Slashdot Mirror
Australian Economists Predictions No Better Than Flipping a Coin
First time accepted submitter ras writes "The Reserve Bank of Australia did some investigation into the accuracy of their economic predictions — the ones they use to run the country — with less than flattering results. '70 per cent of the RBA's forecasts for underlying inflation for the year ahead were close to the mark, but its predictions of economic growth were less accurate, and its unemployment rate estimates no better than [chance] ... The Reserve Bank employs numbers of people on very high pay and what they're admitting now is that their — all of this so-called science — has produced nothing more than what a roll of the dice could produce.'"
Economy is not science and won't ever be.
It is the dismal science in more ways than one.
If 'the market' makes decisions based on the predictions of the RBA, it's no wonder the predictions about 'the market' don't often hold up.
investing in the stock market has become more like high stakes gambling.
The page with everything linked on it
http://www.rba.gov.au/publications/rdp/2012/2012-07.html
Estimates of Uncertainty around the RBA's Forecasts
Abstract:
We use past forecast errors to construct confidence intervals and other estimates of uncertainty around the Reserve Bank of Australia's forecasts of key macroeconomic variables. Our estimates suggest that uncertainty about forecasts is high. We find that the RBA's forecasts have substantial explanatory power for the inflation rate but not for GDP growth.
Download the Paper [PDF 713K] and the Data.
http://www.rba.gov.au/publications/rdp/2012/pdf/rdp2012-07.pdf
http://www.rba.gov.au/publications/rdp/2012/2012-07-data.html
Licence
http://www.rba.gov.au/copyright/index.html
The Singularity is closer than you think
Quant
Economics is the only field where one can be considered an expert without ever having once been right.
Yes, perhaps our economists are no better than flipping a coin... But they're no *worse*, unlike some places...
Or as a caricature of a Nobel laureate once said in Dilbert...
http://www.youtube.com/watch?v=zJwwAVM1Auc
I studied economics at university, the only thing I learnt was how little predictive power the theories have, and how they use certain axioms to ensure their rightness, regardless of the outcome. The one thing I liked were the philosophical aspects of economics, such as the Austrian School, except they don't teach those much, as they have little to no predictive power.
This is my footer. There are many like it, but this one is mine.
A magazine here in Belgium (Humo) did a couple of years ago an experiment about the stock market to see what recommendations of experts were worth.
They had a team of chimpanzees and a team of experts. The results were that the chimpanzees did better than the experts.
Since the chimpanzees can probably be considered a very good random number generator, it seems that it would also probably be better to use random predictions.
Or, as Roger Von Oech would say, "Consult an Oracle".
... has had some reasonable success lately. While I don't know what his long term track record is, he was one of 12 economists recognised as having a mathematical model that predicted the oncoming recession.
09F91102 no, 455FE104 nope, F190A1E8 uh-uh, 7A5F8A09 that's not it, C87294CE no. Ah! 452F6E403CDF10714E41DFAA257D313F.
Congratulations, it turns out cows are not spherical after all.
And unlike "hard" science, where things are fairly constant(or more correctly, their effect is negligible in the over all scheme of things) unless you go to quantum levels, economics has *no* constants. Even something as simple as demand-supply-price relationship is open to alternative interpretations, and not only in highly specific conditions either.
Economics is the unholy child of mathematics and psychology. You are trying to quantify the qualitative. Of course it's going to be a roll of dice.
Wonder if the RBA will now start listening more to one of Australia's most forward thinking economists, Dr Steve Keen. Surprisingly, the vast majority of economist model "the economic system" based on simple linear assumptions. Steve Keen is trying to change all that by modelling the economy for what it is: a complex system. (See this short intro video). It is amazing the amount of flak he gets for applying complex system modelling techniques to the world of economics... (see some of his arguments with Krugman)
Here is a link to a presentation Dr Keen gave to google, interesting stuff.
If you want a job in this laughable field, you need years and years of university and tons of contacts... Oh wait, that's probably part of the scam.
"Projections" by central bank economists are not actually meant to predict outcomes, but rather to manage expectations.
Set your phasers on "funky"!
This is why 'planning' an economy always fails (where always fail is referring to the expected return).
