Control Our Fate and Poor Predictions

Despite our belief that we can control our own fate (Cassius's idea), our supply of data/information and the use of computer modelling, etc, we are not very good at making accurate predictions. For example

- meteorologists have a bad reputation for the accuracy of their predictions of what future weather will be like

- the terrorist attacks (9/11) were not predicted with any degree of accuracy.

- the attack on Pearl Harbor in the 1940s was not predicted with any degree of accuracy

- SUV (sport utility vehicles) automobiles 

These vehicles initially focused on military and rural markets as they could handle all types of terrain, ie off-road. Then in the late 1980s they were modified, ie more upmarket and luxurious; started to become popular as a family car in urban areas. By 2015, they became the world's most popular vehicles (Wikipedia, 2019a). This transformation from working to urban family vehicle was not predicted. 

- Obesity and undernourished 

It is estimated that in the world around 1 b. people are undernourished, while around 2 b. are obese (4AAA, 2019). This rise in obesity was not predictable decades ago when undernourishment was considered the major issue, ie how to feed the starving people of the world. 

- BRICS 

This BRICS acronym refers to the following countries: Brazil, Russia, India, China and South Africa. 

"...at the core of the BRICS narrative is a block of large-population developing nations with vast potential cooperating as much as they compete. A support group of sorts, joining forces not to rival American power but generate a rising tide of income, wealth and financial firepower..." 

William Pesek, 2018 

In November 2001, Jim O'Neill (Goldman Sachs economist) predicted these countries were the future financial and political powerhouses of the world economy, ie 

"...as a block with the potential to lift the developing world, while turning the economic power dynamics upside down..." 

William Pesek, 2018 

By 2018, most of them had lost their economic momentum and were turning inwards politically, eg Brazil has just elected ex-military officer and strongman (Bolsonaro) as its new president; Xi Jinping of China has changed the Constitution so that he can rule for life, etc.. 

"...the biggest risk: the autocratic way coursing through BRICS means less trade, more protectionism and less progress towards higher living standards and reduced poverty......the more they turned away from forward-looking policy upgrades and cooperation, the less vibrant growth will be and the weaker currencies might get..." 

William Pesek, 2018 

Of these 5 countries, only China has become a key growth driver globally. 

"...Although India is growing rapidly, around 8%, it remains relatively closed. Russia has regressed into petro-statehood with an economy roughly the size of South Korea's..." 

William Pesek, 2018 

Furthermore, there is the risk of the "middle-income trap", ie the breaking through $US $10,000 per capita per year can be a problem. For example, China is around $US 8,800 and India, $US 2,000. 

- the global financial crisis (starting in 2007) was not predicted with any degree of accuracy

- just prior to the presidential election in 2000, computer modelling predicted that Al Gore would win by a landslide; but George W Bush won

- the presidential election (2012) between Barak Obama and Mitt Romney was predicted to very close but Obama won very convincingly

- starting in 1960s, most experts did not predict developments or misread events involving

i) Deng Xiaoping (purged in 1966 during the Cultural Revolution and re-instated in 1973 to lead the re-emergence of China)

ii) Ayatollah Khomeini (living in exile in Iraq/France before leading the Islamic revolution in Iran)

iii) Margaret Thatcher (a junior education minister & later the first female PM of UK)

iv) Karol Jozef Wojtyla (Archbishop of Cracow (Poland) during Russian domination & later becomes the first non-Italian Pope (John Paul II) since Adrian VI (1522))

It is hard to predict the future with any degree of accuracy. For example, it is highly unlikely that in 2006 that the following would occur in 2016

- a brash billionaire like Donald Trump becoming the President of the USA

- Britain would leave EU

- a right wing populist party in Germany would win more than 10% support in several State elections

- many terrorist attacks in Europe

- the world is still suffering from the fallout of the GFC, ie low interest rates with high debt

In 2006, the world was a significantly different place with

- Germany had lived through the summer fairy tale of hosting football's World Cup

- Russia was still part of the G8 and welcomed world leaders to the summit in St Petersburg

- Pope Benedict XVI visited Turkey and prayed in the blue Mosque

- in Berlin the first Islamic conference took place promoting better integration for the religion

- a Romano-Prodi-led alliance defeated the populous Silvio Bernasconi in Italian parliamentary elections

- International trade grew by 9% with Chinese economy growing at around 13%

Between 2006 and 2016 the world has lunched crisis to crisis, eg banks and countries have been bailed out, debt growing, and faith in the economy and politics evaporating, wars in Middle East, etc.

