1
JAEBONG SON &
JOHN GASTREICH
Ch 1
The Second Oldest Profession
Predictable Future?
3
History follows a certain pattern.
Future Imperfection
4
Economy
Stock Market
Weather
Obscured by present conditions and trends
Ch 2
When Chaos Rains
Basic Assumption in Forecasting Weather
6
Weather patterns regularly repeat themselves.
The Problems of Prediction
7
The Problems of Prediction - Nonlinearity
8

Nonlinear relationships cause variables to increase or
decrease at more or less exponential rates.
Interest of 12%
on a constant basis
Interest of 12 %
on a compound basis
Paid 10% of interest by mistake
$100 for thirty years
Cost the customer
$60
Cost the customer
$1,250
The Problems of Prediction
9
The Problems of Prediction - Chaos
10
B = 0.4 – 4A2
where A stands for the current temperature and B stands for the
temperature one hour into the future.
Hours After Forecast
1.2
1
0.8
Actual Temperature
0.6
Forecasted Temperature
0.4
0.2
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
 The
simulated temperature patterns in the figure never
repeat themselves.
The Problems of Prediction – Butterfly Effect
11
Edward Lorenz
The Value of Weather Forecasting
12


Is the $4 billion spent each year worldwide on weather
forecasting worth the investment without taking into
account the problems mentioned above?
Why did God create economist?
In order to make weather forecasters look good.
Ch 3
The Dismal Scientists
Economists have forecast nine of the last five recessions.
Theory of General Equilibrium
14
Inherently stable
Dampen external shock
Restores itself to equilibrium
The economy is predictable.
The Economy as a Complex System
15
Steven N. Durlauf
No Natural
Laws
Complex systems have no natural laws governing their behavior
at either their micro-level (individual humans) or their macrolevel (the economy).
The Economy as a Complex System
16
Cannot be
Dissected
No Natural
Laws
Complex systems cannot be dissected into their components,
because the systems arise from the numerous interactions among
the components.
The Economy as a Complex System
17
Positive &
Negative
Feedback
Loops
Cannot be
Dissected
No Natural
Laws
Complex systems are so highly interconnected with numerous
positive and negative feedback loops that they often have
counterintuitive cause-and-effect results.
The Economy as a Complex System
18
Positive &
Negative
Feedback
Loops
SelfGenerated
Turmoil
Cannot be
Dissected
No Natural
Laws
Complex systems exhibit periods of order and predictability,
punctuated by unexpected moments of self-generated turmoil.
The Economy as a Complex System
19
Positive &
Negative
Feedback
Loops
SelfGenerated
Turmoil
Cannot be
Dissected
No Fixed
Cycle
No Natural
Laws
Complex systems have no fixed cycles.
= Histories do not repeat themselves.
The Economy as a Complex Adaptive System
20
Adaption
and
Evolution
Positive &
Negative
Feedback
Loops
SelfGenerated
Turmoil
Cannot be
Dissected
No Fixed
Cycle
No Natural
Laws
Complex adaptive systems adapt to their environments and
evolve.
The Economy as a Nonlinear Complex
Adaptive System
21
Adaption
and
Evolution
Positive &
Negative
Feedback
Loops
SelfGenerated
Turmoil
Cannot be
Dissected
Nonlinear
No Fixed
Cycle
No Natural
Laws
The existence of these nonlinear relationships does not conform
to the general principles of the theory of General Equilibrium.
The Economy as a Nonlinear Complex
Adaptive System with Erroneous Data
22
Adaption
and
Evolution
Positive &
Negative
Feedback
Loops
SelfGenerated
Turmoil
Cannot be
Dissected
Nonlinear
No Natural
Laws
No Fixed
Cycle
Erroneous
Data
Economic data are scant and erroneous.
• Questionable government survey data, false information from
respondent, revised historical statistics.
Human as Irrational Actors
23
Adaption
and
Evolution
Irrational
Human
Positive &
Negative
Feedback
Loops
SelfGenerated
Turmoil
Cannot be
Dissected
Nonlinear
No Natural
Laws
No Fixed
Cycle
Erroneous
Data
Robert Heilbroner “At the root of the economic matter lies man,
but it is not man the ‘economic’ being, but man the psychological
and social being, whom we understand only imperfectly.”
Recommendations from the Author
24

To remake economics into a much more scientific field,
economists should:
 Cast off deterministic economic theories and
perspectives.
 Start to study the economy as a complex system that is
far more dynamic than the idea about the economy
contained in today’s textbooks.
 Look more to biological science than to physics for
explanations of how the economy works, since the
economy is made up of biological units.
Recommendations from the Author cont’d
25

Economics must use the scientific method, which requires
developing theories based on real-world observation
and then testing them through ever more observation.
Ch 4
The Market Gurus
The stock market is part of the economy
and thus a complex system.
Speed
27
Adaption
and
Evolution
Irrational
Human
Positive &
Negative
Feedback
Loops
SelfGenerated
Turmoil
Cannot be
Dissected
Nonlinear
No Natural
Laws
No Fixed
Cycle
Messiness
of Data
Speed
Speed makes the stock market much more dynamic and complex
than the economy
Irrational Herd Mentality & Mass Psychology
28
Adaption
and
Evolution
Irrational
Human
Positive &
Negative
Feedback
Loops
SelfGenerated
Turmoil
Cannot be
Dissected
Nonlinear
No Natural
Laws
No Fixed
Cycle
Messiness
of Data
Irrational
Herd
Mentality
& mass
Psychology
Speed
The stock market is clearly driven by irrational herd mentality
and mass psychology: A psychological soup of fear, greed, hope,
superstition, and a host of other emotions and motives.
The Random Walk Theory
29

