the fortune sellers

Author William A. Sherden

The Fortune Sellers

Agenda

• Brief Introduction• Detailed Discussion of Chapter 1 to 5• Summary

Introduction

• Sellerso People who makes benefits through predicting

futures in a business field• Fortune

o These predictions are not reliable and their success can be attributed to luck not science

CP1: The Second Oldest Profession• What will the future bring?

o Express our uncertainty and desire of knowing future

• The development of prediction industryo From ancient world to modern societyo Promoted by human natureo Forecasting business now exists everywhere,

economics, weather, population…

CP1: The Second Oldest Profession• Disappointing output of prediction industry

o Although many people and billions of money involved in this industry, the prediction accuracy is disappointing.

o Individual success can be explained by the law of probability. 100 people predict a sequence of throwing a coin five times. The probability of nobody predicts right is (1 - 1/32) ^ 100 = 4.2%

CP1: The Second Oldest Profession• Impossible mission for scientists

o Determinism: Generate laws from historical patterns and cycles. Then make prediction. Newton and his gravitation.

o Works in naive world. That’s why we always see lots of assumptions in a paper studying human behaviors in order to simplify the situation

o Determinism cannot handle the complexity and chaos in real world

CP1: The Second Oldest Profession• What should we do?

o Cannot make perfect prediction does not mean we can ignore future

o Focus on the vital information in current environment. Not necessarily concern what it could bring

o Question before believingo The boom of today’s social network and the

burst of yesterday’s dot-com bubble

CP2: When Chaos Rains

• Weather predictiono Has a long history and plays important role in

people’s life. Transportation and agricultural firms relies on weather report to survive.

o Main barriers: data collection and the speed of data transmission

o Kites, balloon, radar and satellite. The desire of prediction future incites the development of technology

o Much more like a kind of science compared with other prediction industry. Since it study the laws of nature.


• How to conduct predictiono Predict a change from current position A to

future position Bo Fully Understand A and Bo Prove the law that’s bring us from A to Bo Distinguish short-term and long-term prediction


• Why always wrong?o Weather situations are volatileo Not able to capture all the detailso Natural laws cannot be stimulated in a linear

system. e.g. “butterfly effect”• Feature of nonlinear system

o Highly sensitive to initial pointo High order functions make slight errors at

beginning be amplified in future


• Chaos systemo Sensitivity to initial conditionso Topological mixingo Density of periodic orbits


• Increasing initial accuracy helps in a non-linear systemo Higher resolution of input image will not affect

the output accuracy of an face recognition system based on neural networks


• Long-term viewo Report from AMC and CAC slightly exceed

random chance (37% to 33%)o The “only credible” Gray’s hurricane forecast

model a little better than naive average in long term

• Reasono Attribute meaning to meaningless patternso Treat co-occurrence as cause-effect relationshipo Rorschach factor: make conclusion based one’s

own imagine


• Weather prediction is still useful and worth of investingo Severe weather events prediction is like a

system with high precision but low recallo A successful prediction can save lots of money

and an error prediction brings few harmso Pay little attention to long-term predictiono It is a competition between human with nature,

a kind of science.

CP3: Dismal Scientists

• The difference between weather predictor and economistso Economists predict the future of people and

nationso Economists make predictions without anyone

else’s approval ( president of CEA & CBO)o Economists use a set of assumptions and beliefs

to analyze their particular economic ‘religion’


• Performance of economists’ predictiono Economists cannot predict the turning points in

the economyo The accuracy drops with lead timeo Average performance is about as good as

guessingo No economic forecasters consistently lead in

forecasting accuracy


• Economy is a complex systemo refers to the phenomenon of order emerging

from the interactions among its components• Features

o No natural laws governing complex systemo Can not be dissected into their components,

people involved, daily transactionso Counterintuitive cause-effect resultso Punctuated by unexpected momentso Adapts to the environment and evolveo No fixed cycles, histories do not repeat


• Economy is also nonlinear systemo Nonlinear features can be described by positive

feedback loopso Higher-production volume reduces costs, which

lead to lower prices, which lead to increased sales, which lead to higher production

o Contain self-influenced variables


• Problem of economics researcho Poor quality of data, e.g. inaccuracy of

international economic statisticso Assume consumer behaviors on a “rational”

math equations. Economists derive theories in their academic offices.

o Overlook psychology and sociology influence.


