« Freakonomics Radio

41. The Folly of Prediction

2011-09-14 | 🔗
Human beings love to predict the future, but we're quite terrible at it. So how about punishing all those bad predictions?
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I found a wage, my wife, what does it mean to be a wicked in Romania: are these people now- here- is psychics her fortune tellers or they difference, and I don't know how is a fortune teller in United States, but here generally, they are a woman of differently they can. They say, They can cures disease, they can bring back your husband or wife. They can predict you're your future, who is a typical client for which there are quite a lot of politicians who are going to witches. You know that France, president, Color Sarkozy, He went to witches last years ago and our didn't in Romania and varying boy politicians from different parties, they're going to which is some of them
they were obliged to recognise day went riches. Some then it's an off the record information, but maybe a journalist. I know that information VLAD Mix, which is a reporter in Bucharest, the capital of Romania. He knows a good bit about the witches there quite a lot of them there quite rich. They have very big houses with golden rooftops. A lot of the manners they are living in small apartment blocks. So going in such a building, will Give you a sense of man, see and respect,
but the romanian which industry has been under attack. First came a proposed law to regulate and tax the which passed in one chamber, parliament before stalling out, but then came another proposal, arguing that witches should be penalised if the predictions they make don't turn to be true, what you do is you are one of my client and if I'm a fortune teller, if I fell to predict your future I would pay quite substantial fine to the state or, if happens many times? I will even go to jail the punishment it's between six miles and three years in jail, what's being proposed in Romania, is revolutionary. It strikes me because we typically don't hold anybody account
forbad prediction, so I'm wondering in Romania. Let's say if a politician makes a bad prediction: did they finder penalized in anyway, no not at all. In fact This is one of the Hobbes of our President doing a lot of predictions which are not coming true, of course, and after that he's reelected or he's popular guarantees rising like like the sun in the morning? You know now anyone can do a lot of bread it shows hearing the Eastern Europe and not a single hair will move from from his or her hand. Come on people that doesn't seem fair. Does it? I don't care if your anti, which are pro which which agnostic. Why should which is the only people held accountable for bad predictions. What about politicians and money managers?
words pundits? What about you I'm happy yeah. We, U N, Y, see and APL american public media. This is Reaganomics radio. Today the folly of prediction: here's your house, even though all of us are constantly predicting the future that we think about it or not. Right now, some small part of your brain he's trying to predict what the show was going to be about. How do you do that factor in what you ve heard so far What you know about free economics, maybe no alive
maybe never heard of about. You might think it's some kind of communicable disease. When you predict the future, you look for cognitive cues for data for guidance. Here's where I go for guidance I think to an economist the best explanation for why there are so many predictions is that the incentives are set up in order to encourage predictions that Steve Levitt, he's my free economics friend and co author and a key Mr the universe, you Chicago some most predictions, we remember are ones which were fabulously, wildly unexpected and then came true. Now that the person who makes a prediction has a strong and I have to remind everyone that they made that crazy prediction, which can really look at all the people. The economist who talked about the financial crisis had a time those guys who On the contrary, I was right. I was right. I was right, but if you're wrong, there's no person on the other side of the transaction
who draws any real benefit from embarrassing. You buy bring up the bad prediction over and over so there's no but he has a strong incentive, usually to go back and say, here's the list of the hundred and eighteen predictions that fast. I remember growing up my mother, who is somewhat of a psychic, would the directive, we are somewhat of a psychic she's, the self proclaimed psychic and she would predict a stock market crash ever single year- and there has been right a couple times, did she has been she's, been right twice fifteen years in and she would talk a lot about the time she was right. I have to remind her about the thirteen times that she was drunk and without any sort of market mechanism or incentive for keeping prediction makers. Honest, there's a lot of incentive to go out and and to make these while predictions, and those are the ones that are remembered in and talked about, think about one of the predictions
You hear echoed more often than almost anyone is Joe Name, is famous pronouncement about how the jets we're gonna win, the Superbowl any was unexpected and it happened if the jet, had lots of super bowl. Nobody will remember the Geneva meeting Conversely, you can probably find at least one player in every team. This lost the Superbowl in the last forty years, who did predicted his team would wit, that's probably right exactly right now. The flip side, which is perhaps surprising, is that in many cases the goal of prediction is to be completely within the pack and so see this allowed with pension fund managers or endow it manages witches if something goes wrong there. As long as everybody else made the same prediction, you can't be faulted very much engine managers, football players, psychic romanian witches- who doesn't try to predict the future these days going
