British writer Tim Harford reveals the economic ideas behind everyday experiences or, conversely, wonders whether cute ideas in theory do work in practice. In the “Undercover Economist” column he writes every Saturday for the Financial Times, he looks at familiar situations in unfamiliar ways and uses them to explain the fundamental principles of the modern economy. He also presents the BBC radio series More or Less, a broadcast programme devoted, as he says, to “the powerful, sometimes beautiful, often abused but ever ubiquitous world of numbers.” His new book, The Magic of Mess, about improvisation and innovation will be published in early 2016.
“There are indeed […] reliable superforecasters.” Their common characteristic ? “A certain open-mindedness applied to an active mode of thought”.
When Tim Harford starts to talk about the future and how to see into it properly, he begins by citing his two ‘favorite’ economists: Irving Fischer and John Maynard Keynes. “Both of them share the fact of having developed theories designed to help them make money as investors”, said Tim Harford at the 7th Forum de la Haute Horlogerie held on November 18th in Lausanne. “Irving Fischer, whose research notably dealt with inflation and who had unshakable faith in the stock market, was universally admired and his analyses were in great demand among the entire financial community. As for John Maynard Keynes, it was as an insider that he set up an investment fund based on currency exchanges before taking over that of Cambridge, whose modus operandi was grounded on his economic cycle forecasts. So these were two renowned economists who, back in their day around a century ago, proved to be savvy investors. However, neither of them foresaw the 1929 stock market crash and the ensuring Great Depression, which led to colossal losses for their respective portfolios.”
Based on this historical observation, Tim Harford wondered what value forecasting the future might have. To find out, he studied the work of sociologist Philip Tetlock, whose last book released last September is tellingly titled Superforecasting: The Art and Science of Prediction. “In 2005, Philip Tetlock had already laid out the conclusions of a first survey on forecasts, which had lasted around a decade”, said Tim Harford. “And the least that can be said is that the results were scarcely encouraging. In other words, if you want to get reliable forecasts regarding a complex problem, you might as well go to a zoo and ask the first chimpanzee you meet. Forecasts are like crisps: everyone loves them but they’re not necessarily good for our bodies.”
Philip Tetlock had nonetheless not entirely given up hope and he therefore decided to address the theme again and conduct a new more broad-based study. This, the results were more promising: there are indeed certain people capable of making good forecasts on complex subjects: reliable superforecasters. “So what sets them apart?” asked Tim Harford. “Their studies, their experience, their gender, the fact that they are left-handed rather than right-handed? Obviously, none of the above, but instead a psychological attitude involving a certain open-mindedness applied to an active mode of thought. These people are prepared to change their minds; they seek to confront their ideas with others, to be challenged. And if you put them together, it turns out that their forecasts are even better. Not perfect, which is impossible, but better.”
Tim Harford went on to deal the decisive blow by coming back to his two economists. “Irving Fischer, who held fast to his certainties based on scientific rationality, ended up ruined and disgraced. Almost no one remembers him except for anything other than the fact that, shortly before the 1929 crash, he had claimed that the stock markets had reached a “permanently high plateau”. John Maynard Keynes, on the other hand, was willing to admit that he’d been mistaken and that his models didn’t work. He was not afraid to change his mind and his approach to the markets. Within a short time, he had rebuilt the fund he was managing. His life continued in relative opulence. And he is now regarded one of the most eminent 20th century economists.” QED.
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