Monthly Archives: November 2015

So you want to be a superforecaster?

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On my travels to and from the fabulous Kilkenomics Festival this weekend, I read [amazon_link id=”184794714X” target=”_blank” ]Superforecasting: The art and science of prediction[/amazon_link] by Philip Tetlock and Dan Gardner. It’s a very interesting book. If you liked Daniel Kahenman’s [amazon_link id=”0141033576″ target=”_blank” ]Thinking, Fast and Slow[/amazon_link], Nate Silver’s [amazon_link id=”0141975652″ target=”_blank” ]The Signal and the Noise, [/amazon_link]and Gerd Gigerenzer’s [amazon_link id=”0241954614″ target=”_blank” ]Risk Savvy[/amazon_link], you’ll like this book too.

[amazon_image id=”184794714X” link=”true” target=”_blank” size=”medium” ]Superforecasting: The Art and Science of Prediction[/amazon_image]

Essentially the book describes the outcome of the research project that followed on from Tetlock’s famous demonstration in [amazon_link id=”0691128715″ target=”_blank” ]Expert Political Judgment[/amazon_link] that experts are not good at predictions. One group of experts failed to do better than random guesswork – and did worse for long term forecasts. Another group did better than this but could rarely beat a simple rule of thumb such as ‘predict no change’ or ‘extrapolate the trend’. The follow up project was stimulated by the introspection of the US intelligence community post 9/11, looking to see whether it would be possible to make forecasts of political or economic events any better than the earlier dispiriting results suggested.

The bulk of the book explains that yes, it is, but it’s hard work requiring techniques and habits that help people avoid the normal cognitive short cuts (‘fast thinking’) we humans take. For example, make sure you start with what the authors call ‘the outside view’. Looking at the drop in popularity of a prime minister after an election? Start out by seeing what has happened to the ratings in the past. Watch out for the ‘bait and switch’ habit of answering an easy question rather than the hard one. Break up complex questions into smaller questions to narrow the territory of your ignorance. Take as many different perspectives as you can. Consult others and welcome diverse views – be on the alert for groupthink.  Be prepared to change your mind. Be alert to conclusions based on your strong feelings or beliefs about an issue (the Keynesians vs Austerians debate is singled out as one where the participants are captive to their prior beliefs). All of the tips are gathered in a how-to-be-a-superforecaster appendix to the book.

Summarised like this, it sounds obvious perhaps. But the book is stuffed with examples demonstrating how hard it is to put the advice into practice. Indeed, the experiment showed that some people can do far, far better than the majority, including ‘experts’ – but there are not many of them. They have specific characteristics: for example, clever (but not Mensa geniuses), open-minded, self-critical, numerate, comfortable with probabilities, willing to change their mind – plus determination. Tetlock is still looking for volunteers to have a go (www.goodjudgment.com).

The book ends with a discussion of two critiques. One is whether Nassim Taleb’s Black Swans imply superforecasting is a chimera – if history moves in jumps because a black swan appears, that must be unforecastable. The other is Daniel Kahneman’s hypothesis that even superforecasters will lose their mojo because their very success will make them as vulnerable to the same cognitive patterns as the ‘experts’ who did no better than randomness or algorithms; we are all vulnerable to complacency or ‘fast thinking’. Tetlock concludes that history does show that the possibilities for the future are radically open but nevertheless argues that his results show that: “People can, with considerable effort, make accurate forecasts about at least some developments that really do matter.”

He does, for me, describe his results convincingly, although the ‘considerable effort’ bit seems a huge barrier to seeing superforecasting habits spreading more widely. But it doesn’t matter if you end up agreeing more with the critiques; this is still a very useful guide to cultivating your own good cognitive habits and critical thinking abilities. I’ll be trying to put the lessons here into practice myself – although not to the extent of starting anything foolish like macroeconomic forecasting.

