Predictions

Matt Harris —  October 20, 2010 — 8 Comments

I think that, sometime soon, people are going to stop making predictions.

Actually, tragically, that isn’t likely to happen. Human beings are seemingly irrepressible predicting machines, in that it is a way to sound intelligent without anyone being able to immediately call bullshit. By the time the future arrives, most people don’t care enough to back-test you. I was jolted into reconsidering this issue by the recent news from England, that they are going to go into austerity mode in order to reduce their national debt. Personally, this feels smart to me, in a “I’m no expert but isn’t balancing your books a good idea?” kind of way, but you can definitely find any number of economists violently committed to either side of the debate.

This is an old story, but it bear repeating: At the start of the year, a stockbroker sends a letter to 1,000 prospective clients, each containing his recommended “best pick” for the coming month. He sends a different ticker symbol to each of 10 groups of 100 prospects. In February, after 5 of the 10 stocks perform above average, he targets those 500 remaining prospective clients, further dividing them into 5 groups and repeating the trick. By June, assuming the same level of performance (ie, 5 of 10 picks perform above average), he has 30-odd prospective clients who think he’s a genius. Rinse and repeat, and you’re in business.

How different is that from Roubini and the rest of the economists out there? The bulls were right for the better part of a decade, until they were horrifically wrong, and the bears have famously predicted 7 of the last 2 recessions. Maybe it was always thus, or maybe it’s newly true, but I think at this point we can conclusively say this: the world is too complicated to predict. There are too many variables to fit in any one model. Just focus on what you know, do a good job, try to add value, say/do something novel, don’t listen to the experts, and you’ll be fine.

8 responses to Predictions

  1. Matt, you are on a thought-provoking roll. However, I think your piece is far too simplistic to properly address a highly complex and varied topic.

    You stated “Just focus on what you know, do a good job, try to add value, say/do something novel, don’t listen to the experts, and you’ll be fine.” The problem is, the number of known knowns is comparatively small, while the number of known unknowns and unknown unknowns is comparatively large. Whether future outcomes are simply a random walk or are indeed subject to accurate prediction, the fact is that without prediction we’d have no stock market, nor any market with the concept of “stored value” (versus immediate consumption). How, exactly, are prices determined? Momentum and mania, yes. Prediction of fundamental value drivers, yes as well. In fact, momentum and mania can itself be predicted and treated as a factor in one’s analysis. While there will always be charlatans, there will also be those whose ability to properly predict unknowns is legion. They all comprise “the market.”

    You also mention “doing something novel.” Well, the realm of novelty spans from addressing a known issue today in new ways, in addition to developing new ideas for markets which are not yet certain to emerge but which could be truly transformational. This inherently involves prediction, and lots of it. Much of what makes something “novel,” I’d argue, embodies a significant amount of prediction, e.g., will this new technology radically transform a market, will this new drug substantially enhance the efficacy of a new treatment, etc. From my perspective novelty and prediction go hand in hand.

    I think your examples of the smart but unethical broker and the economist and worthwhile and highlight the real point you are trying to make: prediction without skin in the game is an illusion, since motivations are highly suspect. But when one has real money – or one’s very livelihood – at stake, my suspicion is that prediction has much great efficacy and value in foretelling the future. Just my $.02.

    • you know, i just bang out a simple post and i get effing donald rumsfeld up in my grill. to be more specific, the activity i’m decrying is public, professional predicting. i realize, and embrace, that what we do all day long, from the simple (will the ball be there when my hand reaches for it?) to the complex (will OnDeck Capital change small business lending?), is make predictions. in particular, people in the innovation business (you, my entrepreneurs, my wife, sometimes me) have to make implicit predictions to make any decisions at all. my point is that there’s no need to yell about it, and no need to listen to those whose entire business consists of broadcasting predictions, from jim cramer to a gartner analyst to nouriel roubini.

  2. “Actually, tragically, that isn’t likely to happen.”

    Isn’t this a prediction? You got me confused right at the start…
    the rest is a rather basic discuss about a complicated issue because we need predictions!

  3. If the future is so difficult to predict, then why are Bill Gates, Warren Buffett, and Carlos Slim so much richer than the rest of us? It seems to me that some people have a great record over a long period in predicting the future. As an investor, the trick is to measure results accurately.

    • Mark, I wish I knew the answer to that question. In my attempts to be a better, and maybe some day great, investor, I tend to focus more on process and principles than on staring at a crystal ball. An example of process would be calling 25 customers and thinking hard about what they say about a company’s product, and using that feedback to evaluate their future success. An example of a principle would be our view that the quality of the management team is about 10X as important as anything else about a business. You could frame these processes (and the information they dig up) and these principles as predictions, eg, “I predict that this company will succeed because their customers love them and their management is fantastic” … but it seems meaningfully different to me than the kind of predictions I’m complaining about (eg, “near field communications will be available at 30% of retail points of sale by 2015”, or “the GDP of Spain will contract by 2% each of the next two years, but then begin growing again.”) I understand that this is a nuance one could quibble with, but it is meaningful to me. My guess is that Gates, Buffett and Slim are basing their decisions on processes and principles, rather than predictions.

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