In Minority Report (an excellent Tom Cruise sci-fi thriller based on a Philip K. Dick story of the same name), crime is virtually eliminated in the future, thanks to an elite law-enforcing "Precrime" squad that uses three genetically altered humans (called "Pre-Cogs") with special powers to see into the future and predict crimes beforehand.
Now, staring at the rubble from our financial system meltdown, imagine putting the stimulus bill (or the bank rescue) through a massive computerized model of the economy to test out how the plan will play out in the future – before it hits the market, and our pocketbooks.
As Portfolio Magazine shows in ‘The Crash-Test Solution,’ mathematicians, scientists, and other experts in ecosystems and weather are at work developing such a model around the premise that the systemic equivalent of Pre-Cogs can do better than human intuition at ensuring that the boom/bust cycle of the past 25 years never happens again.
Here is an Excerpt: The idea is that by studying so-called complex systems—traffic flow, ecosystems, organisms, weather—we can begin to make sense of an increasingly unpredictable economic world. Didier Sornette, for instance, is a world expert on earthquakes. Now he’s heading up a lab in Zurich called the Financial Crisis Observatory, examining how frothy markets show the same signs of stress that the earth shows before an earthquake. Sornette’s group is trying to develop the ability to provide economic warnings, in part by monitoring the stocks of the 500 largest U.S. companies.
Two thoughts. One is that the best laid plans of mice and men often go awry, a pithy quote perfectly underscored by Nassim Nicholas Taleb’s “black swan” construct, which is an argument that it’s not the normal, mundane “white swan” events that drive socioeconomic history, but rather the magnificent outliers, the completely unexpected “black swans.”
In other words, no model, now matter how complete or anticipatory of all of the probabilistic scenarios, can predict (and thus prevent) the unpredictable.
To think otherwise is to ignore the lessons of history.
Two is that, regardless of the inevitability of random chaos, there is a strong case for scenario planning; namely, building up models for anticipating the “type of outcomes” that might play out and delineating their implications from a (scenario) focus perspective to drive better planning and response optimization/mitigation strategy.
For example, what if the government built up a massive database of (near) real-time fiscal scenarios, underlying assumptions, probabilities of different outcomes and impacts from same, and made that data transparent, public and extend-able.
Is it reasonable to expect that the added transparency of data and the depth of analysis available in the public domain would provide a moderating function to our financial system?
What if there was a ‘prediction market’ overlay to the system (ala Intrade Prediction Markets) to enable amateurs and professionals to transparently put their money where their mouth is? Would the visibility of such data act as a throttle on market volatility?
Interesting stuff, as I am both an advocate of formalized scenario planning methodology (read 'The Art of the Long View' for more on this topic) and a big fan of Taleb (although 'Fooled by Randomness,' his predecessor to Black Swan, is a better read).
Related Posts:
- Getting Real: On Doomsday, the Demise of So-Called Experts and the New Arbitrage
- Black Swans and Bank Runs: Why the financial crisis was predictable
- Prediction Markets: Predictions, Markets and the Wisdom of Crowds
