Friday 21 October 2016

Writers predict the future best because it doesn't matter if they get it wrong

Published 22/10/2015 | 02:30

Yesterday was a key date in the hugely successful 1980s film 'Back To The Future II'. The two main characters in the film, Marty McFly and Doc Brown, travel forwards in time from 1985 to October 21, 2015.

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The date has prompted lots of comment about all of the things the makers of the film managed to get right in painting a picture of the gadgets and technology that might be available in 2015, from flatscreen TVs to video communication.

They weren't necessarily right about time travel or self-tying shoes, but the point is they weren't involved in forecasting when they made the film in 1985. They were entertaining people. They just happened to be right about some things and wrong about others.

Making predictions about the future is a precarious business for analysts, journalists, economists, gamblers and those who provide the weather forecast. Met Eireann staff and economists tend to get the most stick for getting it wrong.

In reality, everybody is in the "future business" but some are a little cleverer than others about it. Even futurologists avoid making specific predictions about the future but instead study future possibilities based on current trends.

For businesses, that means extrapolating what might happen in the future and making sure they have a plan to deal with such eventualities, whether they are positive or disastrous. This makes futurology like a form of risk analysis. But you can land a lot more speaking gigs at international conferences if you are a "futurologist" than you will by describing yourself as a "risk analyst".

Inevitably, sometimes people will stick their neck out about the future and get it spectacularly wrong. One of the most famous examples was economist Irving Fisher who said just three days before the 1929 stock market crash that "stock prices have reached what looks like a permanently high plateau".

In 2007 former Microsoft chief executive Steve Ballmer told 'USA Today' "there's no chance that the iPhone is going to get any significant market share. No chance."

In 1962 Decca Records said of The Beatles, "We don't like their sound and guitar music is on the way out."

Spotting winning products when in their infancy can be as much about luck as anything else. But for a variety of reasons people tend to think the economy is different. There is an erroneous expectation that economists are supposed to know what is going to happen in the future - that somehow this is what they are paid to do.

In general their track record in spotting crises is pretty poor. In 2001 an IMF economist did a survey on the accuracy of forecasts in the 1990s. He concluded that they are all much the same and their predictive record was awful. "The record of failure to predict recessions is virtually unblemished," wrote Prakash Loungani.

Of 49 countries around the world in recession in 2009, not one of them had been predicted a year earlier, based on the averages published in a report called Consensus Forecasts.

In Ireland the biggest oversight came in predicting the housing market, banking and wider economic crash. Among the more spectacular house prediction clangers was an article by Mark Fitzgerald of estate agent Sherry Fitzgerald in April 2007 when he said, "I would see current problems as simply a temporary setback and I would actually think it is an opportunity to buy." The PTSB marketing director said in 2007 he expected to see single-digit house price growth in Ireland for the next decade.

Senator Donie Cassidy told Seanad Éireann in April 2008 that "we have a duty to tell first-time house buyers, young couples with no previous experience, that there is unbelievable value in the market place today". There is an endless list on that one, as we saw from the troupe of bankers apologising at the Banking Inquiry. But perhaps it shows the pitfalls of making predictions when you have something to lose yourself.

Nobody is capable of being 100pc objective. But when the person making the prediction has a structural bias in their analysis - namely that they stand to lose a lot of money if events transpire a certain way - we should all be more cautious.

Sometimes having that bias also means the person has a lot of knowledge of an area because of what they do for a living, and the expert knowledge clouds over the structural bias. After the crash, few saw the speed of house price recovery that occurred. In 2011 it was common to suggest we were the new Japan with 17 years of falling house prices ahead of us. Even in early 2012 one broker predicted a further 33pc fall in house prices from their level at that time, despite the fact they effectively bottomed out within months.

So whatever about forecasting doom, in Ireland we have at times been guilty of not spotting the extent of good news coming down the tracks. Department of Finance estimates were consistently under performance during the boom years.

When the banks collapsed in 2010, four-year economic stress scenarios were constructed by experts to determine how much money our banks might need. In the stress scenario, by 2013 our GDP was going to be €154bn. It was actually nearly €10bn higher than that. Our unemployment rate would hit 15.6pc by 2013. It actually came in at 13pc. Even exchequer forecasting for this year has seen several upward revisions on economic growth. By the end of September 2015, our Corporation Tax take was €1.2bn or 45pc more than had been pencilled in at the start of the year.

Another massive global economic event, not widely predicted, was the collapse in oil prices in mid-2014. After years of predicting when "peak oil" would arrive, few saw oil prices falling by 50pc last year. Now the consensus has shifted. The World Bank is predicting that oil prices will only get back to $88 a barrel by 2025.

But forecasting the collapse correctly would not have prevented it. Companies around the world, like Ryanair, would have forward-purchased a lot less fuel, possibly making the oil price crash happen earlier. UK job losses from the oil price collapse have been put at around 65,000. They would have happened anyway.

We all get some predictions right and others wrong. I believed the Eircom flotation was over-priced in 1999 but wrongly said Elan Corporation was finished and would never recover from its 2001 share price collapse.

Here are three big questions for the future that many would love to know the answer to now.

Will Volkswagen survive as an independent company given that some have placed the total cost of its emissions scandal at €100bn? Will China pull off its economic soft landing and avoid a crash? In five years from now will IAG's takeover of Aer Lingus have definitely been the best thing for Ireland Inc?

Here are my three rules of thumb for predicting the future:

1. Avoid specific predictions unless you really have to (note I didn't answer any of the three questions listed above)

2. Strip out structural bias when assessing your own and other people's predictions. 3. Consensus kills. Don't be afraid to go against it.

Predictions should be left to the film-makers and writers. They have nothing to lose if they are wrong.

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