predictions of the bastard only towards fell last year putting struck the farmers almanac makes a colder than usual winter. Bastards fine do not take their money. I get. Those terms is not really ready or fundamentally sound. They are not Danger of going under all the octopus is making yet another World CUP prediction betting on Spain. We will in fact find evidence weapons programmes. Gaddafi will ultimately stuff. You know the worst thing is. Nobody keeping track all those predictions. Nobody separate this Well, I'm a research psychologist who don't forget your name, though I built a lock and
a research psychologist, I've been most of my career at University of California Berkeley and I recently moved the University of Pennsylvania or I'm crossing point in the Wharton School in the psychology department. Philip deadlock is done, a lot of research on cognition and decision picking and bias pretty standard stuff for an ivy league sake Phd. But what really fascinates him is prediction: they're allowed a psychology To believe that there is a hard wired human need to believe that we live in a fundamentally predictable. Uncontrollable universe did also a widespread belief among psychologist that people try hard to impose causal order on the world around them, even when those phenomena are random. The hard wired human need is telling puts it has created what he calls a prediction industry and dont sneer. Your part of it too. I think there are many players in Louis
you might call. The prediction industry in some sense were all players in it. Whenever we go to a cocktail party or colloquium or whatever our opinions are being shared, we frequently make likelihood judgments about possible futures and the truth or falsity of particular claims about futures. The prediction business is a big business on Wall Street and we have futures markets and so forth, designed to regulate speculation in those areas. Obviously, governments great interest in prediction: they create large intelligence agency, bureaucracies and system to help them achieve some degree of predictability in a seemingly chaotic world. Let me read you something that you have set a written in the past, that this determination to ferret out order from chaos has served heiress. She's. Well, we are all beneficiaries of our great collective successes in the pursuit of deterministic
hilarity than messy phenomena. Agriculture, antibiotics in countless other inventions, so so talked to me for a moment about the value of prediction. Obviously, there's there's much has been gained, much to be gained. Do we overvalue prediction, though? Perhaps I think there's, symmetry of supply and demand. I think there is an enormous demand for accurate predictions in many spheres of life in which we don't have the requisite expertise to deliver, and when you have that kind of a gap between demand and real supply, you get the infusion of fake supply, fake supply, I like this guy, this Philip tat, locker he's not an economist, but he knows the laws of supply and demand can't just be revoked, so There's big demand for prediction and all realms of life, and now enough real supply to satisfy it? What does this makes? I sound like what
say it could there could be terrorist threats. The economy could remain. The driving factor here could could could, with some of that radio activity could carry in the atmosphere to the West Coast of United States, a goodly, an interesting battle on the cards when the Oscar nominations are renowned, solid could be picking sat above. Sixteen hundred could certainly get two thousand gold could go to thirty five hundred always announce. There's a pundits taxi out there, a class of people who produce add nausea, often on television they can be pretty good at making their predictions tough to audit. This is the art of fearing to go out on a limb without actually going out on a limb. So, for example, the word could something could happens. The room you happen to be sitting in could be struck by a meteor in the next twenty three seconds. That makes perfect sense.
The probability is, of course, point zero, zero, zero, zero, etc. One face not zero, but is extremely low, and in fact the word could the possible meanings people attached to arrange for but point out one too about point six, which covers more than for the probability scale right there. Nobody likes a weasel somewhere twenty years ago, TAT looks set out to conduct, the largest empirical studies ever of predictions. He chose to focus on predictions about political developments around the world. He enlisted some of the world's almost experts, the kind of very smart people of written, definitive books. Who show up on CNN or on the times is Abed page. In the end, we had a close to three hundred participants and they were very sophisticated political observers. Virtually all of them had some postgraduate education, roughly two thirds them had phds. They were largely political scientist, but there were some economists
