Why experts are bad at predicting most things
One reason why experts get them wrong is their inability to predict seemingly trivial incidents that can lead to enormous consequences
Sometime in March 2008, Arjun N Murti an analyst at the investment bank Goldman Sachs predicted that the price of oil could touch $200 per barrel soon.
Three months later in July the price of oil touched $147 per barrel and from the way it looked Murti's prediction would soon be right. But then things changed. "In September 2008, financial markets melted down, precipitating a dramatic slowing in the global economy. The experts hadn't foreseen this... By December, oil traded at $33 a barrel," writes Dan Gardner in Future Babble - Why Expert Predictions Fail and Why We Believe Them Anyway.
Murti was the latest in the series of experts who got predictions on the price of oil wrong. Steve Forbes, the publisher of the Forbes magazine had predicted in 2005, that in the next 12 months the price of oil would be down to $35 to $40 per barrel. In fact, the price just kept rising and by the first half of 2008, it had touched around $140 per barrel. This is the time Murti made his $200 per barrel prediction. Both Murti and Forbes turned out to be wrong.
And this is a phenomenon prevalent not only in the oil industry. Let's take this case of the Anaconda Copper Mining Company. It was one of the largest companies in the world given its domination of the expanding market for copper telephone wires. In 1968, the president of the company confidently predicted that "the company will be still going strong 100 or even 500 years from now."
But things changed and the company could not even survive for 10 years more. As Gardner writes, "Three years earlier, the brains of two British scientists had figured out how fibre optics could theoretically be a medium of communication. And two years after their boasts, three scientists were able to make fibre optics, a practical technology vastly superior to copper. The price of copper plummeted. Facing liquidation, Anaconda sold itself in 1977."
One reason that experts get predictions wrong is because of their inability to predict monkey bite moments or seemingly trivial incidents that can lead to enormous consequences. But where does the name monkey bite factor come from? The year was 1920. A monkey attacked the dog of King Alexander of Greece. The king intervened, and another monkey leapt in and bit the king. The bite became an infection. In 1920, there were no antibiotics around and the king died. Even though the king was only the nominal ruler of Greece with his power being more symbolic than real, it set off a series of events.
As Gardner points out, "This trivial event set in motion a series of escalating events: the surprise electoral defeat of the Greek government, a plebiscite, the return of the previously exiled king, and, ultimately a military campaign in Turkey that went badly. Some 250,000 people were killed. "A quarter of million persons died of that monkey's bite," Winston Churchill wrote later."
These monkey bite moments cannot be predicted. On November 9, 1989, it was one of these moments that led to the fall of the Berlin Wall that divided East and West Germany. As Gardner writes, "An East German spokesman who was to announce the then president Egon Krenz's new policy permitting East Germans to travel to West Germany — under strict controls — bungled a question at a press conference. When will the new policy come into effect? He was asked. The correct answer was the next day, November 10, but the spokesman didn't say that. Instead, he looked through some papers, fiddled with his glasses, and finally replied with a shrug. '"Immediately, he said.'"
East German citizens went en masse to the Berlin Wall. The guards besieged by tens of thousands of people opened the gates and the strict conditions that the government had planned to impose came a cropper.
The crumbling of the Berlin Wall started a movement which led to the end of communism across the world including the erstwhile USSR. This proved a slew of experts who had been betting that one day USSR would overtake the United States, all wrong.
Take the case of Paul Samuelson, the first American to win a Noble prize in economics. "In the most widely used economics text book of the era — Economics: An Introductory Course — by the renowned economist Paul Samuelson — the moment of truth was forecast for sometime between 1984 and 1977... Samuelson did not acknowledge he had been off. Instead, he pushed the goalposts forward. In the 1980 edition of his textbook, students were told the Soviet economy would take the lead sometime between 2002 and 2012," writes Gardner. Now, we are in the year 2011, and we all know where various countries that formed the erstwhile Soviet Union are.
Similarly, Murti's prediction went haywire because there was no way he could have seen the collapse of one investment bank called Lehman Brothers, starting of a crisis on the Wall Street, which spread across the world.
The philosopher Henri Poincare explained it best when he wrote, "If we had perfect knowledge about all the matter in the universe we could calculate what the matter would do next. But if there was even a tiny problem with our knowledge about anything anywhere — the smallest possible oversight, the slightest misunderstanding — that flaw would quickly magnify as the machinery of the universe ground on. Soon, it would be enormous and our forecast would be completely wrong. In this way, predictions are impossible."
