When and why economic predictions and models misguide our investing

Can economics or investing be predicted? Of all the great economic and financial investing geniuses getting paid 100s of millions of dollars, few really predicted the crisis. Nor did the leaders of the US government or the US Central bank run by PhD economists. Political leaders understand money and markets, that is they only work if they are free.

Intuition for predicting the economy
Use intuition and quantitative methods to see the future but realize all methods have limits

The US government or Wall Street bankers, ” market wizards”, if you may, who watch out for us and protect us from economic boom and bust cycles, did not have the wisdom to see and prevent the crisis.

Why? Economics is a ground up thing, not top down. There are many intangible factors and more important human experience is multi layered and stratified. If you put faith in the one dimensional, you will get burned.

Investment firms used large-scale models and super computers with variables and correlations, multicollinearity, exogenous and endogenous, all tested for relevancy, but still the crash caught most by surprise. Wall Street universally got it wrong.

I am so not impressed by any investment mangager, Harvard, Yale, Uiversity of Chicago, Ivy leaguer brain children with a title or VP and an impressive home and nice cars on the gold coast in Connecticut.

In fact these suits are mildly annoying because of their arrogance/brain ratio. It is all fake and litle wisdom there.  Why did their silicon tea leaves fail to predict the economic future and global collapse?

Economists, bank managers, analysts and rating agencies, journalists and philosophers have disseminated a faith in the precise ‘scientific’ predictability of the economy and the possibility of steering it completely untroubled by the irrational factors, the dangers and side-effects at the world everywhere. But it has now been proved that no mathematical extrapolation and economic-sociological models can predict economic developments with certainty, indeed that all calculations rest on certain assumptions that in fact are unusually excessively optimistic and credulous about progress. – Hans Kung

Too much faith in the tangible – Basically people have too much faith in science and computers and most of all experts.

Yes, even me, if you read my posts I use a combination of quanitative valuations and Stan Weintein moving averages, combined with cost averaging for manaeging my personal portfolio. I wanted to get a PhD in mathimatical economics and build econometric models. I thought I found the way when I was at the university studying math and economics.

  • However, technology and systems can and do fail partially once the system is figured out other people learn about it and the system loses power, but also because life is dynamic. Life is an art not a science.

As mathematical methods and models seem to improve, the system will change as more people become aware of the predictions and it will lose its power- the Pareto principle. We all can not be winners.

If you understand life is an art and use science only as a tool, then you will be better off. If you use technology coupled with human intuition and insight you will profit. Like in the movie Limitness – about a man who amassed a fortune by making conections others could not see, using technology on. Fill your life with meaning and purpose in your actions and use technology and models with insight and  I believe life will reward you .

Triump of spirit over techonology -Think about the little myth of Star Wars when empire put too much faith in technology (the deathstar), while the real future of the galaxy was being determined at a another level, that is a spiritual one. Often times George Lucas would show three battles taking place simultaneously, one one the ground with real people, one in space with machines and the important one taking place between two Jedi. And the latter mattered the most.

  • Believe that reality is more multi layered and complex than just  economic numbers, if you want to see the future of where the economy is going. At the very least your life will be richer in other ways.

We should not give up quantitative methods for predicting economic cycles or investments – However, we should understand not everything is in our control. It is better to take the attitude that ‘it is only money’. That money and economics is not on par with human relationships, love, family, charity and caring about others.

Use ideas like Stan Weinstein and quantitative analysis  but the drum I have always beaten is if you want to make money and predict the future, consider technique that build your intuition like image steaming or even a Warren Buffet methods of looks around and seeing what is going on.


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