- The Washington Times - Sunday, January 2, 2011

ANALYSIS/OPINION:

The science of foretelling was apparently revered by the ancients.

Examples abound of oracles divining the fates of wise men and kings. Mighty warriors, Odysseus and Agamemnon would not dare sally forth lest the portents augured in their favor. The balance of chances measured in scattered bones, animal entrails or the position of the firmament still live on in today’s folklore. But in most of the Western world, fortune telling has lost its potency — that is, unless the fortune teller happens to be a scientist, pollster or economist.

The invention of science and statistics has replaced old-school fortune telling in very insidious ways. Now, while careful to disclaim — past performance is no guarantee of future results — hucksters of all sorts try to sell us stuff by pointing to long-term trends. In fact, America’s current state of economic recession was caused by a confidence born of scientific analysis. Supposedly, we all thought, housing prices would never fall. After all, they had risen steadily for more than 80 years. Very few people alive and relevant today remember the last time when the U.S. housing market went bust. Those people who lost their homes in 1933 are no longer around to deliver any cautionary tales.

So today’s fortune tellers — the economists and statisticians — delivered cryptic pronouncements from their isolated Ivy League lairs, declaring it mathematically impossible that we could experience a complete meltdown in the housing markets. Hindsight would reveal that they were all wrong. Everyone, from the oracle at Phila-Delphi, former Fed Chairman Alan Greenspan, to today’s Fed chairman, Ben S. Bernanke, not only disavowed the likelihood of a housing-market crash, but actually dismissed the possibility that a downturn in housing would spill over to the broader economy. America bet the house, quite literally, on this turning out to be true. As history would have it, even oracles can be wrong.

Perhaps the problem is that despite the disclaimers, most of us do base future predictions on past events. After all, doesn’t it make sense that if something has happened consistently in the past, it is likely to happen consistently in the future? Well, not really.

For a couple of reasons, the past does not equal the future.

First of all, the time periods that we call the past — usually epochs of between five and 500 years, may not be statistically significant enough to draw any real conclusions from. It took millions of years for dinosaurs to die off. It took billions of years for life to evolve on Earth. No 500-year period would have been sufficient to determine what would become of the species. In other words, an observation of home values during the past 80 years — without any other information — cannot possibly be enough information to base one’s decision about home values for the next 80 years. Statistics can be very misleading in this way.

The second reason predicting the future often fails is because of what economist and mathematician Nassim Taleb calls the “Black Swan” problem: The inability of statistics to accurately predict improbable events. No statistical model could predict declining housing prices, precisely because there was little, if any data with which to compute such a likelihood. Furthermore, since major events tend to be both rare and highly impactful, statistics is ill-equipped to determine future states of being on a grand scale.

But that’s precisely what they’re used to do. The problem is not so much that one bets $100 on the one-in-six chance that rolled dice will land on a certain number. It’s easy to determine the exact probability in games of chance where the outcomes are constrained. In the real world, the outcomes are varied and often unquantifiable, especially when there are people who manipulate the balance of chances set out to purposefully mislead the masses. It’s often those events that change the world.

Perhaps the desire to know why something happened leads to generalities about what may happen in the future. The human mind, it seems, cannot long endure a quandary. It has to make sense of what it encounters. So, historians and scientists observing the past usually concoct a story with a causal element to try and explain why something happened. These causal elements are usually broad and abstract — such as the notion that nationalism was responsible for World War I. Be that as it may. But neither the term “nationalism,” nor the possibility of such a large war, were in any way apparent to the would-be participants at the time. In fact, the very invention of the concept was an outcome — not a cause of the war.

But still, when it comes down to the end of the year, many people start making predictions about what will happen in the next year. Basically, those predictions tend to mirror the general mood, or events that have happened in the recent past. It’s amazing how many people predicted another terrorist attack in the years following 9/11. It got to a point that almost any act of violence wherever it occurred and for whatever reason was called terrorism. It’s similarly the case this year that dire predictions of economic calamity dominate the national psyche. People are playing it safe, hunkering down and fearing the worst. Others see the possibility of renewal, change and growth.

Optimism and pessimism usually stays somewhere in the realm of remembered history. Almost no one predicts that 2011 will be the year when the American empire crumbles and becomes a relic of past glory like Rome and Greece. No one predicts that Europe’s current economic woes could spill into America and cause a massive death-spiral in the U.S. economy. Conversely, very few optimists dare dream that 2011 will be the year that America returns to its former glory and becomes the shining beacon of economic success and of freedom it once was. Few believe in the resurgence of a Manifest Destiny.

Either way, it tends to be a self-fulfilling prophesy.

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