help push the border by proposing and publishing a better model?". No, he is content to just shout from the rooftops and make a living out of it. Even his recent attempt to publish an academic paper in 2010 is full of negativity: it's just a way to say, "You're wrong, you're wrong, you're wrong. Here are citations to show you're wrong."
Also, note that Taleb is merely an adviser to Universa. Any credit for profitability at Universa goes to their founder, traders and portfolio managers. When he was the trader (at Empirica), they had to fold the fund. That's when he wrote the books.
What fans of Taleb probably don't realize is that the enemy is not the models or the quants who published the models, who clearly stated their simplifying assumptions in order to make approximate models, (because Newton's laws are a good-enough intermediate model compared to nothing even though they may be wrong at extreme points, and that's where relativity comes in,) but overleveraging (trading with money that you don't have), and good old greed (using a model that states clearly on the label that it is only an approximation, 90% correct, as if it were 100% correct).
Taleb's recent arguments with Scholes (who was awarded a Nobel Prize for the Black-Scholes model) is like a dolt shouting a Newton, saying, "But you didn't consider relativity! You must be jailed for that!". So what, at least he DID something concrete!
Are you not allowed to call bullshit on something unless you can do better? I believe the contrary; I think that reading around and saying "You're wrong, you're wrong, you're wrong. Here are citations to show you're wrong" is actually a very valuable contribution to science and society -- what are the point of such models if they don't work?
The difference between Newton and the securities traders that Taleb dislikes is that Newton actually managed to predict things with certainty. A large part of the Black Swan is Taleb pointing out that barely any retrospective review is done on predictive models.
> is actually a very valuable contribution to science and society -- what are the point of such models if they don't work
Agreed. Some papers just say, "We tried this and it doesn't work", and that's a contribution, too.
I would just like to point out that there is a good amount of unwarranted drama that overemphasizes his contribution and unnecessarily attacks fundamental contributions like the Black-Scholes model. It's especially appealing to the larger public who are looking for a black & white "us vs. them" simplified explanation for the financial crisis.
"when people study success stories exclusively — as many avid devourers of business self-help books do — they come away with a vastly oversimplified idea of what it takes to succeed. This is because success is what economists refer to as a “noisy signal.” It’s chancy, fickle, and composed of so many moving parts that any one is basically meaningless in the context of the real world. By studying what successful ventures have in common (persistence, for instance), people miss the invaluable lessons contained in the far more common experience of failure. They ignore the high likelihood that a company will flop the base rate and wind up wildly overestimating the chances of success."
I would love a book like that, if there was sufficient analysis of the failures, and the interview subjects were as interesting as the crowd in "Founders at Work".
I am probably biased but I think he makes the same mistake he is arguing against. Base rate neglect is due to an inability to calculate a conditional probability properly - assuming P(A given B) = P(B given A). In a similar type of fallacy, looking at the joint probability of 95% or whatever of businesses failing and saying you only have 5% chance to succeed is nonsense.
First this frequentist approach is inapplicable to the real world (Taleb's thesis actually) and secondly you have to look at it as your degree of belief of success given: team, communication ability, industry, environment, economic state, competition, potential usefulness, market saturation, skill, climate, education, timing, confidence, willingness and dozens of other variables. This will , can only be a rough estimate. So don't just look at arbitrary success stories but don't just look at arbitrary failures either. Pick a set of criteria and look at all those most similar to you, whether they be analogues or dopplegangers. Find the success rate in this smaller space.
Your chance of failure might be much lower but it could also be much higher than the base rate. Basically, do your homework. Consider your situation, risk tolerance, odds, utility and act accordingly.
To me it seems that hardest part about predictions is the timing. It's not too hard to understand the macro economic trends and to see which way the wind is blowing, but it's very hard to know when it will happen and how quickly it will happen.
That's why day trading is gambling. The long term buy and hold, and the averaging down strategies will make you money, as long as you understand mid to long term direction of the economy and invest accordingly.
Actually if there's any one lesson to be learned from the last dozen years of the stock market's swings, it is that "buy and hold" is dead as a useful investment strategy.
As to gambling vs. trading, there's a whole industry of people who train traders in eliminating the gambling psychology that can destroy equity so quickly. A short time frame only exacerbates the psychological weakness.
Oddly enough successful day traders, that is, those who hold their positions for mere minutes and close out all positions by the close of the trading day, are about as far from gamblers (in a psychological sense) as you can get.
Actually if there's any one lesson to be learned from the last dozen years of the stock market's swings, it is that "buy and hold" is dead as a useful investment strategy.
I might have misused the term buy and hold. I meant to ignore the intraday swings and keep your eyes on the overlying trends. I certainly don't think you can blindly hold an index fund these days and plan on retiring on it.
My 401K's in a 'LifePath' fund- more-or-less an index tracker which shifts more weight from a stock index funds into bonds as your nominal retirement day approaches. It's quite possible I'll come to regret it, but I can't think of a safer approach.
Personally, I like Schiller (http://www.econ.yale.edu/~shiller/) more than Roubini. His record: he wrote a book called Irrational Exuberance, and the .com market promptly crashed. He wrote papers from 2003 to 2007 suggesting the housing bubble was real, what it's effects were and how it might be mitigated / avoided.
Where Roubini simply says we're all walking in the dark, Schiller is the rare critical eye who offers, in public, insight about where and how things are going wrong.
Personally, I like Mike Whitney (most recent article http://counterpunch.org/whitney01062011.html) more than Roubini. He's not so famous as Schiller but he's not afraid to connect the dots politically as well and call a wealth-based transfer from poor to rich class warfare when that is what it is.