• Harmful influence of faulty econ predictionso Undue influence in the election of those who run

governments; voters should ignore econ promises and predictions

o Result in faulty decision making by policymakers, business executives who are misguided by predictions

o Doomsday predictions will bring needless anxiety, which will cause negative feedback loops


• Some suggestionso Economists should look more to biological

science than to physicso Develop theories based on real world

observation.o Be aware of self-influenced variableso Making hypotheses based on nature observation

and testing hypotheses with controlled experiments

CP4: The Market Gurus

• Predictors in Wall Streeto Predict the Bull and the Bear of the marketo Two groups of people: Fundamentalists and

Technicianso Fundamentalists using logic to deduce how the

market respond to eventso Technicians derive patterns from history to

predict future


• An example of technicians’ solutions

Yields and Years of Chinese bonds have some relationship;We need to build a yield curve to judge the performance of a certain bond;Distribution of bonds should follow this curve, so we learn the function from historical data;


• Fundamentalist Stepso Estimate the intrinsic value of stocko Determine whether the market has over or

undervalued the stocko Assume the price of this stock will eventually

rise or fall to its true value• Stricken by the Efficient Market Hypothesis

o EMH states that the stock market knows everything that is knowable, in another word, no stock is being over or undervalued


• Observation Factso 70 percent of investment professionals fail to

beat the marketo 30 percent of mutual funds beat the market in

any given years, none do so with any consistency

o Statistics show stock market is unpredictable


• Exceptionso Peter Lynch, consistently outperforms the

marketo Roger Babson, predicted the market crash of

1929• Reason

o Peter Lynch focused on those small firms which are overlooked by the market

o Roger Babson was remembered by once successful prediction and his reputation let him foment instead of predicting a crash. In long term, his accuracy is not better than random chance


• Enlightenmento Pay attention to those neglected instances in a

group to be studied. May we can get opposite result against mainstream idea

o Compare those sophisticated model or approaches with classical naive methods. E.g. Naive Bayes for prediction or classification / Euclidean distance for similarity measurement

CP5: Checking the “Unchecked Population”• Population Forecasts

o Not a moneymaking business but has more convincing predictions than weather and economics

o Simple but useful equation: Future = Current + births – deaths + net immigrationo Development of technology reduces the death

rate and make lifetime stable for research

CP5: Checking the “Unchecked Population”• Predict death is easy than birth

o Death is generally controlled by natureo Birth involves more human motivation and even

controlled by government policy which makes it more complex

• Future is not promisingo Technology makes us no more vulnerable to

bacterium; it also makes microorganisms become immune to modern medicines.

CP5: Checking the “Unchecked Population”• Limitations of Population Prediction

o The prediction skills are simple, only accurate in global forecasting. (different region / different religion…)

o Cannot handle tuning points

Pattern and predictable = smoothHard to find a predictable function to capture the tuning point

Conclusion

• Prediction is a impossible mission for any science and technology, at least in long-term forecasting

• Maybe the only certain thing is the development of technology itself. This topic will be discussed in the following chapters

Thank you!

The Fortune Sellers-- Chapter 6 - 9

Authored by: William A. SherdenPresented by: Weifeng Li10/24/2012

SCIENCE FACT AND FICTION

Chapter 6

• Widespread fascination with future technology, however, is a recent phenomenon in human history.

• We had to experience technological progress first before we could foresee it happening in the future

• Inventions influenced science fiction writers; fiction has influenced science as well.o Rocket scientist Констант н Эду рдович и́S а́S

Циолк вскийо́S and Verne

High-tech anxiety

• The flow of technology forecasts pyramid• Largest technology forecaster in Japan

o STA of MITI• Many US politicians and policy analysts see

government sponsored technology forecasting and other forms of industrial policy as misdirectedo Efforts to control commercial events that are

best left to the marketplace to resolve

The flow of technology forecasts

MEDIA

FuturistsWall Street AnalystsIndustry Associations

Government AgenciesForecasting Firms

Think TanksHigh-Tech Firms

The dark art of technology forecasting

• Analytic toolso All useless in predicting significant eventso S-curve

Useful in forecasting existing though inaccurateo Delphi

Widely conducted “Consensus is achieved mainly by group pressure to

conformity”

Promises, promises

• Long-term technology predictions have been wrong about 80 percent of the timeo 75 percent of Japan’s STA’s predictions are

wrong• Amusing predictions of Herman Kahn

o Nuclear power – too cheap to measureo Robots – work only 10 hours a yearo Thinking computers