"...many people in Western countries are worried about losing their jobs, their prosperity and that of their children. They see themselves as losers of a development that only help the elite. the belief that politics doesn't serve the body politic and that the economy doesn't serve the people has taken firm hold. That only corporate and the rich profit. And that globalisation, with its open borders and freedom of movement of both goods and people, is to blame for it all......there are winners and losers, real and imagined. The real losers have lost their jobs because their companies can't compete internationally. The imagined losers believe that without competition from companies, they would have become more prosperous. Some blame adversity from overseas for their own failure or incompetence......globalisation and free trade have increased global prosperity, but they have also increased inequality in the world's wealthiest nations. They have made the biggest companies more powerful, because business operates globally while politics tends to be local or regional affair and made the world for vulnerable to crises, who was everything is networked and the debt of American homeowners could lead the entire world to the brink of collapse......globalisation is responsible for a host of problems that would otherwise not exist......global trade growth has slowed and state interference is on the rise...... if......protectionism and populism gain the upper hand, there is a danger that global prosperity could shrink......the gap between the rich and poor is growing almost everywhere..."

Der Spiegel 2016

It is interesting to observe what has happened 10 years on from GFC (2018) and most were not predicted

Some US statistics, the good news is 

total output is up by more than 20%

- real incomes per head are up by more than 10%

- in late 2009, 10% of American workers were jobless; today it is 4%

- labour income up by more than 33%

- profits up nearly threefold

- the Dow Jones Industrial index increased significantly 

- the global financial system is more robust
, ie 

"...Globally important banks have stronger capital buffers, national regulators have using more tools, and are more sensitive to the risks of the kind of large-scale, highly leverage financial trading that led to the collapse of Lehmann and the seizure of the financial system in the USA and Europe...

John Edwards, 2018 

On the other hand, 

- initially American output fell to just under 4%; with industrial production falling 4 times faster

- recovery has been slower than in previous downturns

- home ownership has fallen sharply

- from 2008 to 2009, America lost 10 m. jobs (2.5 m. manufacturing jobs were lost; with less than half the jobs being regained)

- workforce changed with the largest drop in numbers amongst young workers and those without college education

- US Federal Reserve's debt has more than doubled
 

"...a decade ago it was equal to less than two thirds of US GDP. Today it is equal to more than US GDP..." 

John Edwards 2018 

- US Federal Reserve's interest rates are still below 2%

- US Federal reserve holds US $ 2.75 b. in US Treasury bonds
 (Thus it does not have the reserve to handle another crisis) 

United Kingdom and Germany were hit harder than the USA. It took longer for Germany to recover. 

Elsewhere in Europe like Spain, Portugal, Ireland and Greece, the fallout was far more severe and lasted longer, eg it took 5 years for the UK to return to the GDP of pre-GFC 

While the story in Australia was different 

"... Protected by the then government's strong fiscal response, the Reserve Bank's swift cut in interest rates, a cheaper currency and accelerating growth in China, Australia was one of the few rich economies to survive the crisis with its prosperity intact..." 

John Edwards 2018 

Remember 

"...sooner or later there will certainly be another financial bust. The last three recessions in the US were all directly preceded by financial busts - Savings and Loans crisis in the 1990, the Tech Wreck in 2001 and the long slide in 2008 where the downturn in home construction morphed into the global financial crisis..." 

John Edwards 2018

Some dangerous signs include

- a stretched and volatile stock market that is very vulnerable

- increasing antagonism, especially in trade, between the US and China

- increasing interest rates

- increasing wage growth in the US and the resultant higher inflation

- China's debt levels
 

- research by Philip Tetlock found that despite

"...political scientists claiming that a political outcome has absolutely no chance of occurring, it nevertheless happens around 15% of the time..."