One reason why experts get them wrong is their inability to predict seemingly trivial incidents that can lead to enormous consequences
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Sometime in March 2008, Arjun N Murti an analyst at the investment bank Goldman Sachs predicted that the price of oil could touch $200 per barrel soon.
Three months later in July the price of oil touched $147 per barrel and from the way it looked Murti's prediction would soon be right. But then things changed. "In September 2008, financial markets melted down, precipitating a dramatic slowing in the global economy. The experts hadn't foreseen this... By December, oil traded at $33 a barrel," writes Dan Gardner in Future Babble - Why Expert Predictions Fail and Why We Believe Them Anyway.
Murti was the latest in the series of experts who got predictions on the price of oil wrong. Steve Forbes, the publisher of the Forbes magazine had predicted in 2005, that in the next 12 months the price of oil would be down to $35 to $40 per barrel. In fact, the price just kept rising and by the first half of 2008, it had touched around $140 per barrel. This is the time Murti made his $200 per barrel prediction. Both Murti and Forbes turned out to be wrong.
And this is a phenomenon prevalent not only in the oil industry. Let's take this case of the Anaconda Copper Mining Company. It was one of the largest companies in the world given its domination of the expanding market for copper telephone wires. In 1968, the president of the company confidently predicted that "the company will be still going strong 100 or even 500 years from now."
But things changed and the company could not even survive for 10 years more. As Gardner writes, "Three years earlier, the brains of two British scientists had figured out how fibre optics could theoretically be a medium of communication. And two years after their boasts, three scientists were able to make fibre optics, a practical technology vastly superior to copper. The price of copper plummeted. Facing liquidation, Anaconda sold itself in 1977."
One reason that experts get predictions wrong is because of their inability to predict monkey bite moments or seemingly trivial incidents that can lead to enormous consequences. But where does the name monkey bite factor come from? The year was 1920. A monkey attacked the dog of King Alexander of Greece. The king intervened, and another monkey leapt in and bit the king. The bite became an infection. In 1920, there were no antibiotics around and the king died. Even though the king was only the nominal ruler of Greece with his power being more symbolic than real, it set off a series of events.
As Gardner points out, "This trivial event set in motion a series of escalating events: the surprise electoral defeat of the Greek government, a plebiscite, the return of the previously exiled king, and, ultimately a military campaign in Turkey that went badly. Some 250,000 people were killed. "A quarter of million persons died of that monkey's bite," Winston Churchill wrote later."
These monkey bite moments cannot be predicted. On November 9, 1989, it was one of these moments that led to the fall of the Berlin Wall that divided East and West Germany. As Gardner writes, "An East German spokesman who was to announce the then president Egon Krenz's new policy permitting East Germans to travel to West Germany — under strict controls — bungled a question at a press conference. When will the new policy come into effect? He was asked. The correct answer was the next day, November 10, but the spokesman didn't say that. Instead, he looked through some papers, fiddled with his glasses, and finally replied with a shrug. '"Immediately, he said.'"
East German citizens went en masse to the Berlin Wall. The guards besieged by tens of thousands of people opened the gates and the strict conditions that the government had planned to impose came a cropper.
The crumbling of the Berlin Wall started a movement which led to the end of communism across the world including the erstwhile USSR. This proved a slew of experts who had been betting that one day USSR would overtake the United States, all wrong.
Take the case of Paul Samuelson, the first American to win a Noble prize in economics. "In the most widely used economics text book of the era — Economics: An Introductory Course — by the renowned economist Paul Samuelson — the moment of truth was forecast for sometime between 1984 and 1977... Samuelson did not acknowledge he had been off. Instead, he pushed the goalposts forward. In the 1980 edition of his textbook, students were told the Soviet economy would take the lead sometime between 2002 and 2012," writes Gardner. Now, we are in the year 2011, and we all know where various countries that formed the erstwhile Soviet Union are.
Similarly, Murti's prediction went haywire because there was no way he could have seen the collapse of one investment bank called Lehman Brothers, starting of a crisis on the Wall Street, which spread across the world.
The philosopher Henri Poincare explained it best when he wrote, "If we had perfect knowledge about all the matter in the universe we could calculate what the matter would do next. But if there was even a tiny problem with our knowledge about anything anywhere — the smallest possible oversight, the slightest misunderstanding — that flaw would quickly magnify as the machinery of the universe ground on. Soon, it would be enormous and our forecast would be completely wrong. In this way, predictions are impossible."
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