Wednesday, July 10, 2013
How to be a Nostradumbass
...or, in case you're me, a "Noahstradumbass".
Here's a quick guide for making easy ("dumbass") predictions that are nearly guaranteed to be borne out by events, thus making you look like a sage. The key is to make non-time-sensitive predictions of things that are very likely to happen at some point in the infinite future.
For example: "The S&P 500 will eventually hit 6,000." OK, sure. Suppose that stock prices are a random walk (or if you prefer, stock returns are a fractional Brownian motion with drift, driven by tempered stable innovations with ARMA-GARCH volatility clustering blah blah blah). Well, the variance of a random walk goes to infinity as you look farther and farther into the future. So if you wait long enough, it's a statistical certainty that someday the S&P will hit 6,000. And your prediction will be "vindicated". But at (almost) any point in time, 6000 is NOT the optimal forecast for the future price of the S&P.
Lots of things in finance are pretty similar to (lognormal) random walks. Exchange rates, stock prices, etc. So you can be a Nostradumbass by making predictions about these things but conveniently leaving out the time frame (e.g. "all fiat currencies go to zero eventually"). Make sure to make up a neat story to "explain" your prediction. If the dollar is at 0.8 euros and you predict that someday it'll go to 0.4 euros, make sure to call a "bubble". Actually, the "bubble" story is an especially handy one, since you can say "No one can predict the timing of a bubble burst, but it has to burst eventually, and the fundamentals point to a true value of 0.4."
(If anyone asks you where you got your prediction, tell them you got it from many years of carefully studying the Human Action Axiom.)
OK, here's an even easier example. Some things probably can't go on forever, so according to Stein's Law, they will someday end. So just find something that probably can't go on forever, and predict that it will someday stop. For example, China probably can't keep growing faster than rich economies forever (no country can). So just predict that someday, China's growth will slow. Bingo! As soon as the inevitable happens, you will be "vindicated" and appear "prescient". It might take 10 years, but the resultant glory will be worth the wait.
Now, maybe people are ribbing you about the fact that your predictions don't come with a time frame. Never fear. A slight upgrade to your Nostradumbass strategy will silence the doubters. First, find something that is probably stationary, like real interest rates. Then predict that they'll return to their long-run level. Make sure that the time frame of your prediction is longer than the typical time frame of mean reversion for that variable - so if interest rates usually revert to the mean in 5 years, predict that interest rates will normalize within 10 years.
(Note: Be careful with this last strategy! This strategy does have a nonzero chance of failing. If the thing you thought was stationary is not in fact stationary - for example, if you think economies always bounce back within 10 years of a recession, but actually GDP is unit-root, then you're in trouble! But on average, things that look stationary will turn out to be stationary, and so on average your predictions will be "vindicated" using this strategy.)
But always, always remember the cardinal rule of the Nostradumbass: Make up a good story. Your story should have two key characteristics: 1. Originality, and 2. Truthiness.
1. Originality. If you're predicting that China's growth will someday slow, your story should not be something like: "Eventually, technological catch-up will be exhausted and the marginal product of capital will fall." These are things that everyone knows! No one will think you're a sage for citing these things. Instead, say something like "China's type of growth model is unsustainable." Originality means that instead of applying a well-known formula or just looking at the historical pattern, people will think that they need your unique insight into the quirks and complexities of the present situation.
2. Truthiness. Remember, people suffer from confirmation bias, meaning they like to hear stuff that dovetails with their existing beliefs. Tell people a story that jives with their political prejudices. If you're predicting a 50% drop in stocks (someday!), tell people that it's because America's economy used to be built on sound economic fundamentals and sound money, but that government meddling and the liberal contempt for private business have eroded our foundations. Eventually - who can say when! - the markets must realize this, and the bubble will pop. Truthiness allows you to increase the sense of pleasure your believers get when your prediction is finally "vindicated".
To sum up: The world is full of both statistical randomness and simple well-known inevitabilities. But humans are full of confirmation bias, the need for the illusion of understanding, and the need to believe in sages. You can take advantage of these two facts and become a respected sage without ever having to do any really hard thinking. The Nostradumbass life is a good one.