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The only function of economic forecasting is to make astrology look respectable. John Kenneth Galbraith
Prediction is very difficult, especially if it’s about the future. Niels Bohr
Caveat emptor : Let the buyer beware.
Something about Americans, they love conspiracy theories, they believe that random correlations indicate causation, they swear by Old Wives Tales, they are among the most religious of peoples, they read and swear by horoscopes, they take the advice of movie stars and other famous people in areas where such folks are not experts and they are susceptible to the myth of the America Dream. Social media has expanded the market for nonsensical ideas astronomically. Can you believe that I work up this morning and my digital clock read 333? Was it a sign? Actually, I just had to pee. What if it had read 111 or 222 or 321 or 345 or any other sequence of three numbers? Would that have been a sign? I don’t know the odds (any statistical experts out there?) but I suspect that the odds of randomly seeing a meaningful series of numbers on your clock is much higher than the odds that it’s a sign or a miracle or anything other than just what happens at 333 in the morning. Carl Sagan famously said that extraordinary claims require extraordinary evidence. That’s something to remember next time you hear about a sign or a miracle.
Most of the time such quirky behavior doesn’t matter. We are all vulnerable. But, those most susceptible to crank theories and silly ideas expose themselves to serious and costly mistakes–mistakes that might be avoided with a little common sense and some basic fact checking.
In case you don’t know, The Super Bowl Indicator is a superstition that says that the stock market‘s performance in a given year can be predicted based on the outcome of the Super Bowl of that year. It was “discovered” by Leonard Koppett in the ’70s when he realized that it had never been wrong, until that point. This pseudo-macroeconomic concept states that if a team from the American Football Conference (AFC) wins, then it will be a bear market (or down market), but if a team from the National Football Conference (NFC) or a team that was in the NFL before the NFL/AFL merger wins, it will be a bull market (up market).
Had you changed your investments based on the Super Bowl Indicator over the past three years you would have been wrong every time. Over the long run the Super Bowl Theory has had a decent record. Maybe that’s the result of “self reinforcing expectations,” something I explained in my Economics classes as follows: If everyone thinks the price of milk is going to go up they will all buy milk sooner to avoid the price rise and this excess demand will cause the price to go up. QED Or maybe the Superbowl and stock market correlation is just a random event that won’t be repeated. Is there any reason why it should be true? Is there a reasonable theory behind it? These are important questions to ask before you find yourself hoodwinked and broke. Odd sequences of events like the batter’s “hot streak” in baseball do occur but no more than would be expected randomly.
What about Punxsutawney Phil? Can a groundhog really predict the weather? Sorry folks, the answer is not really. And why should anyone expect that to be true? Naive weather predictions are universally poor. Almost as poor as predictions of babies gender. Or, apocalyptic predictions.
I shouldn’t be too hard on Americans. It seems to be human nature to make predictions based on anecdotal evidence, personal observation, or some other idiosyncrasy. In this, we are all the same, most of us anyway. Two of our heroes at Think in the Morning did manage to find a way out of this common conundrum.
“Would you tell me, please, which way I ought to go from here?” “That depends a good deal on where you want to get to.” “I don’t much care where –” “Then it doesn’t matter which way you go.” Alice in Wonderland
The first piece of advice, don’t get so attached to your prior convictions that you lose all flexibility. Charles Darwin developed an important habit to address just this concern. He used to say that whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man’s natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience–a flaw in our makeup that bears on what happens during secular bull markets and extended periods of stagnation.
Equally important is to keep an open mind (but not so open that your brains fall out—Richard Feynman). Do your own research. Nobel physicist Richard Feynman put it succinctly:
The dream is to find the open channel. What, then, is the meaning of it all? What can we say today to dispel the mystery of existence? If we take everything into account, not only what the ancients knew, but also all those things that we have found out up to today that they didn’t know, then I think that we must frankly admit that we do not know. But I think that in admitting this we have probably found the open channel. Richard Feynman, The Meaning of It All: Thoughts of a Citizen-Scientist
Enormous amounts of time are wasted on ridiculous and often uninformed predictions of sporting events, movie awards, politics, and the stock market just to name a few. Unverified claims for alternative medicine and supplements abound. All of us tend to generalize from ourselves to others. Mundane examples for widely held lay theories are: People who work hard succeed; the longer an event lies in the past, the worse it is remembered; people cannot change their personality, moral character, or intelligence; opposites attract; or that happiness is a matter of wealth.
The mechanisms underlying our ability to explain behavior are very important to us, given that discussing people’s behavior is one of the primary occupations of a human being.
If you have to forecast, forecast often. Edgar R. Fiedler in The Three Rs of Economic Forecasting-Irrational, Irrelevant and Irreverent
Forecasting is inevitably subject to error. Humility, not hubris, is the relevant trait for those brave souls who choose to forecast. If you are going to make predictions, it is helpful to beware of common fallacies in reasoning. For example:
The “post hoc fallacy” occurs when we assume that, because one event occurred before another event, the first event caused the second event. A bonehead example would be: “Every time I wash my car, it rains. Therefore, washing my car causes the rain.” It sounds silly but much economic reasoning today fails to rise above the level of such spurious correlation.
Another error in reasoning, the fallacy of composition, occurs when it is assumed that what is true for the part is also true for the whole. For example, if one farmer increases the size of his crop, his sales and profits will probably go up. If all farmers increase their crops, a glut in supply could cause prices to fall so much that all farmers lose money.
David Hume famously discussed the problem of induction or naive extrapolation, i.e what will happen is what always happens. The bottom line is that, as Niels Bohr said “prediction is very difficult.” It’s difficult because “the facts” can change.
When the facts change, I change my mind. What do you do, Sir? John Maynard Keynes
An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today. Evan Esar
So, what about that Super Bowl Indicator? According to the indicator, the market should be down this year. I personally think it might be down for other reasons but I, like everyone making such forecasts, I could be wrong. If you want to gamble, go ahead. Just remember, you have a 50-50 chance of being right. You also have a 50-50 chance of being wrong. With careful reasoning you may change those odds a bit but you will never reach 100%
Critical thinking: it needs to be taught. Without it, we backslide into illogic and superstition.