Out of the blue

• Inability of experts to predict the major breakthrough technologieso “all inventions met similar derision shortly before becoming

practical realities”o Airplane/telephone/light bulb/electronic computers

• Experts have repeatedly failed to foresee breakthrough innovations, the turning points in the evolution of technology

• Our capacity to foresee the future has not improved at all• Situational bias has continually been a major barrier in

envisioning future technologyo Imagine future technologies as mere extensions of things that

already exist Radio

• Those most likely to develop a new technology often do noto Source of innovation varies by industry

The hidden path of technological Darwinism

• Unpredictability of the evolution of technologyo Uncertainties in technological evolution

Unworkable concepts• Computer: require 100-foot-long rooms to house• Fusion reactor: generate more energy than it consumes• Superconducting materials: hard to fashion• Superfluidity: temperatures near absolute zero

Unknown applications• Laser: situational bias• When technologies are developed to solve a problem, it is difficult to envision how it might

otherwise be used: steam engine; semiconductor material Unproved value Technological synergies

• Superior innovations typically emerge from a combination of different technologies Creative destruction

• The creation of new technologies kills off existing ones Technological lock-in

• Lock-in occurs when a technology or convention becomes the industry standard before competitors come on the scene

• Inferior technologies might be locked in as industry standardo QWERTY

• Chance eventso Large eventso Small events

DOS

Proceed with extreme caution

• “technological forecasting is largely a bogus and fraudulent enterprise”

• Reasons to be skeptical about predictions:o Weak toolso “the illusion of knowing what is going to happen is worse

than not knowing”o Technology forecasts cannot be used to justify business

ventures• Government and industry should work together to

set technical standards• Government should not be in the business of

predicting winning technologies of the future• Government should provide a large number of

smaller grants than fewer larger ones

THE FUTURISTSChapter 7

The infirm foundations of social science

• Sociology is “science with the greatest number of methods and the least results” – Jules Henri Poincaré

• Society as an unpredictable complex system• Scientific predictions were impossible in social science

o Adapt,o Individual,o Chance and accident, ando Heisenberg uncertainty principle contribute to unpredicability

• Corollary principleso History does not repeat itselfo Major social trends, movements, and revolutions surprise those closet to

the eventso Social theories are necessarily weak and ephemeral in their application

to social phenomenao Social predictions are subjective and, accordingly, susceptible to

situational bias, political agendas, and wishful thinkingo Social predictions tend to be wrong

The Newtonian socialists

• Social prophets believed that social progress was inevitable and that it was as much a law of nature as Newton’s laws of motiono John Stuart Mill/Karl Marx

From utopia to techno-totalitarianism

• Utopia: confident expectation of constant technological progress and steady social improvemento H. G. Wells/Edward Bellamy

• After WWI, utopian optimism dwindled, while visions of the techno-society gone bad proliferatedo 1984

• Although the dismal visions of the future have been similarly exaggerated, they continue to provide legitimate warnings of the potential dangers of technology and totalitarianism

Futurology

• Futurists who call themselves as such• Beliefs about the practice of futurology

o There is no single future…the objective therefore becomes to identify and describe a useful range of alternatives…

o We can see those alternative futures…o We can influence the future…o We have a moral obligation to use our capability to

anticipate and to influence the future…• Modern practice of futurology

o H. G. Wellso By the 1920’s: Keynes/Freud/Churchillo After 1940, the futurist movement really started to take

shape: Herman Kahn/Daniel Bell/Alvin Toffler

The trend spotters

• Commercial trend spotterso People who search for emerging societal trends

and sell their discoveries to businesses and governments.

o Naisbitto Faith Popcorn

Cocooning Environment, education, and ethics in the 1990s

An excuse to do the inexcusable

• An evil side to social prediction: the misuse of prophecy by demagogues to control the masses in order to achieve their master plan for society.

• The best way for a society to deflect the dangerous effects of false prophecy is to ensure a high level of education throughout its citizenship and to protect the freedom of all people to dissent.

CORPORATE CHAOSChapter 8

Planning era

• GE’s elite group of planners• The communist governments of Eastern

Europe planned their command economies down to the minutest detail

• Kennedy’s Planning-Programming-Budgeting System

• BCG’s growth-share matrix

The management science myth

• Hindsight has shown that planning had little or no effect on corporate profitability.