STOP BEGGING FOR REGULATION AND GOVERNMENT CONTROL OF ANY KIND. Yes YOU. It is worse than a coin flip. Always has been, always will be. ALWAYS. Every counter-example that pops into your head is the negatively-weighted-coin hitting heads.
... the concept of Economics as a Science.
Though we've known it for years. Children, dogs and octipi beating the "best" finantial minds on Wallstreet. Government and business economic projections that are consistantly off the mark.
Those who think that it is science, has no idea of what being a Science entails.
Economics has way too many unchallenged assumptions, it's theories are often un disproveable, and there are never any real experiments done. Just anecdotal evidence. REAL testing of the theories would take hundreds of years, and require dividing humans into different test groups. And who want's to live their lives inside an experiment that is so likely to have a massive effect on your life, and those of your childern?
We haven't the vision, patience, or the selflessnessto commit ourselves to something that's benifits wouldn't be felt for generations.
THINK! It's patriotic
People want to feel in control. We all could die unexpectedly any second for a million of reasons. Yet we make plans for dinner, for next week, next summer vacation...
That's normal people. Now imagine a head of state. You can't do that job without believing that someone - you or at least your buddies - are in control of stuff. Now take something as chaotic as a real-world economy which is unpredicatable. You literally are incapable of accepting it's under nobody's control. So, of course governments (and corporations) will keep listening to economists claiming to be able to predict the economy. As for economists, well they turn to other experts:
http://www.dnainfo.com/new-york/20101119/manhattan/fortune-teller-who-conned-wall-street-trader-out-of-487k-gets-parole
The only function of economic forecasting is to make astrology look respectable.
The only differences between economists and fortune tellers are the uniform and the pay scale.
Also, this poster is perfectly accurate: http://www.despair.com/economics.html
-- "So they told me that using the download page to download something was not something they anticipated." - Bill Gates
Except we flip two coins in Australia. If the RBA is only flipping one there will be hell to pay.
My ism, it's full of beliefs.
A while back a leading Australian economist was going increase profits in the wool industry by driving the price up. He suggested killing a lot of sheep to make it happen. People listened and there was a massive continent wide cull. Even after that the price didn't change.
He'd forgotten about cotton.
Yes, it really did happen.
The problem isn't so much with economics itself since any understanding of that one way or another was really irrelevant to career prospects as a leading economist, it was instead all about political connections and being a mouth for hire.
Bad predictors predict that their predictions are bad?
There's a word for that!
Don't be apathetic. Procrastinate!
How confident are you....
"inappropriate and inappropriate"
Is correct
... if the economists in question were employed only to make predictions.
As it is, they aren't, so it isn't.
Now weather.gov, they're pretty damn accurate. It's the local news station that's shit.
The problem seems to come from each station wanting to be able to report that they were the first to warn you about some major storm. Thus, if NOAA predicts an inch of snow, all of the television weatherman predict up to 12 inches. They're much more concerned about failing to predict a storm than they are about incorrectly predicting one when one does not occur.
Even NOAA is a little bad about this. They often show half of the days of the week with the "rainy" icon, just because there's a 50% chance of rain, which kind of neglects the fact that when there's a 50% chance of rain, then if there's any rain at all, it isn't likely to be much. It doesn't make sense since the day is going to be much more like a non-rainy day than a rainy day. Thankfully, though, once you realize this, their reports are actually pretty damn accurate.
Quote from the introduction: "The science writer, John Horgan (1995, 1997), has ridiculed what he labels “chaoplexology,” a combination of chaos theory and complexity theory. A central charge against this alleged monstrosity is that it, or more precisely its two component parts separately, are (or were) fads, intellectual bubbles of little consequence. They would soon disappear and deservedly so, once scholars and intellects realized what worthless dross they truly were (or are). As the culminating centerpiece of his argument, Horgan introduced the label, “the four C’s,” which consist of cybernetics, catastrophe theory, chaos theory, and complexity theory." (emphasis mine)
CC
TaijiQuan (Huang, 5 loosenings)
And neither do I.
I've read the literature and pop books:"A Random Walk Down Wall Street", "Thinking Fast. Slow" and others that mention or did the research that has shown time and time again that the experts do no better than the random chance.
