It’s hard to forecast in an uncertain world

Real estate prices are expected to rise, according to owners and advisors, brokers and analysts of real estate companies. Stock prices are expected to rise if one is prepared to believe the fund managers of mutual funds and analysts at stock brokerages, as well as large individual investors. Cryptos is also expected to perform well according to the managers of crypto exchanges. Moreover, the economy is expected to perform well, if one is to believe the economists who work for corporates, stock brokerages and the government. Being positive is part of being an insider in the business that economists call OPM or ‘other people’s money’. If an investment asset class does well, insiders benefit.

As Charles Kindleberger writes in Mania, Panic and Crash: “the purchase of” [financial] Securities or real estate by ‘outsiders’ means that insiders – who previously owned or bought these assets – sell the same securities and real estate and make some profit.” Therefore, insiders should always be positive. needed.

This is not to say that their forecasts are always wrong. they are not. But a broken clock is also right twice a day, and instincts can be a friend.

Predicting the economic and financial future is a difficult task. As John Galbraith writes economics of innocent fraud: “There are more than enough predictions but no firm knowledge. All struggle with a diverse combination of uncertain government action, unknown corporate and individual behavior … of exports, imports, capital movements and corporate, public and government response.” variable effect.”

This led Galbraith to conclude that the combined result of what is unknown cannot be known and was true for both the economy and specific industries or firms.

What makes prediction difficult is the fact that our beliefs about the system affect the way the system behaves. This is the principle of reflexivity propounded by the philosopher Karl Popper.

John Kay and Mervyn King explain this through an example in Radical Uncertainty: “The collapse of Lehman Brothers on September 15, 2008, could not have been widely predicted because if it did, it would not have happened on that date. Either The bank may have already collapsed, or the regulators or Lehman himself may have taken steps to avoid this incident.

Hedge fund manager George Soros puts it a little differently New paradigm for financial markets: “The crux of the theory of reflexivity … is the claim that market prices can affect fundamentals.”

Take the example of a company on which analysts are bullish and its share price rises. Its management, wanting to capitalize on the good times, borrows a lot of money. Banks are happy to lend under the prevailing spirit of good times. However, the company lacks execution skills and government permissions are slow to come. Very soon, it will be difficult to repay the loan.

If this sounds familiar, it should come as no surprise as this is how the bad credit crisis, which Indian banks have been battling for the past decade, inevitably arose and settled.

Plus, for those in the forecasting business going with the herd or what Galbraith refers to as a shared error, it’s understandable. As Kay and King explain: “It’s often the case that decisions are made based on what is easiest to do, not what is the right thing to do. ‘Anyone fired for buying IBM’ takes a long time There was a chant among mid-ranking executives, and a key factor in the success of that company’s technically infallible PC.” Likewise, no analyst was ever fired for being wrong when most others were wrong too.

Of course, all this does not prevent people employed in the business of forecasting from making confident and very specific forecasts, rather than giving range and construction in substantial ifs and buts. Take the case of stock prices. They usually tend to go up. But they can also stay flat for a few years at a time. This disclaimer is rarely used.

Let us consider the economic growth forecasts for the current financial year. Almost no predictions have been made in the possibility of a new covid strain coming into the world. Although no one could have known it in advance, given the history of the pandemic, economists should at least consider this possibility and provide a range to one decimal point rather than a specific growth forecast.

It is not fair to blame only those engaged in the business of forecasting, because ultimately they are serving the audience. As Galbraith puts it: “What is predicted is what others want to hear and what they want to profit… from. This is how in the financial markets we celebrate, even the error of necessity. Welcoming… past casual success and ample display of charts, equations and confidence confirms the depth of perception.” And so things go, as people seek certainty in what is an unstable, uncertain, complex and ambiguous world.

Vivek Kaul is the author of ‘Bad Money’.