Of Professionals and Predictions


February 4, 2013

http://epolicy.blogspot.com/

Of Professionals and Predictions

by etheorist (01-31-13)

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”-John Maynard Keynes

I read with interest here the case of the bank economist who was suspendedBank Islam's Chief Economist from work for making a prediction. What is “wrong” about the prediction?

As economists, ours is a thankless job in the commercial world. Every company feels it needs an economist to dissect what is going on the local and global economies probably half-heartedly because most CEOs feel that they do know their economics and they have a view which is correct because they are already so successful.

So, an economist in a company is nothing more than just a security blanket to do the needed job of writing about what is happening or has happened and to tell them everything is alright. This is the terrible job of an economist, and this is what we were taught in schools with all our models and econometric estimations which are really all about the past because we need data (which necessarily have to be historical and of the past) to prove whatever we have chosen to prove.

The only really useful thing that comes out of econometric modelling is the estimation of key parameters, to know whether a coefficient is a low or high value – as this will help us to conclude about the responsiveness of economic variables to one another.

Once we have a fairly good idea of what the model looks like, then maybe we can have a certain of confidence to make a projection from the past into the future on the assumption that the structure of the model remains intact and relevant for the future. So, projection is a mechanical thing to do and it does not require much thinking.

Of course, the problem with using a variable-dependent model to make projections is that, if you have five variables that will project one variable, and that we need to put in five future variables to project one, it might just be easier to simply give a future value for that one variable that we are interested in in the first place. Of course, we will not have a story to tell. So the model-based projection is “better” because you can say, if this is true and if that is likely to happen, then this will be the projected outcome.

But predictions, to my mind, are an entirely class of creatures all together. Projections, after all, are often argued and justified and hidden behind conditions; projections are conditional predictions. But a prediction, on its own, is an unconditional prediction. “I say the world will end tomorrow.” This is a prediction and the only thing left to do is to see whether tomorrow comes.

In my mind, predictions are meant for prophets and for those who are brave enough to be able to give a pronouncement that “having considered the current situation and assessed all the possibilities for the future, what it is, I say that this is going to happen in the new year.” A categoric pronouncement.

While projections are usually straight-line projections, predictions are interesting only because they are most spectacular when they deal with turning points. When the structure of the model breaks, and a completely new outcome catches everyone by surprise – or rather that they make incumbents very uncomfortable and unhappy because the prediction says that they are not going to be tomorrow where they are today. So predictions are based on an insight into the conditions under which the prevailing system breaks down. Theoretically, this goes into the realm of chaos theory, or more dramatically, catastrophe theory.

So, the said bank economist thought that he was making an innocent prediction about the change of government based on facts which he must argued quite convincingly, maybe too convincingly, of its likely outcome. If true, then this will be bad not to his employer (which is a bank) but his superior who is a person presumably appointed by the power of the day who has been predicted to be out of business by the next election.

No. To remove the economist will be tantamount to admitting the likely defeat; removing him can only be justified on the ground that is necessary to maintain public confidence, especially in the stock market which  unfortunately has been taken to be barometer of the soundness of the economy. So much for the health of the system.

I can assure you that I have not written with great insight but rather with great experience and wisdom. I was lucky that I had a good boss who defended me, but at the same time, all predictions by me were unpublished until I joined an industry where all kinds of predictions including hearsay and bad dreams are considered gems which clients “would love” to read. I suppose we all earn our living by our wits, literally, in the end.

18 thoughts on “Of Professionals and Predictions

  1. After Pakatan win, you will be reinstated with a double promotion for your accuracy. You will receive all back dated remuneration + extra bonuses for psychological hardship. Those who dismissed you will be dismissed along with their accomplices for causing you duress. ………….. hold on for another 2-3 months and then you will talk among giants.

  2. If I were you, I would write a book on the prediction. When your prediction comes true, you book will be best seller. Ravi Batra wrong the 19 Oct 1987 crash before it happened. After that he became famous.

  3. The business of forecasting and making predictions thereon is a risky business. Keynes once said it is like judging a beauty contest. You don’t to pick the faces that are your personal favorites. It is to select those that you think others will think prettiest.

    On the outcome of GE -13, like that Keynesian beauty contest, even the most reckless of pundits would not venture a prediction based on personal preferences. It is too close to call, and that seems to be the prevailing view at this time. But the bank economist took a heretical position, which now threatens his career. Even bloggers can be damned in the most vile manner for daring to be different. Heretics are never welcome. –Din Merican

  4. What’s this?!
    Lemme see: A projection is a conditioned prediction and a prediction is a prophesy with no basis of preexisting factors? Okay.

    So a prophesy is like dividing zero by zero – in which case the result is indeterminate; a prediction is one divided by zero which is also nonsensical and a forecast is one divided by infinity (of variables) which in itself chaotic.

    A better way to look conclusively at variables is to add, multiply, differentiate, then integrate. That’s what we call divination, magic, instinct and gut feeling. That’s the human thing to do, because variables are given different weightage due to personal preference due to hubris or plain ‘idiosyncrasy’. Nothing wrong with that since political science is as exactingly wooly as economics.

    Therefore, to sanction an honest (to himself, anyway) guy who uses the best of his ability to factor in his preferences to ‘forecast’ the imponderable – is the epitome of idiocy and degeneracy. It has another synonym: Ampu Bodekism. It just undermines the whole concept of freewill, democracy and the laws of probability. Actuarial science is just that, a probability – we always wish we don’t fall into the cohort: ‘We, who are about to die, today.’

    Where does that put our air jampi specialists and other soothsaying quacks – like astrologers, numerologists, feng-shui masters, parrot/tarot card pickers etc? Forsooth, they’d go extinct with UMNO’s bomohs/seers!

