No one saw the shocks of 2008 coming

Jan 12, 2009 Business Daily, Strategy

“The past year has been full of big surprises, particularly for banks. One minute it was 85-year-old Bear Stearns that collapsed, the next it was 158-year-old Lehman Brothers, and then the whole financial system needed bailing out as confidence in free-market capitalism itself all but evaporated. Who would have thought, at the start of 2008, that the year would see crisis engulf once-sturdy names from Freddie Mac and Fannie Mae to AIG, Merrill Lynch, HBOS, Wachovia and Washington Mutual (WaMu)?
Not us. The World in 2008 failed to predict any of this.”

The World in 2009, Economist Publications (2008)

2008 will go down in history as the year of the big surprise. Virtually none of the economic bombshells that so stunned us were foreseen by mainstream analysts and experts. Yet these are people who devote their time and skills to their respective sectors, countries and industries. You would think they might have a glimmer of success in predicting what might happen a few months down the road. 2008 proved that hope to be unfounded. So how much faith should we put in their abilities in 2009?

The Economist’s World in 2009 contains a welcome mea culpa, excerpted above. This is a much-needed show of contrition, as humility is something experts tend to lack. The publication has good reason to be humble, though: in 2008 it predicted that oil would stay in the $60-80 per barrel range; it was confident Silvio Berlusconi could not return to power in Italy; that Ken Livingstone would still be the Mayor of London; and that Hillary Clinton would be sworn in as US president in January 2009.

Oh, and in addition it failed to warn us even vaguely that the world economy faced a possible meltdown in 2008, that major corporate names would end the year in the dustbin of history, that financial contagion would sweep across the world, that stockmarkets would collapse in the most dramatic fashion. It also predicted an orderly re-election for Mwai Kibaki in Kenya, and nearly 6 per cent GDP growth in Kenya in 2008. We will be lucky if we get half of that.

The Economist was not alone. Its former editor, Bill Emmott, had to publish his own humble apology in Britain’s Guardian, after rubbishing the possibility of economic catastrophe in August 2008. Jim Cramer of CNBC was as bullish: “No! No! No! Bear Stearns is not in trouble”, he shouted on March 11, 2008. Five days later, Bear Stearns was in REAL trouble. “In today’s regulatory environment, it’s virtually impossible to violate rules.” Who said that? Why, it was Bernie Madoff, who was violating every known rule and is now sitting on top of a $50 billion fraud. Note that this gentleman was once the NASDAQ chairman…

We could go on, but you get the idea. Where does this leave us? There are two main lessons to draw from all the flawed fortune-telling. First, don’t trust anything any expert tells you about the future. For all their degrees and algorithms and years of experience, they really know as little about what tomorrow holds as the quack astrologer does. The problem is, we trust learned experts and base our own plans on what they tell us. Every business I know in Kenya was predicting a record-breaking 2008. As it is, we are lucky to have limped out of the year, and may well visit the sickbed in 2009. So please take expert opinion with a healthy dose of scepticism.

The second conclusion is more important. So the experts often get it very wrong: so what? The point is not to believe in the precision of the prediction, but to analyse the thought-process producing it. Predicting and forecasting is part of human nature, whether we’re good at it or not. What we should be interested in is the agenda of ideas, in having a meaningful debate about the possibilities, in evaluating the scenarios that might unfold. That is good, productive stuff. Being dead certain about the future is just plain stupid.