The Fortune Sellers: The Big Business of Buying and Selling Predictions
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The Fortune Sellers: The Big Business of Buying and Selling Predictions
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Overview
No one can foretell the future. Or can they? There are many who purport to-and they are making a fortune. From meteorologists to investment advisers, prognosticating professionals are part of a multibillion-dollar industry. No longer merely fortunetellers, they are fortune sellers, offering us a commodity we're more than eager to buy: the future.
In this piercing and provocative expose, business consultant and forecasting expert William Sherden casts an unblinking eye on the booming business of predicting the future, separating fact from fallacy to show us not only how best to use the forecasts we're given, but how to "select the nuggets of valuable future advice from amongst the $200 billion worth of mostly erroneous future predictions put forth each year.
Product Details
| ISBN-13: | 9780471181781 |
|---|---|
| Publisher: | Wiley |
| Publication date: | 10/28/1997 |
| Pages: | 320 |
| Product dimensions: | 6.34(w) x 9.43(h) x 1.09(d) |
About the Author
Read an Excerpt
The Second Oldest Profession
What will the future bring? The question expresses the terrible uncertainty we live in, an uncertainty that we would pay dearly to resolve. Isaac Asimov, the famous writer of futuristic fiction, observed, "If I were asked to guess what people are generally most insecure about, I would say it is the content of the future. We worry about it constantly."
The desire to know the future is a deep human psychic need. It lies at the foundation of virtually every religion created since our earliest days as conscious thinkers. Pope John Paul II notes that people are drawn to religion to answer the really big questions--for example, "What is the ultimate ineffable mystery which is the origin and destiny of our existence?"
The desire to know the future also has great allure because of the material benefits one can accrue. Making instant millions on Wall Street would be a piece of cake if you knew whether the economy was going to expand or contract at a particular time or which technologies were going to become commercial successes. If you knew that a spate of unusually bad earthquakes or hurricanes was going to strike, you could short-sell property insurers for a handsome gain. You could make a killing in the commodities market if you could predict the climate for next year's growing season.
Though the title of "second oldest profession" usually goes to lawyers and consultants, prognosticators are the rightful owners. Our earliest written records, from 5,000 years ago, show that forecasting was widely practiced in the ancient world in the form of divination, the art of telling the future by seeing patterns and clues in everything from animalentrails to celestial patterns. No doubt these ancient seers had power and material wealth. Isaac Asimov wrote in his book Future Days, "Such was the eagerness of people to believe these `augurs' that they had great power and could usually count on being well supported by a grateful, or fearful, public."
The Oracle of Delphi has been the most successful prediction business in history. The Oracle prophesied for ancient rulers from about 700 B.C. to A.D. 300, pronouncing on such important matters of state as whether to wage war or to form strategic alliances. The Oracle's success is clearly evident from the vast architectural investment that we can still see today at Delphi and its longevity as a prediction business. It is rare for anything, let alone a business enterprise, to last a thousand years.
Today the predicting business is a multibillion-dollar industry providing employment to hundreds of thousands of people (see Figure 1.1). They work in diverse professions ranging from P.h.D.-intensive scientific fields, to basic white-collar positions, to the purveyors of the paranormal. Mind you, when it comes to foretelling the future, it is sometimes hard to distinguish science from paranormal, and professional from amateur, because the track records are often so similar.
Not surprisingly, the largest group of forecasting professionals are those most closely associated with making money: investment advisers. According to the Securities Industry Association (SIA), a whopping half-million people are licensed by the National Association of Securities Dealers to advise clients on buying securities. They come from all walks of life, and about 200,000 of them actively make a living advising you and me on how to invest our money.
The SIA estimates that, of these 200,000 investment advisers, nearly half are stockbrokers working at securities firms. In fact, almost everyone working in the $71 billion securities industry is involved in projecting the future of investments. The industry employs a large number of "strategists" who project where the overall market is headed and analysts who predict which stocks to buy and sell. Thousands of investment analysts work for investment research firms, whose days are spent cranking out newsletters and research reports.
The Securities and Exchange Commission (SEC) has licensed about 10,000 money management firms. These outfits make up a $50 billion industry that includes everything from major financial institutions like Prudential and Citicorp to thousands of small investment boutiques. According to the Employee Benefit Research and Investment Company Institutes, these tens of thousands of money managers provide investment predicting advice in managing $7.5 trillion in pension, endowment, and mutual funds.
There are 172,000 loan officers predicting whether you will default on your business loan, mortgage, or credit card, and 15,000 actuaries busily crunch statistics about when you are likely to die, be disabled, wreck your car, or suffer damage from a hurricane or an earthquake.
The Statistical Abstract of the United States reports 148,000 people purporting to be economists--whatever that means. There is no professional credentialing for economists. Whether employed by government agencies, corporations, economic consulting firms, or academia, economists generally forecast the impacts of proposed policies and programs on the economy and its industrial sectors.
The Bureau of Labor Statistics counts 208,000 people who call themselves consultants, which no doubt includes a sizable segment of those without "real" jobs in industry. Although consultants work on a variety of assignments, much of their work is prediction oriented. The typical consulting assignment involves advising clients on how future trends will affect their business--usually not a pretty picture--and then proposing new courses of action to ward off these coming adversities.