  5. Harry Truman actually said
    “Give me a one-handed economist! … All my economists say, ‘On the one hand…on the other’”.

  6. http://economistsview.typepad.com/economistsview/2011/09/shiller-keynes-beauty-contest-problem.html

    Sunday, September 18, 2011

    Shiller: Keynes’ Beauty Contest Problem

    Robert Shiller:

    The Beauty Contest That’s Shaking Wall St., by Robert Shiller, Commentary, NY Times: The extraordinary surge of stock market volatility during the last month … has been linked to news events. Much of it came after S& P … downgraded the nation’s long-term debt… It’s tempting to think that the market has been responding rationally to these developments. But that isn’t an adequate answer. Why did investors react so strongly to the rating change, which, after all, was merely the opinion of a few analysts on a committee? And why did the market swing so much day to day, even when there was no significant news? …

    Keynes supplied the answer in 1936 … by comparing the stock market to a beauty contest. He described a newspaper contest in which 100 photographs of faces were displayed. … The winner would be the reader whose list of six came closest to the most popular of the combined lists of all readers.

    The best strategy, Keynes noted, isn’t to pick the faces that are your personal favorites. It is to select those that you think others will think prettiest. … Similarly in speculative markets, he said, you win not by picking the soundest investment, but by picking the investment that others, who are playing the same game, will soon bid up higher. …

    The … best explanation for the market’s back-and-forth swings is that each day we are conducting a Keynesian beauty contest, and reassessing what others think that still others are thinking. On days without much news, the market is simply reacting to itself. And because anxiety is running high, investors make quick, sometimes impulsive, responses to relatively minor events. …

    This may sound like a crazy game, but if others are playing it, we must, too. The outlook for the economy depends on how this convoluted beauty contest plays out.

  7. The way BN has been going about their busyness of plundering the nation and dumbing down their voter base, it takes only one brain cell to predict that they will soon reach the end of the line.

  8. predictions or statistical probabilities have scientific value and use in economics and in the technical field.
    predictions that go wrong are lesser than those that come true. the latter go unnoticed and are portrayed as result of scientific research.
    I don’t mean predictions about the end of the world or such religious mumbo jumbo, these are called Prophecy. the result of the communication between a prophet and the divine superbeing.
    the poor young man is a victim of his sincerity. he should have thought twice before rocking the boat.

  9. Reeper,

    I suppose the old advice to err on the side of caution applies in this case since the bank economist provides economic advice to clients and investors. I was not free to write what I thought about politics, economics and civil society issues when I was in Sime Darby. There are corporate guidelines and rules to be followed. We have a communications department to deal with the media and the investing public.–Din Merican

  10. So easy to be famous. Publish 2 books with opposing predictions, use different pen-names. One will come true and you will be rich

  11. Yup, it’s all about statistical probabilities, reeper.
    Nowadays, the old investment gut instinct ‘experts’ are going the way of the dodo – and are being replaced by graduates in physics and mathematics, toting notebooks full of arcane mathematical formulae. But basically, they do the same job – speculating. All these quasi-science and quantum math ain’t helping, when it comes to that very curious human notion of Money-Wealth and Emotional eudomia (balance).

    That’s why the economist in question gave 3 political scenarios and chose to highlight the one that suits his conscience and preference. Another might have given different weightages and come up with a totally scenario. Economics is a function of politics and has been since it displaced religion over the past 2 centuries. It’s basically the same idea with the supernatural deity expunged. Economic forecasts also have what is known as the paradox of the ‘Observer Effect’.

  12. That’s why when taking a penalty in soccer, it is best to shoot at the goalkeeper. Whether he dives left or right the kicker will win. Rooney has a lot to learn in that department. No need for one hand this or one hand that.

    In Bolehland politics, aim for FLOM. No way you’re gonna miss.

  13. What can I say man? When people speaks with facts get suspended & sacked. Some folks high up talks BS reap fortune

    Read this!

    http://www.themalaysianinsider.com/malaysia/article/muhyiddin-ticks-off-guan-eng-for-politicising-bn-chinese-new-year-party/

    Seriously, I wonder how could that university can give him a degree. This cow doesn’t know what politics is & he is our DPM. Furthermore, any attempt to wear different colour can be constituted as policising…..Where is my spitton? I need to do a merlion NOW!

    Din,
    I sincerely believe that if Tan Siew Sin were to raise from the dead, he will shoot Donald Lim with senapang gajah

    http://www.themalaysianinsider.com/malaysia/article/malaysia-will-never-default-under-bn-says-donald-lim/

    He got the cheek to say that Malaysia is stronger than Singapore in terms of economy. Or perhaps, Donald Chai has been advised by hishamh to say

    What say you, hishamh!

    Here is a son to MCA man

  14. yes Dato,
    thanks for reminding me of that idiom ‘to err on the side of caution’
    he threw caution to the wind and made a politically explosive prediction (a case of juvenility probably). politics is very much dependent on predictions (of the publics opinion). ‘Meinungsforschungsinstituten’ institutes that analyse public opinions here (some) are funded by political parties. they have influence on the voting public especially the undecided voters.

    ”the old investment gut instinct ‘experts’ are going the way of the dodo” – CLF

    the human brain fed with raw knowledge out of experience and given a non interferring environment to work in will produce results more accurate than the super – duper gadgets. the computer is just a number cruncher(only 0 and 1).
    Hamburg bought the NEC SX9 super computer (cost: 39Mio.Euros) capable of 109TeraFlops per second (that is 109billion computation in a second!) in 2009 to make accurate weather predictions.
    has anything changed? No, the people still make fun of the weather forecasts and claim a farmer with experience is more precise.

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