The random walk theory states that stock market prices
evolve according to a random walk and thus the prices
of the stock market cannot be predicted.
Technical Analysis
(history of prices)
Fundamental Analysis
(future earnings, a discount rate)
EMH and Irrationality of the Stock Market
30


The Efficient Market Hypothesis (EMH) (1960s by Fama)
 The stock market knows everything that is knowable
about future corporate earnings and thus prices all
stocks at their true values.
However, the market also responds to news events in a
strange way.
 The crash of the U.S. stock market in 1987
The irrational dimension of the stock market means that the EMH
is at least partially flawed.
Lessons Learned
31





The only certain things in life are death and taxes.
Faulty assumptions must lead to wrong research
conclusions.
A small mistake could lead to major errors.
Psychological bias affects predictions and research
results.
Increased complexity degrades forecasting accuracy.
 If possible, divide a problem into small pieces.
Ch 5
Checking the “Unchecked Population”
Gloom & Doom
33

The Ice Age Cometh
 The End: The Imminent Ice Age and
How We Can Stop It! (1988)



Ice ages are predictable
Spread rock dust over earth’s surface
Global Famine
 Famine – 1975! (1967)
“Starvation will become widespread famine”
 But, undernourished people declined from
942M to 786M (1970 – 1990)


Societal Collapse
 Exponential pop. growth outstrip natural resources

Easter Island
Population Momentum & Predictability
34

Total population is predictable for decades (U.S.)

Demographers still miss the turning points
World Population
35

Forecasts accurate for decades

Remained flat until 200 years ago
County Populations
36

Accuracy increases with size
Life Expectancy
37

Death is predictable (U.S.)
Death Rate (U.S.)
38

Death rate easy to predict; little change

Forecasters miss turning points
HIV Predictions Overstated
39

Public Health Service – 85 experts
Unborn Difficult to Forecast
40

20-year forecasts are accurate for exist population

Demographers miss turning points
Contraceptives
41

Strong predictor of fertility
Developing Countries
42

Exponential growth only in developing countries
Immigration (U.S.)
43

Bureau of Census underestimates numbers
Chapter 5 Conclusions
44



Nature abhors exponential growth & curbs it
Question: When & how?
 8 billion?
 10 billion?
 More?
Future depends on uncertain forces
 Global cooperation
 Technology
Ch 6
Science Fact and Fiction
Mind-Boggling Leaps in Technology
46


Older generations have witnessed
 Television
 Radar
 The laser
 Atomic energy
 Manned space travel
Younger generations have witnessed
 Information technology
 Genetic engineering
Technology Forecasting
47

Evolution of Technology Forecasting
Flow of Technology Forecasting
48

From organizations to media
World’s Largest Technology Forecaster
49

Japanese government’s technology forecasting
Technology Forecasting Techniques
50

Brainstorming techniques
 Delphi method


Trend extrapolation techniques





Cross-impact analysis
Analytic hierarchy process
Relevance trees



S-curve
Trend analysis
Correlation analysis
Analytic techniques


Nominal group process
Systems dynamics
Scenario development
Real-world situation analysis


Case study method
Lead-user analysis
“Useless in predicting the most
significant events in the evolution of
technology”
S-Curve
51


Pro: Useful to forecast established technologies
Con: Hard to predict size and shape of S-curve
 Market size
 Development speed
Technological Darwinism
52

Uncertainty in technological evolution
Moore’s Law
53

Increasing density of microprocessors
Ch 7
The Futurists
Faith Popcorn
John Naisbitt
Infirm Foundations of Social Science
55

Society – a complex system
 Popular attitudes & beliefs
 Economic conditions
 Technological advances
 Population trends
 Political events
 Wars
 Weather
All Unpredictable
Society is Unpredictable
The Newtonian Socialists
56

Believed
 If Newton can predict paths of planets, we can predict
social evolution
 Social progress in inevitable as Newton’s laws of
motion
Futurology
57


Coates (author of Future Work)
 There is no single future
 We can see those alternative futures
 We can influence the future
 We have a more obligation to influence the future
However, most futurists
 Argue strongly for a single vision
 Do not identify alternatives
 Say, “There will be.”
Trend Spotters
58



Commercial trend spotters
 Search for emerging social trends
 Sell their “discoveries” to business & gov’t
Firms
 Gallup
 Yankelovich
Gurus
 John Naisbitt
 Faith Popcorn
Ch 8
Corporate Chaos
Strategies of Management
60

Boston Consulting Group’s growth-share matrix
The Unpredictable Future
61

Realm of future possibilities
Opportunity
62

Realm of current possibilities
Ch 9
The Certainty of Living in an Uncertain World
Thinking Critically
64

People are vulnerable to false prophets
 We fear uncertainty
 Seek counsel of those who “know” the future
 Innately gullible
 Believe
rather than question
 Attribute meaning to chance events
 Driven
by herd instinct
 Easily swayed by voices of authority
Self-Defense Against Futurists
65


React with informed skepticism
Ask 5 questions
 Based on hard science?
 How sound are the methods?
 Forecaster has credible credentials?
 Forecaster has a proven track record?
 Is my belief influenced by personal beliefs & wishful
thinking?
Dr Browning Predicts Earthquake
66


Prediction
 New Madrid, Missouri
 Near epicenter of 1811 most severe earthquake
 On Dec 3, 1990 (plus/minus 48 hours)
Mass Panic Reaction
 Schools & factories closed
 Shopping centers taped up windows
 Residents left town & called Red Cross
 Rumors that town reservoir dropped 15 feet
 Media: New York Times to Poland
Questions
67