We live in a prediction society.
That's another way of saying we live for the future, our minds restlessly casting forward to some concatenation of forces, energies and tendencies that will produce a certain effect at a specific time: a sunny day, high of 87, meteor shower at midnight or, better yet, Dow 36,000. Homo sapiens has undoubtedly always needed to peer ahead through the banana leaves to an uncertain future, if only to get that next meal. But our fixation on the future, our deep, often subconscious belief in progress, is an aspect of modernity, fueled by the acceleration of technological change, and the rise of growth-oriented economies driven by free markets. In a performance culture, the future always beckons. Our success in those areas, particularly in the ability of "hard" sciences like physics to accurately predict natural processes, has emboldened us. We are all forecasters now, nowhere more so than in finance. We look back only to peer forward; the past has become a warehouse of shrouded furniture awaiting new digs. We drill into historical prices in hopes of establishing a discernible pattern into the future. We poll the masses, or accumulate Internet data, to extract some sense of how they'll react in the future. We ponder charts. We strain to master mechanisms -- economic, market, governance, sentiment -- in the belief that a known set of causes will create a known set of effects. We live for prediction because we need to believe in an orderly world where a known past shapes a predictable future. We're free agents dreaming of determinism. Of course we fail regularly. Sometimes embarrassingly. Occasionally spectacularly. In hindsight, stupidly, foolishly, malevolently. How did we miss that expanding disaster at our feet? Prediction is famously like hitting a baseball. Infallibility is (as far as history has ever told us) impossible; the best prognosticators aim for a decent average. We (you, me, Alan Greenspan) always whiff at the wrong time.
It's no surprise money managers that can beat the market over a decent period are rare -- and deified. And it's no shock success can be interpreted as luck. The task, as academics prove regularly, is daunting. Why? Well, there are fundamental tendencies of the prediction game that undermine the old Newtonian cause and effect. Complex systems are tougher to predict than simple systems. Long term is harder to forecast than short term; indeed, as you mentally extend yourself in time, predictions detach from fact and drift off like balloons into the speculative ether. The more people, as opposed to physical or natural forces, involved, the more capricious the future. Knowing a black swan exists is not the same as predicting its squawking arrival. Looting the bottomless past for similarities to current conditions is more fantasy than forecast. You're always up against Nature's dart tossers, formidable rivals.
This is where we summon John Maynard Keynes, a philosopher of economic and market predictions long before "risk management" became a "science," then a ubiquitous technology. It's pretty clear Keynes would have been skeptical of its pretensions, as he was about laissez-faire markets. Keynes understood probability; his first book was "A Treatise on Probability," and the underlying idea -- the difficulty of acting in a world of incomplete information -- persisted through his "General Theory of Employment, Interest and Money." Indeed, Keynes' belief in the centrality of uncertainty only deepened with age. He understood the natural tendency of investors to predict, and he was realistic about the universality of error. Thus his relatively nonquantitative economics leaned heavily on insight into investor psychology, linking notions such as animal spirits, convention and uncertainty to speculation and crowd behavior. Keynes saw speculation as the attempt to forecast not a long-term truth but shifting market psychology: "Investment based on genuine long-term expectation is so different today as to be scarcely practicable," Keynes wrote in "The General Theory" in the 1930s. "He who attempts it must surely lead more laborous days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and given equal intelligence, he may make more disastrous mistakes."
Keynes or not, we still demand predictions and we still assume -- provisionally perhaps, or at least until a better idea comes along -- certainty. We may believe that economics failed miserably to predict the financial crisis, but we still hang on every subsequent forecast. What choice do we have? What if they're right? What if the Mayans nailed it? We talk expertise but we believe in the hot hand. When we lose confidence in a guru, we search high and low for a credible sub and hoist him up. This might be called (unfairly perhaps) the Roubini syndrome, for the man lionized for calling the real estate collapse and affiliated woes. There were others who similarly got it right, from Yale University's Robert Shiller (who gets credit for two -- count 'em -- correct bubble calls: dot-com and real estate) to hedge funder John Paulson, who lucratively shorted mortgages and got really rich, then famous.
All of which points out other odd aspects of the prediction game. There are probably more folks out there guessing right (or in the neighborhood of right) than you might think (and many more claiming prescience after the fact); we just haven't heard of all of them. It's also true that unless you have tremendous PR, or a very long track record, you're only as good as your last call, which means prognosticators tend to rise and fall faster than growth stocks. An exception to this applies to so-called permabears, who have been calling cataclysms for years. Wait long enough, and they will inevitably be proved right. But in getting there, they will be consistently wrong, which means that those who survive are a hardy band prone to irony and jokes. Even now, on top at last, they engage in a paradoxical certainty that the chronic uncertainty that prevails definitely suggests further troubles ahead. Maybe they're right. Maybe they're not.
Prediction is, under any conditions, a stern taskmaster. Prediction is a public activity; correct forecasting without an audience is like the tree falling in the philosopher's forest. Audience matters. It's easier to convince a large, lay audience of grand, long-term predictions than, say, small expert groups, which hang, like traders, on the short end. Error may be universal, but how we get there differs considerably. Most forecasters attract small audiences. But persuading a larger crowd to believe in your prescience can create a nasty backlash if you stumble. The crowd will not only drop you, but kick you on the way past. Because prediction is viewed as a rational activity based on technical expertise and insight, failure requires an explanation. And that explanation, filtered through the popular Newtonian mind, with its clacking billiard balls, often comes back to a sellout or betrayal for profit. (Like paranoia, sometimes they're right, which complicates things.) A ritual beheading of losers is one way of retaining belief in the replacement crop.
Given all that, and despite the battering of economics or the damage inflicted on the efficient-market hypothesis (a sort of metapredictor and regulator wrapped into one), we cannot seem to get by without regular dosages of prediction. The very best prognosticators feature a richness of analysis that provides a service beyond the actual calls. It's often what we really pay pundits, consultants, analysts, economists, even academics for. And, indeed, in times that are as anxiety-ridden about where we are and where we're going as today, the psychological need for prediction waxes like a full moon. Will we have a double dip? Where are stocks going? Will M&A surge? What effect will re-regulation have on Wall Street? Will private equity deal with its debt? And of course there's the long-term forecast. Where's the dollar (or pork bellies) going? Whither China? Is America in decline? Is Europe, as a single entity, toast? What about the deficit? Does another Mother of all Crises loom?
Read on. There is nothing quite so alluring and provocative as newly harvested predictions still resistant to the ravages of time. It's what we share with the Mayans.
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Our society is absorbed with what the future holds, especially when it comes to the economy.
David Levy believes there's a 60% probability of recession by 2011.
Opportunities beckon in the form of businesses that need to clean up and deleverage from the 2005-'07 period.
Why are we seeing a surge in dealflow generated by sell-side advisers?
The co-founder of Veronis Suhler Stevenson predicts good times for the media sector.
The Latham & Watkins partners says the most vulnerable sectors are healthcare and retail.
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