Nate Silver, 2012

- attempts to predict earthquakes by using highly sophisticated, mathematical and data-driven techniques have proved inadequate, eg the Fukushima nuclear reactor was designed to handle a magnitude 8.6 earthquake based on seismologists' best predictions, ie anything larger than 8.6 was supposedly impossible. In March 2011, Japan was hit by an earthquake of magnitude 9.1. Furthermore, the building of sea walls to prevent damage to coastal villages from tsunamis caused by earthquakes made the situation worse, ie the water flowed over the top of the walls and the walls prevented the water flowing back to the sea. The walls were built on historical evidence of the past tsunamis. The one in 2011 was considerable worst than previously recorded.

organisational development change management

(source: Henry Tricks, 2013)

The watch industry is a good example of unpredictability, ie who would have believed that
- men would ditch the pocket watch for the more feminine "wristlet" version
- in the 1970s, Swiss watch industry was decimated by the quartz time piece made famous by Japan's Seiko. This less expensive and more accurate watch marked the end of the traditional industry with mechanical cogs-and-spring movement, ie it is estimated that 3/4 Swiss watchmaking workforce and their machinery disappeared. There was no certainty that the mechanical watch was going to survive. The Swiss watch industry recovery was based on the watch becoming a desirable luxury item like the Omega Speedmaster watch that went to the moon and is still a huge success in 2016.  Nicolas Hayek Snr was the man responsible for introducing a face-saving Swatch and consolidating the Swiss industry
- smart or connected watch, ie in addition to telling the time, being a luxury item, etc the watch had become a mini computer (Bani McSpedden, 2016)

Another example of poor predicting is Chinese steel production. Two of the world's largest miners, eg BHP Billiton and Rio Tinto, with the help of consulting group Kinsley in 2007 predicted that China's annual steel production would reach 1 b. tonnes between 2025 and 2030. This prediction was 60% higher than China's production in 2010. It was used by private organisations and governments like the Asian Century White Paper (2012), Australian Treasury, Reserve Bank of Australia, etc, in their planning for the outlook of federal budgets and for thinking on monetary policy, ie encouraged expenditure, like infrastructure, and tax breaks that were unsustainable. This prediction resulted in unrealistic expectations. Recent events have seen a weak steel demand in China, eg peaked at 823 m. tonnes in 2014 and expected to fall by 15% in 2015, and the price of iron ore hovering around a decade low of US $53 per tonne. It is now thought that the figure overstated annual demand by 350 m. tonnes for 2030!!!!! This is a classic case of expecting what has happened in the past to be repeated in the future, ie

"...as a country raced to build enough apartments, railways, airports, cars and household appliances for the more than 450 m. people who flocked from villages to the cities, steel production soared. It went from an average annual growth of 7% during the 1980s to 10% during the 1990s and close to 20% in 2000s. At the start of the past decade, China made up 15% of the global steel production, now it accounts for around half..."

Angus Grigg et al, 2015

Chinese growth has stalled especially with the weak property market where construction accounted for most of its steel production.

Another example of poor predictions is in infrastructure projects with cost overruns.

"...that infrastructure mega-projects costing $1 billion or more, some 90% go over budget by 20% in the case of roads, and 45% in the case of rail projects..."
Bent Flyberg has quoted by Charles Conn et al 2018

After being exposed to predictions, people can change their behaviour as a result of the prediction and this can impact on the accuracy of the prediction, ie becomes a self-fulfilling prophecy

Key to good decision-making is prioritising

Accurate predictions very difficult, eg

Weather forecasting

- it is a dynamic system - everything affects everything else & systems are in perpetual motion

- uncertain initial conditions

- poor data

(NB Do not mistake statistical correlation with causation, eg positive correlation between electricity poles & heart disease)

Change is like weather & economic forecasting, ie very hard to make accurate predictions, ie

"...there are too many factors to lay down fixed rules..."

David Hains

"...the amount of knowledge in the world is increasing, the gap between what we know and what we think we know may be widening..."

Nate Silver, 2012

Over a 15 year period (starting in the 1980s) it was found that expert opinions, regardless of the field of expertise, were not much better than random chance in the accuracy of their predictions, from work by Philip Tetlock as quoted by Nate Silver (2012),

 

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