Arnold Kling  

Forecasting for a Swing

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Joe Keohane writes about Nouriel Roubini,


For a prophet, he's wrong an awful lot of the time. In October 2008, he predicted that hundreds of hedge funds were on the verge of failure and that the government would have to close the markets for a week or two in the coming days to cope with the shock. That didn't happen. In January 2009, he predicted that oil prices would stay below $40 for all of 2009, arguing that car companies should rev up production of gas-guzzling SUVs. By the end of the year, oil was a hair under $80, Hummer was on its way out, and automakers were tripping over themselves to develop electric cars. In March 2009, he predicted the S&P 500 would fall below 600 that year. It closed at over 1,115, up 23.5 percent year over year, the biggest single year gain since 2003.

Thanks to Phil Izzo for the pointer. The article is based on a paper by Jerker Denrell and Christina Fang.

It would appear that Roubini's strategy is to make forecasts that differentiate himself from the consensus forecast. This allows him to be spectacularly right sometimes and spectacularly wrong sometimes. As long as he succeeds in getting everyone to remember the right forecasts more clearly than the wrong ones, he becomes a prophet.

In tournament bridge, this strategy is known as "playing for a swing." You deliberately try to make a bid that you think others holding your cards would not make, in order to create a different result. As you might expect, this strategy loses on average, but when it works you get a really good score. But you should not judge a bridge player who plays for swings just by the times that it works.


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CATEGORIES: Economic Methods



COMMENTS (9 to date)
tom writes:

This is funny as-is.

But much funnier if you have quotes from Roubini's Black Swan, where he spends most of a chapter explaining exactly this fact about big economists and investors making predictions. There is a lot of petard hoisting material there, except that Roubini would probably agree with the critics.

Chris writes:

Arnold, are you a bridge player?

Arnold Kling writes:

Chris,
I like bridge better in theory than in practice. I have an unusually high ratio of bridge books read to tournament hands played.

nickn writes:

Tom: Nassim Taleb wrote The Black Swan, not Roubini.

Patrick L writes:

"Imitation typically benefit's the individual now; innovation tends to benefit the group eventually." - Patrick Chapin

The psychological hardship from losing is rough, and losing consistently by bucking trend is a strong incentive to go with the crowd. Contradiction is a public good. It requires you to consistently be wrong, to consistently make a fool of yourself, in face of clearly better alternatives.

I don't see any problem with listening to these people, or our rewarding them with choosing to buck the trend and take gambles. Just go into it understanding that you're listening to them to understand the physics of the system, not to hear the answer. You're trying to learn the theory behind their thinking, not the result. It's not accuracy you're aiming for, but understanding.

tom writes:

nickn, damn. But I'll regroup and say that Taleb wrote wonderfully about it.

Rich writes:

For some reason I have this idea that I once read Roubini is an excellent bridge player. Does anyone else remember that?

Nick writes:

this is an old cold reading trick. you make a lot of predictions people have a natural disposition to remember the correct ones and it seems tthat there is some special insight. any magician worth his salt would not be fooled by this.

Jacob AG writes:

Moreover, as far as I can tell, Roubini's predictions vis-a-vis the bubble (you know, the famous ones) didn't come until 2006. That's too late to be a prophesy, for me; the autistic guy in Michael Lewis' "The Big Short" got it much earlier than that.

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