a variety of other professionals as well, and they all participated in your study anonymously correct. That was a very simple condition for obtaining cooperation now, if they were not anonymous? Presumably we would recognise some of their names are prominent people at political signs, departments and economic departments. It I'm guessing some of the better universities around the world. Is that right, where I just want to say too much more, but I think you would recognise some of them. Yes, I think some of them had substantial Google counts. The study became the basis of a book tat lock, published a few years ago, called expert political judgment, there were two major rounds of data collection, the first beginning, a nineteen eighty, eight, the other one thousand nine hundred and ninety two please. Nearly three hundred experts were asked to make predictions about dozens of countries around the world. The questions
multiple choice, for instance in democracy, Ex let's AIDS England. Should we expect that after the next election, the current Majority Party will retain blues or strengthen its status, four undemocratic country. Why? Egypt, maybe should we expect the basic character of the political regime to change in the next five years in the next ten years, and if so, in what direction into what effect the experts made predictions within their areas of expertise and outside, and they were asked to write their confidence level for their predictions. So after tracking accuracy about eighty thousand predictions by some,
three hundred experts over the course of twenty years, Philip deadlock found that experts thought they knew more than they knew that there is a systematic gap between the subjective probabilities are experts were assigning to possible futures and the object of likelihood to those futures materializing. Let me translate that, for you, the experts were pretty awful, you may think, awful compared to what did they read a monkey with a dark moors? How the monkey with a dark word, comparison that comes back to haunt me all the time with respect to how they did relative to say a baseline group at Berkeley Undergraduates, making predictions that they did somewhat better than that did they do better than an extrapolation algorithm. No, they did not. They did in for the most part of a little bit worse that how did they do relative to purely random guessing strategy? Well, they did a little bit better than that, but but not as much as you might hope that extra
nation algorithm the deadlock mentioned that simply a computer program to predict no change in current situations, so it turned out that these smart experienced confident experts predicted the political future about as well, if not slightly worse than the average daily reader of the New York Times. I think the most important take away would be that the experts think they know more than they do. They were systematically overconfident. Some experts were really massively overconfident and, We are able to identify those experts based on some of the other, the characteristics of their belief system in their cognitive style. There thinking style, okay, so so now we're getting into the nitty gritty of what makes people predict. Well or predict poorly, what are the characteristics then, of a poor, predictor dogmatism,
it can be summed up that easily. I think so I think, I'm an unwillingness to change once more. Then in a reasonably timely way. In response to new evidence, a tendency when asked to explain once predictions generate only reasons at favour. Your preferred prediction and not to generate reason, is opposed to it and I guess what striking to me and I'd love to hear you have to say about this. Is that it's easy to apply one word prediction too many many many different realms in life, but those comes all operate very differently. So politics is different from economics and predicting a sports outcome is different than predicting an agricultural outcome, but. It seems that we dont distinguish so much necessarily- and this is modern sense- almost at anything can
be and should be able to be predicted. Am I kind of right on that are now? I think there's a great deal of truth to that. I think it is very useful in talking about the predictability of the modern world to distinguish those aspects of the world that show a great deal of linear, regular. Thirty and those parts of the world that seem to be driven by complex systems, that are decidedly nonlinear and decidedly difficult, if not impossible, to predict talk to me about a few realms that generally are very very hard to predict and a few realms that generally are much easier. Predicting Scandinavian Paul takes a lot easier than predicting middle eastern politics. Yes, that was the first came to my mind to hurry, but keep going to think about the radically unpredictable environments is that after appear for very long period of time, to be predictable. So, for example, If you had been a political forecaster, predicting regime longevity in the Middle EAST, you would have done
extremely well predicting that I know what you need gift, that Mubarak would continue to be president of Egypt year after year after year, in much the same way that if you'd been sold a legislative and very well in the version of Europe predicting continuity. There's an aphorism. I quote in the expert political judgment book from Karl Marx. I'm I'm I'm I'm not obviously not a marxist, but I thought that the beautiful aphorism that he had, which was that when the train of history hits a curve, the intellectuals fall off coming up. Hooting you predict, will hear from next a bunch of people who awesomely good at predicting the future right, maybe later, first four years more does from Wall Street the NFL and the cornfield. When four June.
