Can we predict future?

Ragu Rajan of University of Chicago Booth School of Business tries to explain who is responsible for not forewarning about the financial crisis that has engulfed the entire financial world.

At the height of the financial crisis, the Queen of England asked my friends at the London School of Economics a simple question, but one for which there is no easy answer: Why did academic economists fail to foresee the crisis? There have been several responses to that query. One is that economists simply lacked models that could account for the behavior that led to the crisis. Another is that economists were blinkered by an ideology according to which a free and unfettered market could do no wrong. Finally, an answer that is gaining ground is that the system bribed economists to stay silent. In my view, the truth lies elsewhere. I would argue that three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.

He reluctantly accepted that forecasting future events is difficult, if not impossible. Here is another study that shows, why it is so difficult.

Stossel cited a study in the journal Economics and Portfolio Strategy that tracked 452 managed funds from 1990 to 2009, finding that only 13 beat the market average. Equating managed fund directors to “snake-oil salesmen,” Malkiel said that Wall Street is selling Main Street on the belief that experts can consistently time the market and make accurate predictions of when to buy and sell. They can’t. No one can. Not even professional economists and not even for large-scale market indicators. As economics Nobel laureate Paul Samuelson long ago noted in a 1966 Newsweek Column:  “Commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions!”

Even in a given tech area, where you might expect a greater level of specific expertise, economic forecasters fumble. On December 22, 2010, for example, the Wall Street Journal ran a piece on how the great hedge fund financier T. Boone Pickens (chair of BP Capital Management) just abandoned his “Pickens Plan” of investing in wind energy. Pickens invested $2 billion based on his prediction that the price of natural gas would stay high. It didn’t, plummeting as the drilling industry’s ability to unlock methane from shale beds improved, a turn of events even an expert such as Pickens failed to see.

Why are experts (along with us non-experts) so bad at making predictions? The world is a messy, complex and contingent place with countless intervening variables and confounding factors, which our brains are not equipped to evaluate. We evolved the capacity to make snap decisions based on short-term predictions, not rational analysis about long-term investments, and so we deceive ourselves into thinking that experts can foresee the future. This self-deception among professional prognosticators was investigated by University of California, Berkeley, professor Philip E. Tetlock, as reported in his 2005 book Expert Political Judgment. After testing 284 experts in political science, economics, history and journalism in a staggering 82,361 predictions about the future, Tetlock concluded that they did little better than “a dart-throwing chimpanzee.”

The said study concluded that expertise in one area of study leads to narrowed focus and increases confidence but also blurs the value of dissenting views and transforms data collection into belief confirmation. One way to avoid being wrong is to be skeptical whenever you catch yourself making predictions based on reducing complex phenomena into one overarching scheme.

Having said so leads us to nowhere. Since the world is a very complex phenomena and there are many intervening variables, we shall never be able to predict future whatsoever may be at our help. There will always be surprises.

A Hadith of Prophet (PBUH) - Narrated Abdullah Ibn Umar (RAA)

Allah's Apostle said, "The keys of the Unseen are five:

1. Verily with Allah (Alone) is the knowledge of the Hour,
2. He sends down the rain and
3. knows what is in the wombs.
4. No soul knows what it will earn tomorrow, and
5. no soul knows in what land it will die.

Verily, Allah is All-Knower, All-Aware." (31.34) 

Sahih Al-Bukhari  6.151