Thursday, November 10, 2011

Predictable unpredictability.

(11/8/11. WSJ) - Over the past 12 years, longtime banking analyst Mike Mayo has issued numerous calls to sell bank stocks, a rarity in a system where nearly all stocks are rated buy or hold. His negative ratings have frequently gotten him in trouble with banks, clients and his own bosses, who didn't want to alienate those companies.

One of the problems with predictions in social systems, especially wrt timing of the predicted events, is that, unlike in physics, somebody has the ability to counter-act the prediction. That is, when you know all the major forces acting upon two billiard balls, their relative positions, masses, and speeds, you can predict their future trajectories. The balls do not have the power to change the environment by objecting to your predictions. But in finance or stock market or green energy, predicting something contrary to common beliefs may not help. Making people believe into the predicted reality and, more importantly, getting them to act upon it fulfills the prediction. Innovators like Thomas Edison and Steve Jobs were successful not only because they produced great ideas, but also because they were able to create "the reality distortion field."

Behavioral economists study the Field, but I don't think they are at the physics level yet. If you want to know more about the subject, you can view or download podcast of UC Berkeley Economics 119. Also, here's a profile of Daniel Kahneman, a Nobel Laureate who pioneered the field.

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