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is dogmatism sticking to their ideologies, even when presented with evidence that the wrong you buy, that I by politics, is full of ideology awaken the people who study politics be at least a little bit ideological. So let's try a different set of people. People who make predictions that theoretically at least, have nothing to do with ideology, lips
go to all the experts on Wall Street or, following all over themselves, to predict the year ahead. Rising inflation rate will send the U S and a downward spiral. Higher interest rates are gonna, hurt the housing market they're gonna make money. I would rather Amazon GO visor. How can we achieve a funny, sterile motors, even though all IBM Joe had to sell button just yet? I'm Christina professor of management, again versatile, Cisco, Christina Fang, like Philip Deadlock, is fascinated with Dixon, why is generally forecasting about anything about tat? Ology about product, whether it will be successful about whether idea a venture idea could take carve a lot of things, not just economic, but also business in general. Thing was an interested in just your street level. Predictions though she I dunno to know about the big dogs. The people who make bold economic predictions occur
praise tags in the many millions and billions of dollars, along with a fellow research Yorker DEN Rail Fang gather data from the walls it journals survey of economic forecasts. Every six months. The paper asked about fifty top economists to predict a set of macro economic numbers: unemployment, inflation, gross national. Things like that Fang audited, seven consecutive surveys with an eye toward a particular question. When someone correctly predicts an extreme event. A market crash may be or a sudden spoken. Inflation, what does that say about his overall forecasting ability? in the Wall Street Journal survey it if you look at the extreme outcomes, either extreme a bad outcomes and extremely good outcomes. You see that those people who correctly predicted either, many good are extremely bad outcomes. They are likely to have overall lower levels
accuracy. Never was there doing poorer in general catches. But people who happened to predict accurately the extreme events they happened to also have a lower. Overall level of accuracy, so I can be right on the big one gets if I'm right on the big one. Generally will tend to be more often wrong than the average person on average on arouse on average across every day. Predictions as well and our research suggested for someone who has successfully predicador events
we're gonna predict that they are not likely to repeat our success. We are often not it was their overall. Credibility is likely to be noticed impressive, as their apparent success seems to be so. The people who make big, bold, correct predictions are, in general, worse than average at predicting the economic future. Now wisest problem, maybe they're, just like home, run, hitters lotta strike out, but a lot of power to I'll. Tell you why it's a problem, actually Steve levity, Incentives for addiction makers are to make either cataclysmic or utopian predictions like, as you don't get attention. If I say that I was gonna, happen amounts exactly seems what happened? Did you don't get on tv programme tv? If it happens to come? True cares. I don't get credit for coming true, There is a strong incentive to make extreme predictions because seriously
tunes into here. Some guy say that next year, we'll all be pretty much like last year and then once you have been right on extreme forecast. Let's say you predicted the two thousand eight market crash in the great recession, even if your predicting every year, like steel, will have its mouth, you'll, still be known as the guy who called the big one in if all your file, what predictions are wrong. You still got the big one rate Joe Name, third annual ball gave a ball of our culture, and our parliament has far too many weapons. I liked the Burma because I've been so impressed by the way to minute we're gonna win the game again. I've gotta are predicting the economy predicting the political future. Those are hard. Those are big, complex systems with lots of moving parts. So how about
football. If you're in NFL expert, how hard can it be to forecast say who the best football teams will be in a given year, we asked for economics, researcher Haze Davenport to run the numbers force. While I looked at. Past three years of expert picking out from the major and fell, I prediction outwits, which are you say today: sports illustrated dot com and yes, beyond our come, we looked at a hundred five sets of texts total their picking the division winner for each year, as well as the wild card for that you're. So their basically picking the whole play off picture for that year. So talk about just kind of generally the degree difficulty in making this kind of a pic. Well, if you're sort of an an untrained animal making, NFL packs, you're gonna have about a twenty five percent chance of picking each division correctly because early Teams are so haze. You're, saying that an untrained animal would meet would be about twenty five percent accuracy just pick one out of four, but what about
a trained animal. Like me, a casual fan, how do I do compared to the experts right? So if your cutting off the worst team in each division, if you're, not picking from among those you'd, be right about thirty three percent of the time, one in three and the experts are right about thirty six percent of the time, so just a little better than that? Ok, so if you, saying they'll pick it about thirty six percent accuracy and I or someone by chance would pick it about thirty three percent accuracy. So that's a three percentage points. Improvement are all by about ten percent better may we should say: will you know? That's not bad. If you beat the stock market by ten percent every year, be noon gray. So should we think of these- and I fell pundits as picking thirty six percent
right being really wonderful, or I wouldn't say that, because there is, there is a specific fallacy that these guys are operating from, which is they. They tend to rely much too heavily on the previous years standing in making their picks for the following year. They play it very conservatively, but there's a very high level of parenting, the NFL in right now, so that's not exactly how it works. Tell me some of the pundits who whether by luck or brilliance and hard work turn out to be really really good. Sure either are too ass from ESPN, who are sort of far ahead of the field, one is patio sink ass, the others John Clayton, who is actually pretty well known. I you mix lot of appearances on sports, Henrys, Canada, never she professorial type and a perform a much better than everyone else, because their excellent wildcard pickers thereby
