Scenario Planning (Cont.) Control Of Our Fate

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

- 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 Barack Obama and Mitt Romney was predicted to very close but Obama won very convincingly

Some examples of unpredictable, unintended consequences, ie it is very hard to predict the outcome from most change.

i) Introduction of transgenic cotton varieties resulted in an environmental plus with fewer chemicals needed to grow the plant. On the other hand, it had an unexpected impact: with the use of fewer chemicals, it is considerably cheaper to grow cotton. So with a lower cost of production, developing countries were able to grow the crop competitively, and the subsequent increase in production resulted in the cotton price falling. Ironically, by making cotton growing more environmentally friendly, there as an unexpected results - the market was swamped

ii) Vegetarians (initially many people become vegetarians as a protest against animal cruelty in farm practices, ie animal welfare issues. Later other issues supported their position, eg
- climate change (livestock, especially ruminants, produce methane which is not good for the environment)
- health benefits from plant-based, meat-free diet was recognised, ie reduced acute and chronic inflammation, reduced arthritis pain and stiffness, weight loss (helps with metabolic symptoms like obesity, high blood pressure and high cholesterol, etc), fewer colds, reduced risk of diabetes, help with renal problems, etc.

"...there are some real positives in plant-based diets so full of antioxidants, which you get from a lot of fresh fruits and vegetables. It's a diet rich in nutrients, high in fibre, which can help lower your chances of getting bowel cancer and bone disease. But make sure you use milk alternatives like soya milk which are rich with calcium and vitamin D, or add calcium to your diet by eating tofu, sesame seeds and brown bread. Also, take vitamin B12 supplements (a micronutrient essential for good health, but found mostly in meat, fish and dairy), or look for foods fortified with it..."
Anna Daniels as quoted by Lucy Holden 2019)

iii) Management Consultancy (one phone call from a senior Fijian manager in 2001 asking for help, resulted in a management consultancy firm working with around 200 Fijian organisations, around 100 from Solomons and around 50 in PNG. This happened over two decades and was not predictable in 2001.)

iv) The changing of the source of household gas supplies to natural gas resulted in a significant fall in suicide rates in the UK. After WW1, many British houses used gas (town gas) that was manufactured from coal (a mixture of different compounds like hydrogen, methane, carbon dioxide, nitrogen and carbon monoxide; the last was odourless and colourless). By the early 1960s, carbon monoxide poisoning was the leading cause of suicide in the United Kingdom, ie 44% in 1962. It was used as it was

- widely available,
 
- required little preparation,
 
- no specialised knowledge,
 
- could be done in the home,
 
- it was painless,
 
- didn't result in disfigurement
 
- did not produce a mess when compared to alternatives like hanging, asphyxiation, drowning, shooting, standing, jumping off high places or in front of moving vehicles (trains, buses, etc), etc.
 
Then in the mid-1960s, the town gas was replaced by natural gas, ie no carbon monoxide

"...natural gas had markedly different chemical properties from town gas......every gas appliance in England had to be upgraded or replaced..."
Malcolm Gladwell 2019
 
This meant that you could not poison yourself by using the natural gas, ie suicide using gas became a psychological impossibility.
 
A similar story happened when better controls on automobile emissions were introduced, ie suicide rates fell.
 
v) Use of fertilisers to increase crop production to help feed the world was praised as a good thing. It was not anticipated that its overuse would cause massive environmental problems like polluting rivers, lakes, oceans and the air.
 
vi) Use of the Internet was initially hailed as a way to increase people's access to data, information, knowledge and wisdom. Its use for spreading 'fake news' (misinformation) and the demise of experts' credibility was not anticipated.

- Brexit vote in UK (2016) where that no vote was predicted to win but lost

- Donald Trump wins the US presidential election (2016) against most predictions from most polls

- Italians voted "no" on changing the Constitution while most polls predicted "yes" (2016)

- 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 of 9.1.

Our reliance on computer modelling has demonstrated the fragility of the conclusions due to our choice of assumptions, etc

. From work by Philip Tetlock (2005) as quoted by 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, ie

"...They were grossly overconfident and terrible at calculating probabilities: about 15% of the events that they claimed had no chance of occurring in fact happened while about 25% of those that were absolutely sure things in fact failed to occur..."

Philip Tetlock as quoted by Nate Silver, 2012

Additional problems with predictions are that

- some people are better at understanding the "big picture" and others are more into the details. The latter provide more accurate forecasts

- predictions do not abide by fundamental laws, like physics, where there are intrinsic, knowledgeable and predictable consequences. Predictions are based on limited information that is continually updated.

- the brain is wired to detect patterns. Sometimes patterns are imagined rather than actual

- forecasting technological improvements has not helped to offset human biases, ie we select data that suits our biases

- extrapolation is a basic tool of prediction that is not necessarily an accurate tool, owing to the assumptions used, ie what has happened in the past will continue to occur

- as we receive more information than our brain can process, we sort it into patterns based on past experience. This can cause mistakes as these past patterns are not necessarily going to repeat themselves

- our brains process information by means of approximations, generalizations, simplifications, etc but these can be misleading and not reflect the true situation

- the volume of information is increasing exponentially while its value is not. Thus we need to find ways to differentiate between useful and useless information

"...experience, simplifications and approximations will be useful guides and will constitute a working knowledge. But they are not perfect, and we often do not realise how rough they are..."

Nate Silver, 2012

To help understand this, we use the idea of efficient-market hypothesis and whether an individual investor can beat the stock market. Each statement is an approximation that builds on the last one to become slightly more accurate, ie

i) no investor can beat the stock market

ii) no investor can beat the stock market over the long run

iii) no investor can beat the stock market over the long run relative to his level of risk

iv) no investor can beat the stock market over the long run relative to his level of risk and accounting for his transaction costs

v) no investor can beat the stock market over the long run relative to his level of risk and accounting for his transaction losses, unless he has inside information

vi) it is hard to tell how many investors beat the stock market over the long run, because the data is very noisy, but we know that most cannot relative to their levels of risk, since trading produces no net access return but entails transaction costs, so unless you have inside information, you are probably better off investing in an indexed fund

The first statement is a very powerful one; while the last one is full of qualifications and probably more realistic. The lesson? We need to be careful about mistaking approximations for reality

 

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