Saturday, September 4, 2010

Predicting Perils

There are pundits aplenty who, in retrospect, fill pages of the finance columns of newspapers and magazines to describe how the crisis came about. And they take it to the logical conclusion of formulating step by step instructions to make the future of the world economy robust and immune to similar capitulation.

All this leads me to wonder why none of these wise men, a lot of them drawing sinful salaries and with numerous awards and recognitions under their bursting belts, managed to predict the coming of the slump. A renegade Nicholas Taleb perhaps, and that too will be strongly contested by economists hungry for the spotlight. They have their models, their sacrosanct predictors. It is sacrilege for others to be correct and prove them wrong.

Sceptical though I remain of Dr. Suprakash Roy’s explanation of the crisis as a result of the inhibition-less internet, it does raise several questions in my mind. Have we overused technology to our own destruction? Much in the way people had predicted that the world will degenerate into a mushroom cloud resulting from advances in nuclear physics. We came close, but the extinction of the human race was once avoided by the presence of mind of one of the most unsung heroes of humanity, a seldom remembered Soviet general whose name I will Google up later.

Perhaps we have avoided the nuclear disaster with the fall of the Soviet Union, which leaves the United States with little excuse to press the panic button. There remains the threat of Chernobyl like accidents in US, UK, India, Pakistan, Israel, North Korea and all the other countries who are the proud owners of weapons of mass destruction. But, in an inconspicuous way, the innocuous technology of fibre optic cables and hyper text transfer protocol may have reformatted the spherical world into a flat one and may have been ignorantly and irresponsibly responsible in accelerating one of the biggest non-violent disasters in history.

To return to the question of the failure of predictors, I wonder if I have managed to obtain a humble insight into it. And at the risk of being branded pop-economist or pretentious, let me forward the theory in the comforting solitude of my blog.

A couple of days back, a senior person of our company had come popping into my cubicle and indulging in an impassioned and incensed tirade against my buddy. I have related feeling not a little strange about the entire episode. In the corridors of the company, the relationship between the two is rumoured to be hand in glove – a situation not very favourable in the insecure eyes of some senior people and also the reasonably insignificant point of view of a few grumpy ones.

All these lead me to believe that for whatever cryptic reason, the manager has developed a temporary pointy edge in the soft corner reserved for my buddy.
I guess you must be wondering what this relational dynamics have with respect to the financial world. The lateral approach to the way of looking at things, introduced by my buddy, and taken to a transcendental (please, please notice the pun on trance) with the session in the Magic Pot, has helped me to draw a curious solution.

Could any economic model predict this change of relationship? I hear some of you scoffing at me and pointing out that it is not the job of economic models or financial analysts to work out sentiments of complicated individuals.

But, on second thoughts, is this absolutely true?
When light shines through an aperture in a physics experiment, there is no emotional conflict between the photons, and that makes the result predictable. However, with two tiny apertures, we get an interference pattern due to the uncertainty in the world at the level of quantum physics. All this confusion and a proprietary uncertainty principle exist in the physical world even without the involvement of emotions.

What about the economic or business world? It is a world predominantly governed by human beings, who are not projected photons of light through apertures, but a complicated conglomerate of emotions, sentiments, values and thought. Is it possible to predict the complicated turbulences caused by interpersonal or intrapersonal relationship with any degree of accuracy?

Let us deviate a while and consider a game between Mets and Yankees. The detailed records of all the Murphys, Wrights, Castillos and the Jeters, Swishers and Canos are documented with precision in numerous sports databases and can be found in the pockets of any self respecting junior school collector of baseball cards. However, with all these facts and figures at our fingertips, can we predict the result of the match with any degree of certainty? With the help of the formbook, maybe we can make a decent effort, but when it comes to the individual performances, we cannot even dream of approaching certainty.

What if Sabathia pulls a muscle and can’t pitch? Can a predictor based on the statistics database foretell it?
Similarly, in the more heated battlefield of business, can we predict whether a sudden terrorist attack on the Empire State Building will make speculators behave erratically? Can we say for certain whether the best financial adviser of a Dutch bank will suddenly decide to spend the rest of his days locked up in a monastery in Bhutan after coming close to choking on his liquorice stroopwaffels?  What if the CEO of the same bank, after a satisfying spree in de Wallen, decides to go against the board of advisors and sell off a section to Rabo?

When it comes to people, it is very difficult to predict. And therein lie the problems of prediction where we compute the trends, drifts and direction of numbers and charts without accounting for people. We have on our hands a human race that is being exposed to a new plaything every day, with e-commerce, Swift, identifier, secure socket layer and the orkut, facebook, twitter, linked in, blogs ... I guess I have ultimately identified with the good doctor after all.

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Simon van der Wiel is a fictitious character who appears in the novel The Best Seller by Arunabha Sengupta.

These lines are both collected from the novel and extrapolated from it - additional musings of the author through his alter ego

About Simon

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Amsterdam, Netherlands