people who have correctly predicted both wildcard teams in a conference in a season by their especially good, because they actually play at me safer than everyone else now you say that their very good persuade me that their good and not lucky. I can't do that there's a lot factor involved in all these predictions. For example, if you take the patriots in two thousand made in time, he gets injured and they drop out of the playoffs has very little. You can do to predict that so injuries will mess up predictions all the time and other like turnover rates in football that are sort of unpredictable So there is a lot factor tat morning, so, whether its football birds, calling Sundays game or economists, forecasting, the economy or political pundits. Looking for the next revolution, we're talking about accuracy rates that barely be a coin toss,
for maybe all these guys, deserve a break. Maybe it's just inherently hard to predict the future of others. When beings there so malleable so unpredictable. So how about a prediction were human beings are incidental to the main Action, I'm job rosati- and I am director of Statistics- division with the USDA is national Agricultural Statistics service or mass. For short, you grew up on a farm. You get back openness and what I would call a deep southern all noise I'm sitting here in Washington DC and where I grew up in Illinois, is for the south and were I'm sitting today and we based. We had corn soybeans and raised hogs bit of Anna Winter Reign, the fabled editor vote magazines, Joe per Saki, is kind of like
the winter for farms. He puts out publications at a red by everyone who anyone in the industry, titles like acreage perspective, plantings and crop production. Precisely these reports carry running forecasts of crop yields, cotton, soybeans. We the court also time or monthly forecasts are probably within icons, gearing within five percent. Most time I can say within two to three percent of the file and some one would say well that seems very good in the agricultural world, they they, the day users, expect us to be much more precise. In our forecasts. This work. How does the USDA Forecast something is vast, as the agricultural output of american farmers, at the beginning of March, we will conduct large survey of farm
ranches across the United States and sample size. This time this year was a body a thousand the farmers are asked many acres. They plan to devote to each crop corn. Let's say then in late July, the USDA sends out a small army of enumerated indirectly. Nineteen hundred cornfields intense dates. Guys mark off plots of corn twenty feet long by two rows across the random, place to have randomly selected feels in random location within the field. Make it a sample. It's maybe twenty twenty paces into the field and forty rose over Yet one that's two hundred fifty paces in the field and a hundred google the enumerated look at every plant in that plot and then they'll cow, what they see or anticipate to be years based on looking at the point of a month later, they go back out again and check the corn stocks quickly. Here,
Well, you could have animal loss. Animal might tulip plant off may the plant may die so all were updating the number of plants all along we're updating the number of years Other thing we need, you need an estimate of ear weight or fruit way they go out again? a bunch of years and way that await still not done. The harvest is one more round of measurement. Once the field is harvested she has gone through the field. Innumerable back out to the field the lay out another plot. Just two, just beyond our harvest very where we work and they want. Or through and pick up off the ground, any kernels, after all round pieces of years of corn and such on the ground, so we get a measure of harvests laws, so the sounds pretty straightforward rate compared to predicting something like the political or economic,
estimating corn yield based on constant physical measurements of corn plants. Pretty simple, except for one thing, called, the weather officials to Clara Drought watch for the entire state whether remains so hard to predict in the long term that the USDA doesn't even use. Forecasts uses historic averages instead, So your talk to me about what happened last year with the USDA corn forecast. You must know this was coming from me, so the the Wall Street Journal headline was USDA floods in predicting corn crops, explain what happened. Well, this is the whether your factor that came into play. It turn off pretty hot and pretty dry, and I asked a few folk no, then around no out about- and I were what happen- they said This is just a really stranger. We just don't know now with some us, as did we love it.
That was the forecast based on the information I had as of August one, September one I had a different set of information, Sober one I had a different set of information. Could we have a better job. A lot of people thought they could have last June? the USDA lowered its estimate of corn stockpiles, and in October it cut its estimate of corn yield after the first report, the price of corn spiked nine percent. The second report: another six per cent Joe precisely got quite a few emails. Ok, the first one is thanks a lot for collapsing. The green market today with your stupid in this, is that the word is three letters because today than it has two dollars I catch. I know that Word USDA report as bad as the stench of Ed bodies in Haiti must be it can't even compared to the files Densher corruption.
Emanating from our federal government in Washington DC. It strikes me that there is room for trouble in that your forecasts are you used by a lot of different people who engage in a lot of different markets in your research, can move markets wondering what kind of bribes may become your way. I have is really innocent people that they call. I called we call fishers, they call maybe a day or two days before, and has I tell him, I says why do you do this week? had this discussion before this could do neither one of us good, because I have to sign. There's a couple. Things were I sign a confidentiality statement every year that says I I'll, not release any information before its due time or bad things happen. There's like a hundred its two thousand dollar fine or your time in prison.
