Black swans, Libya and crude oil

I’ve said before that market and economic predictions are not a good move unless you want to look foolish.  But people still make them. 

The only prediction I made was that things wouldn’t stay the same – so predictions would make the predictor look silly.  And trying to base regulations and policies on the predictions, would go badly.

Still, the fact that I’m right doesn’t stop anybody predicting, even though, as with the oil price rises and the situation in Libya, nobody actually predicted what would happen. 

Except – sorry to sound boastful – me.  I said chaos meant that the “experts” would predict things, be proved wrong and then justify themselves.  And of course, it happened.  It’s happening now.  I said, in an article for a newspaper:

Everybody thinks they can now explain the economic crash, say what caused it, what should have been done, how all the factors interacted. But a point made by Taleb in ‘The Black Swan’ is that if you ask people to describe the pool of water that will form from a melting ice-cube, they can do it, test whether they are right and most of the knowledgeable ones will give the same, single correct answer.


If you show them a pool of water and ask them what shape the ice-cube was, they can’t test whether they were right, don’t all give the same answer and nobody actually knows whether any of the explanations were right. In reality, markets are like that.” 


Nobody knows what is going to happen in Libya, or to oil prices.  Nobody knows why what has happened has happened, why it happened now not next week or last week, what its effects will be or whether the oil prices are directly related to Libya at all (so if the situation resolves, will oil prices fall to the level they were before, if it gets worse, will prices rise? etc.)  But we have quotes such as this, including:   

“The potential impact of high oil prices on economic growth meant the FTSE 100 Index continued its poor week, falling by as much as 60 points early on and later standing 30.5 points lower at 5893.3.” 

So they think they know what the effect on oil prices will be, know that it is this that has the impact on the FTSE and that nothing else is having an impact.

Of course, really, they know they don’t know, but feel they have to say something.  But all the other commentators say the same things.  They all talk about lots of guesses and assumptions as if they were facts and assume “cause-effect” links that might not exist as if they are proven.  And everybody forgets that they are guesses and assumptions.  And when the next “Black Swan” comes along, or chaos means that things don’t work out the way they predicted (oil prices fall anyway, Libya has a bloodless coup but oil prices go through the roof, Martians invade) they make another set of guesses and set out some new justifications for why their previous ones were wrong.

It’s all quite entertaining, as long as you don’t believe any of it and don’t base your own finances on it. 

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