Yet, I still pick stocks the old Ben Graham - Value way and consistently make money - beating the market most of the time.
I'm delusional or I just happen to be the monkey that's flipping heads 20 times straight in a row.
There is also market timing. As an individual, I can do things that pros can't do - like sell half my holdings when the market hits highs for no reason other than QE - like now - and as soon as the Fed stops the flow or slows it down, we'll see some major corrections.
When? I don't know. But I get half way out early.
"I got rich selling too soon."
-Mayer Rothchild
"In earlier days, the riffraff was sitting in the fairground booth in front of a crystal ball. Today they just changed their rags with suits and stand in front of flipcharts."
We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
It's like predicting earthquakes. The underlying mechanisms are understood pretty well, but the specifics depend on microlevel details that can't be abstracted out.
Economics doesn't analyze the actions of individuals and can't predict innovations, fashions, moods and memes. Like earthquakes, "irrational exuberance" or Greek accounting practices can be identified, but whether the bubble bursts tomorrow or 20 years from now, nobody can be sure.
When did we go from talking about Australian to Austrian?
Just wondering?
You have 5 Moderator Points!
Which Helpless Linux zealot/MS basher do you want to mod down today?
However some were not. Be fair; the headline's not
Most economics isn't even astrology: it is a cargo cult (act as if something is true and this will somehow make it so).
*To be fair to Gorbachev, he did actually point out that Soviet economics didn't work before 1990, whereas governments are still able to be in denial about Capitalist economics - till the resources start to run out.
From scarped cliff or quarried stone she cries "A thousand types are gone, I care for nothing, no not one."
I'm delusional or I just happen to be the monkey that's flipping heads 20 times straight in a row.
Its because these studies are cherry picked all the way through.. they dont select investors randomly.. they select "top performers" which in their interpretation equates to "extreme risk takers" -- they dont select the guys that have brought in 8%/year average over 20 years.. they select the guy that brought in 150%/year over 2 years.
"His name was James Damore."
Back in university we had one math course in the same building where the non-scientific junk (economists, legal and suchlike) loitered.
One day we found the board filled with a big formula, obviously left over from the economy guys. We spotted some (for us) obvious problems, and our professor did so, too, when he arrived. He decided that we should analyse the formula, and we found that even with using irrationally high precision, the error margin for a computer implementation (and nobody would do thousands of iterarions manually...) of the algorithm exceeded the expected result range many times over.
Our professor later had a talk with the economy professor, who then admitted that he just copied some formulas together without even knowing that precision errors could add up like this...
Economists don't know shit about math. Thats why I check everything a bank offers to me, and I found a lot of errors over the years! And if it is not an error, I can at least see where they try to bullshit me. Just last year a bank offered an investment that in best case would gain 0.6% p/a over 20+ years - if I was lucky. The lady who was trying hard to sell me the contract (and who would have gained a large commission) had to ask someone else to confirm my results.
That monetary economic theory is too complicated? Too chaotic to model?
That all of our working models are wrong?
Or that some of the largest influences on the economy are absent from the economic models we use? (Such as the influence of the worlds cabals of billionaires with their own agendas)
Is it too obvious to mention that Nassim Nicholas Taleb wrote a book that explains why this should not be surprising news to anyone?
Economics is at best a pseudoscience that has built a cargo cult around the results of econometrics.
So because some people build bad or incomplete models, economics somehow does not use the scientific method? Curious logic you have there. Do you think that Rutherford model of the atom wasn't science just because it was later proven to be a bad model? Science is a PROCESS of putting forth a hypothesis and then a model to explain that hypothesis and then gathering evidence to support or refute that model. Economics absolutely is amenable to the scientific process. People put for testable models to explain hypothesis that are then either supported by evidence or refuted by contradictory findings. That IS the scientific process.
Economic models are often difficult to test because much evidence has to come from real world economies and often cannot be experimentally modeled under controlled conditions. It is the exact same problem we have with certain aspects of studying human biology and disease processes where for ethical and practical reasons we cannot simply do double blind experiments on everything. The fact that evidence gathering is challenging has no bearing on whether the field follows the scientific process or not.