I know that the dollar- fine, ok, this principle abolished, but there's gotta be a certain price. Which so so, let's say I offered you. I came to you and I said Joe ten million dollars for for a twenty four hour headstart on the corn forecast, Trust me, somebody would track me down here again. Prison time. It bothers me I'd so Joe per Saki probably can't be bought, and the USDA is generally considered to do a pretty good job with crop forecasts, but hardly agency has to work. Measuring
cornfield row by row, going back to look for animal laws and harvest lost and still it's projection, which is only looking a few months into the future, can get thrown totally out of whack by a little stretch of half dry weather. That dry spell was essentially a ray, Can I Tom Brady's knee getting smash? I hate to tell you this, but the future it's full of random events twice a hard to predict. That's. Why can be scary? Nor do we know this course. We know it. Do we believe it some scholars say that our need for prediction is getting worse or more accurately that we get more upset now, when the future surprises us. After all, as the
becomes more rational and routine eyes, Often know what to expect, I can get it MAC not only in New York but in Beijing to and not a pretty much the same. So when you're used to that and when things don't go as expected, watch out our species has been trying to. Or tell the future for ever oracles and go end trails and roosters pecking. The dirt, the oldest religious texts, are filled with protection. I mean look at the afterlife. What is that, if not a prediction of the future, a prediction that, as far as I can tell, can never be categorically?
who did were confirmed a prediction so compelling that it remains all these years later, a concept around which billions of people organise their lives. So what do you see when you gaze into the future a yawning chasm of random events, or you look for a neat pattern? Even if no such pattern exists, it's much more costly for someone who not detect a pattern? That's not seem Taliban, the author of fooled by randomness in the black swan, it's much costlier for us as a race to make the mistake of now, seeing a leopard then have the illusion of pattern. And imagining a record weather is not, and that error, in other words mistaken the non run for Random
which is what I call the one way, is a bias now that biased works extremely well, because what's the big deal of getting out of trouble, It's not causing you anything, but in the modern world it is not quite harmless admit this illusion certainties make you think that things that have an exhibited risk, for example, a stock market are useless. We had a turkey problem, the butcher visa Turkey for a number of days, and then the Turkey imagine that this permanent butcher feeds the Turkey and Turkey mad this is permanent. So you gotta ask yourself: who am I the butcher, the Turkey coming up, hedgehogs and foxes and a prediction? does years ahead
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we don't just a vague and our praise without omelette all ourselves, so we congenital predictors, but genes are often wrong. What then defend bad predictions. I asked Philip deadlock what all those political experts and when he showed them their results, he had pretty stashed their excuses in a neat taxonomy. So if you thought that the Gorbachev, for example, was flu yeah. You might argue well my understanding of the soviet political system that fundamentally right and the Soviet Politburo, but for some cookies, The collaboration of soviet Politburo would have gone far more conservative candidate and their argument might be well. I predicted that Canada would disintegrate that debt at Quebec would secede from Canada and it didn't succeed, but the secession almost
seated, because that there, the fifty point one percentage vote against the session and that well within the margin of sampling here are there others you want to name on other popular predict often timing that comes up creator. In the financial world as well in many many, a very sophisticated students to find it. Have commented on how hard it is saying that the market can stay irrational longer than you can stay liquid. I think as a George Soros expression, so fun timing is a fairly popular belief, system, defence, as well I predicted the Canada would be gone up and you know it has not gone yet, but done just noticed, hold on You answered very economically when I asked you what are the characteristics of a bad predictor used. One word dogmatism: what are the characteristics of a good one capacity for constructive self criticism?
does that self criticism come into play and actually change the course of the prediction. Well, one sign that your capable of constructive self criticism is that you're not dumbfounded by the question. What would it take to convince you you're wrong? If you can't answer that question, you could take that as a warning sign in his study, TAT Lock found that one factor was more important than any other in someone's predictive ability, cognitive style. You know the story about the fox and the hedge fund, as ever Lynn tells us that the quotation comes from the greek warrior. Poet are killing us twenty five hundred years ago, and the rough translation was the fox knows many things, but the Headshot NOS one big thing so talk to me about what the foxes do as predictors, what the hedgehogs do, his predictors shore, the foxes, tend to have, rather a click,
copper. Tunis Stick approach to forecasting they very pragmatic, famous aphorism by dung shopping. Was he didn't care if the cat was white or black Islamic caught mice, and I think the attitude of many foxes what they really didn't care, whether ideas came from the left or the right, they tended to deploy them rather flexibly. In deriving predictions said they often numb borrowed ideas across schools of thought that hedgehogs viewed as more sacrosanct. There are many sub species have hedgehog, but what they have in common is a tendency to approach forecasting deductive top down exercise that they they stop with some abstract principles than the apply those abstract principles to messy real rural situations and the fit is often decidedly imperfect. So far This tend to be less dogmatic than hedgehogs, which makes them better predictors. But if you had to guess who do you think is more likely to show up on tv or in an Ipad column, the pragmatic nuanced,