Kilkenomics – laughs and books

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I’m off later this morning to Kilkenomics, the brilliant festival of comedy and economics in Kilkenny, and taking a look at the programme reveals that the authors of many fine books will be there. Radical econo-politicians Yanis Varoufakis ([amazon_link id=”178360610X” target=”_blank” ]The Global Minotaur[/amazon_link]) and Corbyn’s guru Richard Murphy ([amazon_link id=”1907720286″ target=”_blank” ]The Courageous State[/amazon_link]) will be there. The mutli-talented Gillian Tett ([amazon_link id=”1844087573″ target=”_blank” ]The Silo Effect[/amazon_link]) and her FT superstar colleague Martin Wolf ([amazon_link id=”0718197968″ target=”_blank” ]The Shifts and the Shocks[/amazon_link]). There’s also the radical economist George Cooper ([amazon_link id=”0857193821″ target=”_blank” ]Money, Blood and Revolution[/amazon_link]), Joris Luydendijk ([amazon_link id=”1783350644″ target=”_blank” ]Swimming With the Sharks[/amazon_link]), Professor June Carbone ([amazon_link id=”0190263318″ target=”_blank” ]Marriage Markets[/amazon_link]), Larry Elliott ([amazon_link id=”009952368X” target=”_blank” ]The Gods that Failed[/amazon_link]), Nassim Taleb ([amazon_link id=”0141038225″ target=”_blank” ]Antifragile[/amazon_link] and [amazon_link id=”0141034599″ target=”_blank” ]The Black Swan[/amazon_link]), Philippe Legrain ([amazon_link id=”1782924809″ target=”_blank” ]European Spring[/amazon_link]), Stephen Kinsella ([amazon_link id=”1905483694″ target=”_blank” ]Ireland in 2050[/amazon_link]) and Steve Keen ([amazon_link id=”1848139926″ target=”_blank” ]Debunking Economics[/amazon_link])

[amazon_image id=”1844087573″ link=”true” target=”_blank” size=”medium” ]The Silo Effect: Why putting everything in its place isn’t such a bright idea[/amazon_image]  [amazon_image id=”1783350644″ link=”true” target=”_blank” size=”medium” ]Swimming With Sharks: My Journey into the World of the Bankers[/amazon_image]  [amazon_image id=”0190263318″ link=”true” target=”_blank” size=”medium” ]Marriage Markets: How Inequality is Remaking the American Family[/amazon_image]  [amazon_image id=”1905483694″ link=”true” target=”_blank” size=”medium” ]Ireland in 2050: How we will be Living[/amazon_image]

I can’t miss the chance to plug the new paperback edition of [amazon_link id=”B0168T5AHE” target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link]. London-based folks, I’m doing a talk on GDP and matters digital on Monday 16th November at the LSE.

[amazon_image id=”0691169853″ link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image]

Just before that comes the Bristol Festival of Economics – next weekend, record sales but some tickets left.

Economic progress

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It’s reading week here so I’ve had the luxury of an afternoon in my office, thinking quietly about my favourite subject, economic statistics and their meaning. I picked up Colin Clark’s [amazon_link id=”B016S90XYO” target=”_blank” ]The Conditions of Economic Progress [/amazon_link]from the shelf: “The securing of an abundant supply of these goods and services, though among the most important objects of economic science, is by no means the only object. We properly include among the objects of economic science the attaining of a just distribution of wealth between individuals and groups, and security of their livelihoods, the mitigation of economic fluctuations, and the increase in leisure, though recognising that these objects are sometimes inconsistent with each other.” To improve the trade-offs, he continues, we need “disciplined study of the facts.”

Hear, hear. The question of the aims of economic policy (and economic science) came up at the conference I attended this morning, organised by my politics and development colleagues in honour of the late, great Sammy Finer. For policy debate has become narrowly focused on GDP growth, and it isn’t obvious how anybody can break out of the cycle: media criticise politicians on economic growth record – politicians obsess about GDP – statistical effort is dominated by GDP figures – published GDP figures grab media attention.

I guess my hope is that modernising economic statistics will inject some humility about taking the GDP statistics as accurate gospel, and ultimately lead to some conceptual work on measuring economic welfare better than current statistics allow us to do. Hence some of my recent posts – this for the latest NIESR Review and this for the FT’s The Exchange blog.

Back to Colin Clark.