I studied economics at university, the only thing I learnt was how little predictive power the theories have, and how they use certain axioms to ensure their rightness, regardless of the outcome.
And I have a master degree in finance to go along with my engineering degrees. A lot of economic models have perfectly fine predictive power as long as you are aware of the limitations of the model. For instance the Black-Scholes equation is quite useful so long as you do not greatly exceed the underlying assumptions of the model. It does not explain everything about derivative financial instruments and it is often applied inappropriately but it has useful predictive power in the proper set of circumstances.
Economic theory is incomplete but hardly without predictive power.
The article says the predictions are as accurate as a both coin flips and dice rolls. Well one of those is 1 in 2 and one of them is 1 in 6 or or much worse. Also, are economic predictions literally just a "one thing or the other" possibility? Not instead one of a great many things that could happen? Perhaps narrowing it down as close as they did actually much better than a simple "coin flip".
I'm a good cook. I'm a fantastic eater. - Steven Brust
You can predict is what the outcome of actions will be, you just can't predict what action people are going to take.
You cannot reliably predict the actions of individuals but it is demonstrably possible to predict the actions of statistically significant groups of people. Much of economics is statistical modeling of group dynamics. Adaptations of chaos theory, thermodynamics, Brownian motion, Bayes theory and many more statistical models have applications in economics that work just fine with groups.
I've found over the last bunch of years that I don't think economists have any more knowledge than the rest of us.
Sure, they have all these fancy models ... but often the assumptions of these models are so numerous and founded in theory they come down to belief systems instead of any objective measure.
People then use these dodgy models to set economic policy -- but things like asset backed paper commodities, and the fact that everybody is trying to game the system for their own benefit means it's seldom works as people expect.
And, of course, these people keep telling us that tax cuts for corporations and the wealthy magically solves the other problems, when it mostly just causes those entities to get more money and hoard it.
Add this to the fact that the stock market believes companies can and will grow by a certain percentage indefinitely, and it's hard not to conclude that most of modern 'economics' is mostly a guessing game and a way of achieving political ends -- and has nothing to do at all with reality. But they still continue to believe their models are more accurate than simply hoping.
Lost at C:>. Found at C.
To me, this seems like evidence that we need prediction markets more than ever.
Austrian, Keynsian, Marixist, doesn't it seem strange to anyone that all our current economic theories are 100 years old? We have world wide lightspeed communication now, and jet airliners, and robotics. These radically change the economic landscape. I think it is time for a new model.
Mostly economists are ideologues. The successful ones are those that have ideologies that serve the interests of the rich and powerful. They follow the basic rule of business, if you want to make lots of money develop a product or service for those who have lots of money.
Almost all economic models are designed to explain what already happened in a way that at particular group of ideologues can say, "See, we were right!". In turn, this allows the rich and powerful whose interests the ideology serves to make the case for public policies that promote their interests.
The official quote is "all of this so-called science â" has produced nothing more than what a roll of the dice could produce."
Dice are generally used when you want something other than 50/50 odds. And even with just two six sided dice, you have many options of how to read them (they could be differently colored). Sure, the whole predictive nature of the "science" arising from recognition of cause and effect is broken if you just toss some dice, but weather forecasts toss dice all the time. (60% chance of precipitation today).
Maybe I'm just a young whippersnapper, but your posts are unbearable to parse because they read like a 1700's legal document. I'm guessing you're a lawyer of some sort? Just a small word of advice, but audience effects presentation. Its very difficult for most to parse language the way a lawyer can so I wouldn't be surprised if I'm not the only one who got lost in your comma minefield.
Economists don't answer questions because they know what the answer is. They answer because they are asked.
Economists = more than one economist.
Economist's = the next thing belongs to the economist.
Economists' = the next thing belongs to the economists.
LEARN THIS.
Do try not to fuck up concepts key to third/fourth grade English when posting about important concepts.
- Zav - Imagine a Beowulf cluster of insensitive clods...
The Rutherford model isn't a bad model, neither the Dalton's model was bad, but better models happened as science advanced.