But I know it all heads you're gonna be paying seven or eight dollars a gallon for your oil very soon doomsday scenario: that policies are terrible to the beginning of the end, its full crap. You got it hedgehogs, I think, are more attractive to the media. It had. Hedgehogs are more likely to offer quotable soundbites, whereas foxes more likely to offer rather complex copycat laden, sound bite and not through not sound bites anywhere. If there are complex and caveat laden, so if you were to go? control of that say at a really big media outlets. New York, Times or and beseech tee
and you said you know, I want to dispense a different kind of news and analysis to the public. What would you do? How would you suggest building a mechanism to to do a better job of of keeping all this some kind of poorer expert prediction off the airwaves? I'm so glad you ask that question. I have some specific ideas about that and I don't think they would be all that difficult to implement. I think they should try to keep score more. I think is remarkably little effort in tracking accuracy and if you happen to be someone like Tom Friedman or Parker of manners are some of those at the top of the Pandit pecking order. There is very when sent a few to want to have your accuracy tested, because your followers are quite convinced that your extremely accurate and it's pretty much a game you can only lose. Can you imagine every time appended appeared on tv, the network with
This is banning average rate after his name and affiliation. You think that might cut down on blowhard predictions just a little bit. Looking back So what we ve learned so far, it makes me wonder, may be the first step toward predicting the future should be to acknowledge our limitations or at the very least, let's start small weren't. If I could tell you what kind of music I like and then you could predict for me, some other music I'd want to hear that actually already exists. Called Pandora radio, here's cope under TIM Western. So what we ve done is we ve broken down recordings into their basic components for every dimension and already in harmony and rhythm and form instrumentation down into a kind of the musical according to primary colors, the pandora
database includes more than a million songs across every genre that you or I could name each song. Is broken down into as many as four hundred and eighty musical attributes almost like genetic code, Pandora's organizing system is in fact called the music genome project. You tell the Pandora website a song you like, and it rummages through that massive genetic data base to make an educated guess about what you want to hear. Next, if you like that song, you press the thumbs up, button and pandora takes note. I wouldn't make to claim that Pandora can map your emotional persona, and I also don't think frankly that that Pandora can predict a hit, because I think it is very hard evidence magic. That's what makes music so fantastic. So I think that you know we know our limitations, but within those limitations I think that we make a much much more likely that you're gonna find that song. I just really touches you.
So TIM, you are good enough to set up a station for me here. It's train in vain radio. So but the song we gave you was train in vain by the clash. So let me open up my radio station here and all his plans to which you got for me. Yeah. I like them. That's a jam I'm gonna give it a thumbs up. I lay down call malice. I've been through a couple more songs in my station here telling Tom Berlin. He was always to cool off running I can see why you would think that I would like- and I appreciate your efforts MR bandied about Are you? Will you tell him, then and you know one thing. Of course These songs are all rooted in guitarists, yet as our repetitive motifs
wait on the guitar and similar sound, and he got a little Tang underplayed kind of families are a little bit rough, which is that set upon I gotta tell you even though in the sun came up- and I heard the son a few times, and I told you I didn't like television, much of the song how big it now I see there, that's exactly referring to do it's a really great thing too. But it's not really predicting the future. The way most people think of it as predicting the future. Is it. Well, I certainly wouldn't put our mission the same category as predicted, the economy are GEO political futures, But you know the average American listens to seventeen hours a musical week, so they spent time doing it, and I think that if we can make that
more enjoyable experience and more personalized. I think maybe we'll make some kind of meaningful contribution to culture Oh pandora, does a pretty good job of predicting the music. You might wanna hear based on what you already know, you like, but again become much effort that takes four hundred and eighty musical attributes, and it's not really predicting the future, is all pandora as is breaks down the confirmed musical preferences of one person today and come with some more music that'll, fulfilled that same persons preferences tomorrow,
If we really want to know the future, we probably need to get much more ambitious. We probably need a whole new model like how about prediction markets. A picture market mechanically is basically like abetting market or a speculative market like go orange juice futures are stock markets. Things like that. The mechanics is that there is an asset of some sort that pays off if something true like weather. Person, wins the presidency or a team wins a sporting contest and people trade that asset in the price of that asset becomes a forecast of whether that claim is likely to be true. That's Robin Hansen is economics, Professor George Mason University and admitted advocate of prediction markets as Hansen sees it a prediction.
Market is far more reliable than other forecasting methods, because it addresses the pesky incentive problems of the old time prediction. Industry, soil protection market gives people on and son of a clear personal incentive to be right and wrong equally important gives people an incentive to shut up when they don't know what it is. Often, a problem many of our other institutions. So if you as rapporteur, call up almost any academic and asked them various route, vaguely related questions they'll. Typically, I try to answer them just because they want to be heard a burden of proof.