He called the Great Recession many times from 2006 onwards, just dig through that site for his articles, like this way for instance (https://encrypted.google.com/search?hl=en&q=%22by+mike+w...) - really, the guy is super cynical but nothing macroeconomic-wise escapes his beady eye.
Please don't be crude :) Yes, like a fine malt whiskey Mr. Whitney can go straight to your head. I never said that he was an economist mind you, just that his economic analysis is spot on and he was yelling "housing bubble!", "credit bubble!" as the regular economists were ignoring Roubini et al. Whitney is pessimistic but if you hadn't noticed there has been a lot to be pessimistic about for the last 5 years of irrational exuberance and recessionary times. Besides, he's an accessible and engaging writer. Take the time to go back to a few of his articles from years gone by to get a feeling about his track record and insight.
I like Bob Schiller very much also. Really down to Earth guy and not extremely opinionated. Mostly his predictions are a range of possibilities, not 100% certain events like it is the case with Roubini.
When asked whether something is (over|under)valued he mostly answers he's not sure. If only others in Economics were as humble...
P.S. and obviously this is not something that will get one any upvotes :)
We want to believe success is more probable than it is, that it’s the result of a process we can wrap our heads around. That’s why we’re drawn to prophets, especially the ones who get one big thing right. We want to believe that someone, somewhere can foresee surprising and disruptive change. It means that there is a method to the madness of not just business, but human existence, and that it’s perceptible if you look at it from the right angle. It’s why we take lucky rabbits’ feet into casinos instead of putting our money in a CD, why we quit steady jobs to start risky small businesses. On paper, these too may indeed resemble sucker bets placed by people with bad judgment. But cast in a certain light, they begin to look a lot like hope.
That sound you hear is the sound of a thousand VCs crying out en masse.
>It’s why we take lucky rabbits’ feet into casinos instead of putting our money in a CD, why we quit steady jobs to start risky small businesses.
Again, I am probably biased but I think this indirect comparison is nonsense. While one action is unequivocally irrational the other could be rational if you take into account situation, tolerance to risk and expected value - expected utility of the action.
In October 2008, he predicted that hundreds of hedge funds were on the verge of failure and that the government would have to close the markets for a week or two in the coming days to cope with the shock.
Most hedge funds would have been bankrupt if not for the bailouts, so he was technically correct.
It actually makes sense. To predict the economy without government you need to predict trends and the behavior of many people. To predict the government moves you need to predict the whims and arbitrary actions of individuals, and do that according to their perceived political gains.
A much simpler explanation. Even though the prophet is usually wrong, we believe him when he's right because that's the only time we notice he has even made a prediction.
I would buy this argument if it wasn't for the fact that he managed to not only correctly call the timing but also the cause of the recession.
It sounds to me like he's a good person to listen to for potential trouble spots. The economy is very path-dependent; just because someone is good at pointing out potential issues doesn't mean they're going to know how it turns out.
1. quantitative easing [which had the effect of propping up the stock market], and
2. the creation of a backdoor funding initiative to subsidize the investment banks on the backs of all USD savers, by pretending they are regular banks, allowing them to borrow at the nonsensical rate of 0% (or nearly that) [allowing banks to make billions per year nearly risk-free, thus keeping them from going under]
betrays either the article writer's dishonesty, or lack of knowledge on the subject.
Mainstream Economics assumes the monetary system and government policy are some abstract and perfect continuous function. As perfect example the IS/LM curve. They aren't though, they can radically change the rules anytime they want to throwing years of equations out the window. Imagine the utter theoretical chaos that would be caused if the U.S defaulted on its bonds because Treasuries represent the "Risk free rate of interests" variable present in perhaps thousands of economic models.
Idea for a small startup: service, which collects predictions from experts and politicians, and have a number showing percent of predictions, which came true.
Based on the author's logic you might as well throw up your hands and stop trying to predict anything.
Roubini didn't get his message from God, he made it based on a public, replicable analysis using standard economic theory from his economic school. Other people from his economic school also made the same predictions that followed logically from their premises and the indicators.
This is like saying when a doctor tells a patient that if he keeps smoking he will get cancer, and the patient gets cancer, he just did it by luck.
It's not by luck. He is not making wild speculations. He's doing it systematically based on logic and facts and a respected system that has a level of credibility behind it.
All the austrians predicted the housing bubble.
This article is a hit piece, pure and simple. It is teaching the reader to be stupid.
"Based on the author's logic you might as well throw up your hands and stop trying to predict anything."
You say this like it proves the author is wrong. This point isn't really that obscure, Nicholas Nassim Taleb sold millions of books making this very point over the last couple years.
"This is like saying when a doctor tells a patient that if he keeps smoking he will get cancer, and the patient gets cancer, he just did it by luck."
No, this is a poor analogy. Its more like saying that if you keep predicting someone is going to get cancer for smoking, eating apples, drinking Coors Light, and playing basketball you shouldn't get any credibility for being right on one and wrong on all the others.
"All the austrians predicted the housing bubble."
Yes, but they also mispredicted a lot of other things, thats the point.
Forecasting the economy is trickier than the weather, even with the advanced quantitative tools available to Economists today. Standard economic models were totally blind to the collapse. In fact, following standard models was worse than having no model at all, it created false security and hid risk from the markets.
Austrians don't concern themselves too much with quantitative models because they are inherently unreliable. The main idea is that interfering in prices produces negative consequences in the same manner that any control of prices does. The Austrians are simply extending the theory of price controls to interest rates.