• Organizations are complex systems that behave in subtle and sometimes counterintuitive ways.o Feedback loopso Irrational decision making

• There are no laws governing the behavior of organizations

Back to the future

• A continual procession of management fadso BCG’s growth-share matrixo Porter’s Competitive Advantageo Peter’s Stick to Your Knittingo Re-engineeringo Strategic Planning

The illusion of control

• the complexity of organizations is not directly controllable.

• Organizations do not need to be heavily controlled, because they have the capacity to achieve great things on their own through the process of self-organization.o Respond to emerging threats and opportunitieso Develop successful strategies

• Ironically, planning kills the thing it aspires to create: a strategy.

The future does not exist

• The futureo The pathway into the future is unknowableo What is possible in the future is somewhat constrained by what

exists in the present.• Opportunity

o Opportunities exist more in the present than the future.• Vision

o Positive regression: abandoning traditional practices that provided a competitive advantage, in favor of a new, innovative approach that might cause a deterioration in short-term financial performance.

o Visionaries: do not foresee the future but a superior way of doing things.

o Every move on the competitive map of opportunities changes the pathway into the future and opens a new realm of possible futures.

o The only thing that is real is the present

Thriving in the future

• Guidelines for shaping the future• Self-organization

o Two essential ingredients: empowerment and guiding principles• Intelligence

o Organizational intelligence is the collective intelligence of the organizationo Intelligence: the capacity to acquire and apply knowledge.

The acquisition of knowledge is useless, however, if the information does not get to the right places in the organization where it can be best put to use.

o Organizational learning is greatly enhanced by sharing information across different levels and functions, and these new information connections result in a cross-fertilization of organizational thinking that often leads to new ideas.

o The speed of learning that separates the winners from the losers.• Natural reflexes

o An organization can prepare itself for the otherwise unexpected surprise events.o Managements can anticipate possible future situations by simply asking “what-if” questions.

• Mutationo Small random changes in a home-grown cohesive organization may produce highly beneficial

results.• Symbiosis

o The partnerships can lead to mutually beneficial process improvements and provide a source of creative new product ideas.

• Competitive challengeso Competitive challenged organizations also evolve to become tough and resilient.

The murky world of leadership

• To build empowered and intelligent organizations that are capable of self-organizing and adapting to ever-changing environment.

• To mold the future of the organization to every extent possible.o Strategic vision -> strategic plan

• To guide and influence the employees to fulfill the strategic vision.o The most potent: structural changeo Political tacticso Persistence

• An effective leader must have a strong sense of intuition.

THE CERTAINTY OF LIVING IN AN UNCERTAIN WORLD

Chapter 9

• How can we sort the wheat from the chaff in terms of evaluating predictions?

• What lessons does complexity theory offer on how to live in this uncertain world?

Thinking critically

• We are vulnerable to false prophets.• To think for ourselves in a critical and

objective manner about their forecasts.o Informed skepticismo Is the forecast based on hard science?o How sound are the method used to make the projection?o Does the forecaster have credible credentials?o Does the forecaster have a proved track record?o To what extent is my belief in a particular forecast

influenced by my own personal beliefs and wishful thinking?

Thinking critically (cont.)

• Scienceo A truly scientific forecast is based on equations

derived from proved laws of nature that specify how a phenomenon at point A in the present will progress to some point B in the future.

o There are no proved natural laws underlying the behavior of social systems.

Think critically (cont.)

• Methodso Predictions based on trends can be highly

inaccurate. S-curve

o Predictions based on cycles are almost sure to be erroneous. The illusion of cyclical behavior


• Credentialso Our minds look for simple clues to gauge

forecasters’ credibility, such as their association with a prestigious institution, their resume, and their appearance, reputation, and conviction.

o The story of Browning predicting an earthquake


• Track recordso Not easy to judge – vaguenesso To assess whether they demonstrate any skill

beyond naïve guessingo To make their predictions conform to supposed

real outcomes• Personal bias

o Barnum effect: our propensity to believe in predictions consistent with our own beliefs

Que sera, sera?

• “whatever will be, will be”• Our future lives are more influence able

than predictable.• We can choose to lead lives that flexibly

adapt to unforeseen changes, and ambitious and motivated individuals can influence their futures by striving to make things happen.

Questions?

the fortune sellers

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