For market most people, don't speak up. Every one of your listeners today had the right to go to speak up in orange juice futures. Yesterday, every one of you could have gone and said orange juice features. Forecasts are too low or too high and almost no end it. Why? Because most of you don't think you know, and that's just the way we want so most of these products from markets. What we want is the few people who know the best to speak up and everybody else to shut up. Prediction markets are flourishing, some member private multinational firm might set up an internal market to try to forecast when a big project will be done and there are four profit prediction markets like in trade based in Dublin, where you can place a bet on say, whether any country that currently uses the Euro will drop the euro by the end of the year, as I speak, that bad has a fifteen percent chance on in trade. Here's another in trade bet
whether there will be a successful wmd terrorist attack anywhere in the world by the into twenty thirteen. That's got a twenty eight percent chance. That's going to sound a little edgy, no betting on terrorism. Robin Hansen himself has a little experience in this area on a U S, government. Project, he work done so back in two thousand DARPA. The defence advanced research projects agency had heard about prediction markets and they decided to fund a research project and they basically said listen. We ve heard this is useful for other things. I would like you to show us that this can be useful for a kind of topics we are interested in. Our project was going to be forecasting, ah GEO political trends in the Middle EAST,
but we are going to show the prediction markets could tell you about economic growth, about riots, about perhaps wars about whether the changes of heads of state and how these things would interact with each other in two thousand three, just as the project was about to go along, if the press heard about it on Monday morning to senators had a press conference where they declared the darker the military, we're going to have a better economic terms, and also there was a sudden burst of media coverage and by the very next morning, the head of military basically declared before the Senate that this project is dead and there was nothing more to worry about. What do you think We collectively you in particular, would know now about that part of the world that say if this market had been allowed to take root, why think we
gotten much earlier warning about the revolutions we just had an if we would have had participants from the Middle EAST forecasting, those markets, Luckily, we would get advance warning about which things might happen, but then how our actions could affect those so, for example, of the say, just came in on the side of the Libya rebels to support Willoughby rebels against other Gaddafi regime. What the chances that will actually help the situation is poised to make it worse, but give me an example of what you consider among the hardest problems at a prediction. Market could potentially help so crucial utterly who should we elect for president, but whether we should go to war here or whether we should begin this initiative. Or should we approve this reform bill for medicine etc. So sounds very logical, very appealing. How realistic is it
Will it depends on there being a sort of customers who want this product? So if prediction markets have an Achilles heel, it certainly the possibility that people dont really want accurate for prediction: markets put a price on accountability. If you're wrong, you pay simple, is then just like that posed law against the witches in Romania, maybe that's what we need more of your Steve Levin again when there are big rewards, the people who make predicting to get them right and zero punishment. People whom make bad predictions because there ITALY, forgotten and accountants who predict that's it. That's a recipe for getting people to make Dixon all the time, because the incentives are all all encouraging you to make predictions of your life. You get it right, there's an up son if you get it wrong, there's almost no downside right. If the flip side were that, if I make a false prediction,
immediately said to the prince? for one year term, Serbia was more protection and all those football pundits and political pundits and financial pundits wouldn't be able to wriggle out of their bad call saying my idea was right, but my timing was wrong. I mean that's how everybody does that big storm, the weatherman call but never showed up. Happened already says, but two states over here have at all predictions for the end of the world, the apocalypse, the rapture all that well, they say we prayed so hard that God decided to spare us remember back in May, when an eighty nine year old preacher named Harold Camping, declared that the earth would be destroyed at five, nine p m on a Saturday and only the True believers would survive remember very well because my
Ten year old son was petrified. I tried telling him camping was a cook that anybody can pretty much say anything they want about. The future didn't help. He couldn't get to sleep at night and then the twenty first came and went and he was psyched anew at all long. Daddy said when I asked him what he thought should happen to Herald Camping, the false doomsday profit. It's easy. Off with his head. My son, not a bloodthirsty type he's, not a turkey. You know you economics radios produced by W N Y see a PM american public media and governor productions, our produce these include Elizabeth Giddens calling
both Susie like Timber, Chris Nearing and Diana win. We had help Helen Horn and Peter cloudy. This episode was mixed by John to Lord. If you want more for economics, radio you can subscribe to. Our podcast on Itunes bore. Go too far economics dot com, we'll find lots of radio, a blog that books and more. If you thought you had to travel far over the patio bankers to taste the pastries parents to take another look with two times total points. A grocery stores, your same kitchen can come with marked within the sapphire preferred from Chase make my what's yours alone at the one doesn't hours and purchases per month from November. First, one joint able three twenty one want to concentrate credit approval, Cardoso Budgetary Monetary sprang, a member of the sea.
Transcript generated on 2021-03-17.