Missing the point. George Box put it best when he said "all models are wrong, some are useful". The Rutherford model was wrong but it was still good science (for the time). It put forth a hypothesis and then a model based on that hypothesis. Likewise economic models are based off of observed phenomena and have falsifiable models based off of hypotheses. The fact that gathering data and creating studies for economic models is more challenging in many ways than for physical phenomena does not mean that they are not science. Economics is a science that studies a type of behavior involving living organisms. It is essentially no different than studying herd migration patterns or some other aspect of biology. The fact that there is much we still do not understand about economics in no way changes the fact that economics cannot be usefully studied by any known process other than the scientific method.
The problem here is that these so called economic models aren't based on hard science.
The term "hard science" is a colloquial term based in perceptions with no utility in the actual practice of science. Science is a process or a method if you prefer based on observations in an objectively shared reality. The scientific method is based on empirical and measurable evidence subject to logic. Just because a field of study doesn't (directly) involve fundamental particles does not mean it cannot be studied with excellent scientific rigor.
This is the great misconception: the model must not explain anything, it should be just a matter of fact, a mathematical consequence of the hard science behind the hypothesis.
There is no misconception here at all excepting yours. Saying the "model must not explain anything" is to completely misunderstand how science works. A model is the description (an explanation if you will) of what is observed about the phenomenon. If the model provides useful and accurate predictions about how the phenomenon will behave in the future then the hypothesis is considered proven. A model IS the explanation of what is happening. The model (the explanation) can be proven wrong but that doesn't change what it actually is.
Even "disproven" hypothesis can still be useful under specific conditions. Newtonian physics has been supplanted by Relativity but for practical purposes (large objects at slow speeds) it is still useful as a model. Likewise many economic models are useful under specific conditions that may occur only rarely in the real world but they remain useful models from which we can build future hypothesis and models. Over time we refine these models as we learn more and more accurately describe with new models how the world works.
Three prominent economists..
Paul Krugman
Ben Bernanke
Alan Greenspan
All people I would like to see in a sinking ship over the Marianas trench. Economists add no value to society and spend most of their time trying to influence financial policy in the wrong direction. It doesn't amaze me then that a study finds that their predictions are no better than flipping a coin in Australia. I would submit that I could get a tarot card reader to give me the same predictions and if she was still in business, so could Ms. Cleo.
Harrison's Postulate - "For every action there is an equal and opposite criticism"
In the late eighties, a friend, who'd gotten his degree in economics from Chicago, after years of working for the Fed, got so mad he finally quit and got an honest job, programming. He sent out to a number of us a 32 page rant, including small details like his professors at Chicago making jokes in the halls about what they'd do when the public figured out it was all a scam.
I've been arguing this for years. Quick, name *ONE* *MONTH* in the last 10 years that the monthly headlines have *EVER* said "met economists' expectations". Show me three where it was withing std deviation beyond chance.
Science has predictive power. Art has descriptive power. "Economics" has neither - it has the track record of the writers of supermarket tabloid horoscopes. It's the modern Royal Readers of Entrails (what do you want it to read, boss?). (c, m.roth, 1990-2013)
And if *ANY* of it was right, why did we have the S&L scandal, the tech collapse, and the market collapse? Why booms and busts (no, I didn't mean her, slashdot kiddie)?
Suckers.
mark
complex science should be done, and compare that to the state of economics.
The breadth and depth of knowledge about the evolution of social systems, and the reasoning based upon that base of information and theory is so far beyond anything that economics has conceived of as to make economics an enbryonic science, at most.
Economics data is the same quality as history's data. We don't expect predictions from historians to be worth much, we certainly should not expect more of economists.
Economic follows Game Theory where there are no time-independent experts. Your choice and time T alters opportunities at T1.
Anyway, nobody should ever be criticised for seeking to improve their prose style.
From scarped cliff or quarried stone she cries "A thousand types are gone, I care for nothing, no not one."
OHMYFuUUUCKINGGOD Its another -1 Interesting post!!!!11! Quick, go whine on your journal about how moderators disagreeing is proof of a vast conspiracy to steal your gold and nuclear weapons.
I wish I'd had professors like these when I was a student - can slashdotters recommend any other writers "of their ilk" ?
"Gold is money, everything else is credit" --J.P. Morgan
Casteism