Climate, Economic, Financial Forecasting Models: Accuracy
Even if you believe that strict mathematical formulas can be applied to social sciences like climate, economics and finance, what if, they turn out to be off by up to 50% or even more, every time? Do you really think that these formulas are like E=mc², where mc² always turns out to be E or a+b, where it always turns out to be equal to c or water which always turns out to H2O. For example, a Cato Institute article, Model Meltdown, mentions, “This week, the United Nations‘ Intergovernmental Panel on Climate Change is slated to release its fourth report since 1990. Leaked copies indicate an admission that there has been no global warming for the past 16 years, but the report will also increase its probability from 90 percent to 95 percent that global warming — if it does occur — is caused by man. Not one of the major climate models on which the panel bases its predictions forecast the lack of warming over the past 16 years, even though the models do vary widely as to how much warming they predicted.” The article which was originally published in Washington Times goes on to include this chart about the accuracy of Obama administration’s economic forecasts:
On the other hand, “Declaration of G20”. Whitehouse.gov. Retrieved February 27, 2009, mentions about 2008 financial crisis, “Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products”. In a Peabody Award winning program, NPR correspondents argued, “Giant Pool of Money” (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. This pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with products such as the mortgage-backed security and the collateralized debt obligation that were assigned safe ratings by the credit rating agencies.” A Wikipedia article, Financial crisis of 2007–08, states, “The collateralized debt obligation in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. This essentially places cash payments from multiple mortgages or other debt obligations into a single pool from which specific securities draw in a specific sequence of priority. Those securities first in line received investment-grade ratings from rating agencies. Securities with lower priority had lower credit ratings but theoretically a higher rate of return on the amount invested.” Same article, also writes, “This boom in innovative financial products went hand in hand with more complexity. It multiplied the number of actors connected to a single mortgage (including mortgage brokers, specialized originators, the securitizers and their due diligence firms, managing agents and trading desks, and finally investors, insurances and providers of repo funding). With increasing distance from the underlying asset these actors relied more and more on indirect information (including FICO scores on creditworthiness, appraisals and due diligence checks by third party organizations, and most importantly the computer models of rating agencies and risk management desks). Instead of spreading risk this provided the ground for fraudulent acts, misjudgments and finally market collapse.”
The reasons for continuous failure of these models to forecast with accuracy is first of all it is extremely difficult to include all the contributing factors in any analysis. Plus, the outcomes in social sciences like economics and finance are heavily influenced by factors which are virtually impossible to measure, like human psychology and behavior, and available information, access to that information, and understanding, appreciation and comprehension of that information. In addition to this, these forecasts are highly tinged with ideologies. Does this mean that it is impossible to have a proper learning and understanding of social sciences? Is it really impossible to estimate the outcomes? Of course not. But, this requires a more logical and obvious method of estimation, which many of so called experts don’t want to use because of it doesn’t fit their ideological preferences.
This really obvious and logical method is learning from history and past experiences of our own, and others, around the world. You do not have to be genius to know, what happened to the government controlled and centralized economies in recent past. All the major ones are now back to open markets, have been able to reverse their course and are growing, some really fast. Others, who insist on government regulating and controlling everything are still struggling and going downhill.
In past, we built the richest economy, ever, in human history, not by strict government controls, but, by individual creativity, innovation, entrepreneurship, competition, hard work and talent. Of course, Capitalism does not mean the crony capitalism and corporatism, which we have transitioned to, over time, as a result of ever increasing interference from government, which itself has been growing exponentially in terms of size, authority and spending. Anyone who has just a little bit of common sense, and knowledge of history and human behavior, knows that authority and secrecy, two biggest hallmarks of our government in recent times, always leads to corruption.
Different critics point out to different causes of us gradually losing the number one status. To me, it is very obvious. It is the most despicable alliance between corporations, big media and so called two major political parties. Corporate money and their lobbies, continuous disinformation and propaganda from big media and misguidance from politicians, has got us into trap, in which the open markets are being increasingly strangled by the governmental and corporate monopolies and oligopolies. Under the influence of these three strong factors, our whole education system is also heavily influenced by assumption based ideologies, which have failed the test of time. Corporations finance the campaigns of crooked politicians; media provides them a coverage fully biased in their favor, and does a complete blackout of more reasonable politicians and political parties; politicians sell the corrupt ideas, dictated by corporations and lobbies, to general public; and so called scholars and graduates of these educational institutions, forecast the success of this cronyism.