The devil take the debt

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Adair Turner’s [amazon_link id=”0691169640″ target=”_blank” ]Between Debt and the Devil: Money, Credit and Fixing Global Finance[/amazon_link] – out this month – joins a select group of books that provide as clear an explanation of the financial crisis as one could hope for. It complements John Kay’s [amazon_link id=”1781254435″ target=”_blank” ]Other People’s Money[/amazon_link], with its emphasis on globalisation, financialisation and the switch from relationship to transactional finance. [amazon_link id=”0691169640″ target=”_blank” ]Between Debt and the Devil[/amazon_link] emphasises above all the inherent instability of banks’ ability to create credit, when not restrained by policy, especially given the scarce supply of that all-important asset, real estate. The growth of the shadow banking sector amplified this pre-existing source of volatility.

[amazon_image id=”0691169640″ link=”true” target=”_blank” size=”medium” ]Between Debt and the Devil: Money, Credit, and Fixing Global Finance[/amazon_image]

The book starts by pointing out that it was always foolish to think financial markets would satisfy the criteria for efficient (and stable) outcomes. The pre-crisis orthodoxy of liberalisation ignored the pervasive information asymmetries and non-rational choices in finance. [amazon_link id=”0071592997″ target=”_blank” ]Minsky[/amazon_link] features prominently here. As Turner points out, it isn’t as if there was any shortage of evidence from history that financial crises occur reasonably frequently. He adds the distinctive feature of the recent crisis, the increased inequality of incomes driving demand for easy credit, which banks were only too happy to meet. (Echoes of of Raghuram Rajan’s [amazon_link id=”B005CQAJD0″ target=”_blank” ]Fault Lines[/amazon_link].)

The third part of the book covers the global dimensions of the crisis, in particular the China-US flows, and the role of the Euro. The financial flows not intended for direct investment were both immense and destabilizing, he writes. Among the high income countries, gross cross-border flows increased from less than 10 times GDP in the 1970s to 37 times GDP in the 2000s, with even larger proportionate increases for middle income countries. There is no evidence at all, he argues, that financial flows on this scale play any socially useful role at all.

And in this context of unsustainable credit growth at home and destabilizing flows across borders, only a minority of banks proved able to manage their balance sheet risks. To make matters worse, those that were good at risk management looked after themselves by offloading their bad risks onto other financial institutions, less well able to manage them. So the outcome for the system as a whole was even worse.

Given the difficulty of tackling the three drivers of the crisis – a limited supply of land and real estate, income inequality and global imbalances – what does Turner, a former head of the FSA, recommend? His answers are interventionist, suggesting a total rejection of the idea that finance can be left to ‘the market’. “To achieve a less credit-intensive and more stable economy, we must … deliberately manage and constrain lending against real estate assets,” he writes. He also advocates central bank monitoring of credit growth, constraining it when necessary; taxation of land values; taxation of debt to bring its treatment in line with taxation of equity; and raising bank equity ratios and minimum liquidity requirements (a step advocated by every, but every, economist who has given a moment’s thought to the crisis – shocking that the banks have lobbied their way out of this minimal step towards systemic stability).

Indeed, the book’s final chapter has some sympathy for even stronger measures: outlawing private money and credit creation; taxing credit creation funded by debt; and encouraging equity and hybrid instruments in place of debt.

However, the book concludes with a caution: “We face a choice of imperfections, and some of the imperfections are unfixable.” Financial markets are imperfect; so are policy-makers. Simple rules will never deliver stability, Turner argues. Far tougher constraints on the financial sector are needed. But policymakers will always have to make judgments as conditions change, and will get it wrong sometimes. Still, he suggests, not as wrong as in the mid-2000s.

Turner is at the tougher end of the spectrum in terms of his recommendations for constraints on the financial sector. But his calls for reforms join an honourable roll call of economists – as well as [amazon_link id=”B00UJD8AS2″ target=”_blank” ]Kay[/amazon_link] and [amazon_link id=”B005CQAJD0″ target=”_blank” ]Rajan[/amazon_link], [amazon_link id=”B00LLPSU4Q” target=”_blank” ]Admati and Hellwig[/amazon_link], [amazon_link id=”022627165X” target=”_blank” ]Mian and Sufi[/amazon_link], for example. As [amazon_link id=”0691169640″ target=”_blank” ]Between Debt and the Devil[/amazon_link] points out, millions of people are still suffering from the effects of the financial crisis. Yet the policy response has been minimal, and there is nothing to stop the whole thing from happening all over again. At least if it does, nobody will be able to blame the economists this time for not having sounded the warning.