How the mighty fall. Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, is now talking about the Indian economy growing at anywhere between 5-5.5 percent during this financial year (the year ending on 31 March 2013).
What is interesting that during the first few months of the financial year he was talking about an economic growth of at least 7 percent. In fact, on a television show in April 2012, which was discussing Ruchir Sharma's book Breakout Nations, Ahluwalia kept insisting that a 7 percent economic growth rate was a given.
Turns out it was not. And Ahluwalia is now talking about an economic growth of 5-5.5 percent—and thus way off the mark. When someone predicts an economic growth of 7 percent and the growth turns out to be 6.5 percent or 7.5 percent, one really can't hold the prediction against him. But predicting a 7 percent growth rate at the beginning of the year, and then later revising it to 5 percent as the evidence of a slowdown comes through, is like not hitting the broad side of the barn.
And when its the Deputy Chairman of the Planning Commission who has been way off the mark with regard to predicting economic growth, then that leaves one wondering: if he has no idea of which way the economy is headed, how can the other lesser mortals?
Forecasting is a difficult business. The typical assumption is that those who are closest to the activity are the best placed to forecast it. So stock analysts are best placed to forecast which way stock markets are headed. The existing IT/telecom companies are best placed to talk about cutting edge technologies of the future. Political pundits are best placed to predict which way the elections will go and so on.
But as we have seen time and again, that is not the case. Surprises are always around the corner.
One of the biggest exercises on testing predictions was carried out by Philip Tetlock, a psychologist at the University of California, Berkeley. He asked various experts to predict the implications of the Cold War that was flaring up between the United States and the erstwhile Union of Soviet Socialist Republics at the time.
In the experiment, Tetlock chose 284 people, who made a living by predicting political and economic trends. Over the next 20 years, he asked them to make nearly 100 predictions each, on a variety of likely future events. Would apartheid end in South Africa? Would Michael Gorbachev, the leader of the USSR, be ousted in a coup? Would the US go to war in the Persian Gulf? Would the dotcom bubble burst?
By the end of the study in 2003, Tetlock had 82,361 forecasts. What he found was that there was very little agreement among these experts. It didn't matter which field they were in or what their academic discipline was; they were all bad at forecasting. Interestingly, these experts did slightly better at predicting the future when they were operating outside the area of their so-called expertise.
People get forecasts wrong all the time because they are typically victims of what Nassim Nicholas Taleb in his latest book Antifragile calls the Great Turkey Problem. As he writes: “A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief – right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey.”