110312 Rethinking Predictions

by josephgraves | Mar 14, 2011 | Business, Economics

In light of the recent devastation in Japan, perhaps its time (again) to acknowledge the limits of our knowledge and pay heed to those constraints when making predictions about nature specifically and complex systems in general (such as economics, world trade, and the environment).

While watching yet another dumbfounded scientist babble about how their assumptions failed to account for actual events that transpired (the earthquake lasted 20 times longer than any of their assumptions) I was reminded of the Vernon Cooper quote “Knowledge is of the past, wisdom is of the future.”  Knowledge masquerading as wisdom is dangerous and  implies a level of precision that doesn’t exist.   History is rife with examples of overconfidence ending in tragedy with examples from the Titanic (the unsinkable ship) to the Space Shuttle Challenger (the “O” ring probability of failure being calculated at 1 in 100,000 or a flight a day for 300 years) to the government bank bailouts ( “Among the largest banks, the capital ratios remain good and I don’t expect any serious problems”-Ben Bernanke February 2, 2008) naming just a few.

At some point we simply have to acknowledge that we can not, and will not, be able to predict with any real measure of accuracy the consequences of actions in a complex system.  Some things are simply unknowable and rather than wasting time and effort knowing precisely what has occurred, to consider the wisdom of preparedness and plain old common sense along with the acknowledgement that accidents do happen, however unfortunate.  I’m not advocating ignorance of the past, simply that we must not continue to seek artificial comfort in incomplete datasets.  In the book “Slow Money” by Woody Tasch he describes Kurt Gödel’s Incompleteness Theorem this way: “Every formula is either complete and inconsistent, or consistent and incomplete.”  Many economists (and mathematicians, journalists, and politicians)  fail (sometimes tragically) to acknowledge the incompleteness of the formulas used as the basis of prediction.

I believe a far better methodology (wisdom) for dealing with systemic complexity comes from a talk I recently posted by Guy Kawasaki during which he suggests businesses perform a premortem on what circumstances might cause them to fail and address the problems before failing rather than waiting to conduct a postmortem assessment.  This slight but significant change in mindset removes the false sense of security resulting from flawed calculations performed with incomplete data (it’s impossible to know or control every variable).  In its place an iterative approach can be adopted to overcoming challenges as they are discovered with each cycle of assessment uncovering (hopefully) new errors and flaws to be remedied.

I’ll close with a few quotes:

“Where is the wisdom we have lost in knowledge?  Where is the knowledge we have lost in information?” -T.S. Eliot

“To know that we know what we know, and that we do not know what we do not know, that is true knowledge.” -Thoreau

“It is the tragedy of the world that no one knows what he doesn’t know – and the less a man knows, the more sure he is he knows everything..” -Joyce Cary