Disappointing unfolding in the quest for the Greater Fool

Today WSJ Real Time Economics seems to match a recent John Kay column of FT called Kudos for the contrarian.

Here's a excerpt from the latter:
"This is the time when pundits make predictions about what will happen in 2009 – after a year of shocking and unanticipated economic events. The Queen, visiting the London School of Economics, wondered why the credit crisis and its evolution were not predicted. Here, Ma’am, is the outline of one loyal subject’s answer. You will appreciate, I am sure, that economic prediction is hard. National economies, financial markets and businesses are complex, dynamic, non-linear systems. Your economy contains many people and many agents, and there are many interactions between them".

Here are the crucial points that he outlines:

1)Problems of physics often involve objects large enough to be studied individually or components small enough to be subject to statistical regularities. Many of the phenomena we deal with in economics and business fall in between – the units of analysis are individualistic but also too numerous for their idiosyncrasies to be individually understood.

2)Economic systems are also dynamic. Dynamic in the sense that they evolve – which makes the mathematics harder. But also dynamic in the sense that the structural relationships constantly change. Some economists(mainstream up to Lehman bust) believe(d) (that) there is a deep underlying structure from which laws of economic behaviour that are universal in time and space can be deduced. A minority of brave free thinkers kept saying that the best we can do is to identify empirical regularities that apply to particular contexts. Whoever is right, it is evident more work needs to be done in understanding the relationships.

3)Dynamic complexity interacts with non-linearity: small differences in initial conditions can have dramatic differences in ultimate outcomes. The problem is often expressed through the metaphor of the butterfly which, by flapping its wings on one side of the world, sets in train a chain of consequences that results in a tornado many thousands of miles away. The nature of such complex, dynamic, non-linear systems is that we may be able to say a lot about their general properties, while being unable to make specific predictions.

Such limitations on our knowledge lead to a further problem.

4)Although people endlessly ask for predictions, they rarely really want the answers. The market for clairvoyance has existed through history and is satisfied by messages based on hope and ambiguity. The market for economic prediction is similar. Successful proponents are distinguished by their television manner rather than the accuracy of their forecasts. After the fact, people who had not wished to be told they were talking nonsense before the bubble burst did not wish to be told they had been talking nonsense after the bubble burst either. Indeed they did not recall that they had been talking nonsense.

The American political scientist, Philip Tetlock, has studied the prognostications of pundits over several decades. He finds that the better known the forecaster, the less accurate the forecast. Business people, politicians and journalists value clarity and certainty of view more highly than acknowledgement of the uncertainty of a complex world. But it is mostly people who appreciate that complexity who have worthwhile things to say about the future.

Here is the link to Raghuram G. Rajan presentation at the Kansas City Fed’s Jackson Hole symposium, back in August 27, 2005.

And here the full story. Highly instructive!!
He fairly and elegantly point out that many economists shared the same analysis and were deeply concerned about the future. Why does he stands out?
In Rajan own words:
"Most academics are really reluctant to take part in the public dialog, because the public dialog requires you to have an opinion about things you can’t really be sure about,” says Mr. Rajan. “They fear talking about things where everything is not neatly nailed in a model. They stay away and let the charlatans occupy the high ground.
Who are the charlatans? I guess that he has been explicit enough. We just can't ask him to do all the job. Let's join the dots!!