Monday, December 29, 2008

Prediction: where only fools and angels dare to tread

I'm reading a wonderful book at the moment: "The Black Swan: the Impact of the Highly Improbable" by Nassim Nicholas Taleb. Lots of academics and bureaucrats hate him, and no wonder. Like one of my other heroes, John Kenneth Galbraith, he is an expert at pricking the pomposities of experts and other overpaid drones, especially those suffering from anxieties caused by their suppressed fear of their own basic fraudulence and incompetence.

Let me quote:

There are those people who produce forecasts uncritically. When asked why they forecast, they answer, "Well, that's what we're paid to do here."

My suggestion: get another job.

This suggestion is not too demanding: unless you are a slave, I assume you have some control over your job selection. Otherwise this becomes a problem of ethics, and a grave one at that. People who are trapped in their jobs who simply forecast because "that's my job", knowing pretty well their forecast is ineffectual, are not what I would call ethical. What they do is no different from repeating lies simply because "it's my job".

Anyone who causes harm by forecasting should be treated as either a fool or a liar. Some forecasters cause more damage to society than criminals. Please, don't drive a school bus blindfolded.

With this in mind, recall my recent comments about Glenn Stevens, Governor of the Reserve Bank of Australia. Is he a fool, or a liar? I invite you to judge. Remember that this man and others like him are presently controlling your destiny.

I wish I had read this book in 1980. It would have saved me a great deal of angst. In fact I spent some time trying to develop some sort of algorithm or model to help me forecast risks when building complicated scientific models in a business which I've been operating for many years, and which has on more than one occasion brought me badly undone. "The Black Swan" is about precisely these types of problems. Unfortunately the book was not published until 2007!

He talks about a very difficult subject but manages to give us some simple tools and concepts to help manage it. For me, one of his key ideas is the division of our world into two sections, which he names Mediocristan and Extremistan. Mediocristan is where most of us live: it's where you need to turn up and do a fair days work to get paid, and where rewards will always be modest but reasonably predictable. Extremistan is the country inhabited by the sorts of people you read about in magazines while waiting to see the doctor. The super-rich: Nicole Kidman, Donald Trump, Mick Jagger, Eddie McGuire. And a whole lot of other people who are less visible but no less extreme in their wealth or power. What he discusses are the characteristics of these two worlds and how they interpenetrate and interact with each other. Extremistan has the characteristic that there are many, many more losers than winners, but the winners may reap astronomical rewards.

Some professions may move from one world to the other. This is what happened to musicians when recording was invented: the majority of musicians lost their livelihood or it became very precarious, while the lucky few became incredibly rich.

But in a certain sense we inhabitants of the modern world are all inhabitants of Extremistan, with its huge rewards and equally huge risks. The present financial crisis comes precisely from this cause, and is the outcome of large numbers of people confusing one world for the other and believing it was possible to get something for nothing. That's what trading on the stock market is all about. That is why asset bubbles occur. That is the basis of gambling.

Anyway I recommend you read this book if what I've said so far intrigues you.

An interesting post by Dmitry Orlov after quite a long lull on his blog. I haven't been posting of late, mostly because I feel that my job is more or less done. I called it as I saw it, and, unfortunately, I seem to have called it correctly. The US is collapsing before our eyes. Stage 1 collapse is very advanced now; stages 2 and 3 are picking up momentum.

I have a similar sense that there will come a time when I feel no further purpose will be served by riffing on the same old themes. I had an interesting experience yesterday where a very young girl, perhaps seven or eight years old, came into our shop to look at our aquarium fish. She began talking about the financial situation in the US (I can't remember what triggered this!) and started by saying "the depression in America" and then corrected herself, "I mean it's only a recession now, but it might turn into a depression". I asked her where she had heard about all this and she said something vague about school. Some time later my former bookeeper came in and told me her bookeeping guru had said the coming downturn could last forty years.

When two unrelated people from such wildly different backgrounds have some grasp of what the situation facing us could entail, there's no need for me to use a megaphone. On the other hand the practicalities of how we're going to deal with all this are still of interest, and perhaps this blog may serve some function in that regard.

In fact my task for the next couple of weeks is to sit down and produce a new business plan for our nursery, something which we have to do if we're to face up to the reality of what's coming towards us. There is no guarantee I'll get it right but failure is guaranteed if I don't do it at all.

Finally, the conclusion of Jim Kuntsler's latest post:

The big theme for 2009 economically will be contraction. The end of the cheap energy era will announce itself as the end of conventional "growth" and the shrinking back of activity, wealth, and populations. Contraction will come as a great shock to a world of conventionally programmed economists. They will toil and sweat to account for it, and they will probably be wrong. Unfortunately, this contraction will do its work in unpleasant ways, driving down standards of living, shearing away hopes and expectations for a particular life of comfort, and introducing disorder to so many of the systems we have depended on for so long. People will starve, lose their homes, lose incomes and status, and lose the security of living in peaceful societies. It will become clear that the Long Emergency is underway.
My hope for the year, at least for my own society, is that we will transition away from being a nation of complacent, distracted, over-fed clowns, to become a purposeful and responsible people willing to put their shoulders to the wheel to get some things done. My motto for the new year: "no more crybabies!"

Read the whole thing if you haven't got time to read The Long Emergency. It's a lengthy and comprehensive examination which may seem excessively dire until you realise how accurate he's been so far.

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