Weather forecasting is approximately a $5 billion business employing 6,000 schooled meteorologists and a large number of forecasters, whom those meteorologists consider to be "paraprofessionals." The federal government employs about two-thirds of the meteorologists, mostly at the National Weather Service but also in the armed services (weather has always been a major factor in warfare). The other third work for the hundred or so private forecasting firms or for industries--transportation, for instance--that are severely affected by weather.
The World Future Society boasts a membership of 30,000 "futurists" who predict how we will live in the future, what our society will be like, what the long-term threats are to our nation, how technology will change the workplace, and other big-picture issues. Businesses rely on futurists to keep pace with emerging lifestyles in developing new products and marketing messages. Businesses, for example, might develop new snack foods to fulfill the emerging needs of the couch potatoes of the future.
Additionally, there are numerous futurist types employed throughout government in such organizations as the CIA and the National Security Council. Then of course there are the "beltway bandits": the independent think tanks that advise government agencies in making policy decisions that will affect the future of society and government.
A look at the prediction industry would not be complete without the news media, which flood us every day with forecasts of all types. Daily newspapers contain predictions about the weather, economy, stock market, politics, society, science, and geopolitical trends and events. Many routinely include horoscopes. Much of the editorial page is speculation. The National Inquirer, the number-one-selling newspaper in the United States, thrives on prophecy.
THE REIGN OF ERROR
Each year the prediction industry showers us with $200 billion in (mostly erroneous) information. The forecasting track records for all types of experts are universally poor, whether we consider scientifically oriented professionals, such as economists, demographers, meteorologists, and seismologists, or psychic and astrological forecasters whose names are household words.
In fact, these experts whose advice we pay handsomely for routinely fail to predict the major events that shape our world, or even the major turning points--the transitions from status quo to something new--whether it be the economy, stock market, weather, or new technologies. Recent events that caught the forecasters by total surprise include the 1987 stock market crash and its subsequent rapid recovery to record heights; the entry of women into the workforce in massive numbers; the fall of communist Eastern Europe; the Gulf War; the decisive Republican victory in 1994 congressional elections; all recessions, including the crash of 1929 and recent, smaller blips in the financial markets; the use of lasers to transmit telephone messages (even though the phone company's researchers at Bell Labs invented it); and the floods in the Mississippi River valley in the summer of 1993 and those that plagued California during the winter of 1995.
How could all our experts miss calling the fall of communist East Berlin? With all our massive investment in foreign intelligence and our aggressive news media, how did such a momentous event elude them? Why wasn't it predicted months ahead--or even the day before?
No doubt you could name an expert or two who predicted some big, surprising event. But ... did they really? It is very hard to distinguish a long-shot direct hit from pure chance. The laws of probability dictate that if thousands of forecasters make thousands of predictions, someone at some time is bound to make a spectacular direct hit. Typically, these lucky few enjoy their fifteen minutes of fame before sinking back into the ranks of mediocrity as they revert to meting out egregiously wrong forecasts.
A prime example is the stock market guru Elaine Garzarelli, who is said to have predicted the 1987 stock market crash--the worst since the Great Depression. At no time before or after this famous forecast has she ever made any similar long-shot forecasts that proved to be true. In fact, her long-term stock prediction track record is rather poor, judging from the performance of a mutual tuna she ran for seven years. During this time, her fund increased 38 percent while the Standard & Poor's 500 Index increased 62 percent. Her employer at the time finally shut down the fund in August 1994.
FUTURE IMPERFECT
Even with all the advances in science and technology that are available to them, the experts are not getting any better at prediction. In some respects, we are hardly better off than the Romans or Greeks, who read animal entrails to make major decisions regarding the future.
How can the experts get it so wrong? The prediction industry attracts some of the best and brightest minds, in addition to enlisting the latest technology. The answer is that the experts are trying to do the impossible. Until recently, scientists viewed the world as an orderly place governed by immutable laws of nature. Once uncovered, it was believed, these laws would enable scientists to determine the future by extrapolating from historical patterns and cycles. This approach worked well for Sir Isaac Newton; once he discovered the mathematics of gravity, he was able to predict the motions of our planets. Since then, scientists have continued to apply the same formula: more laws, more patterns, more predictions.
This line of thinking, called determinism, is based on the belief that future events unfold following rules and patterns that determine their course. Dr. Ravi Batra, a recognized economist from Southern Methodist University and a best-selling author of economic prophecy, illustrates his deterministic thinking this way: "History follows a certain pattern, which is observable and which can be used to forecast the future course of events."
Current science is proving this deterministic view of the world to be naive. The theories of chaos and complexity are revealing the future as fundamentally unpredictable. This applies to our economy, the stock market, commodity prices, the weather, animal populations (humans included), and many other phenomena. There are no clear historical patterns that carve well-marked trails into the future. History does not repeat itself. The future remains mostly unknowable.
That we cannot predict the future has been known to better minds for many years. After an unsuccessful stint as a futurist, Winston Churchill complained that the future was one damn thing after another. Benjamin Franklin quipped that the only things certain in life are death and taxes; this, however, did not dissuade him from doing a little prophesying on his own under a pen name in his Poor Richard's Almanac. Being shrewd, he no doubt knew that prophecy was a lucrative business. Peter Drucker wrote in his seminal business book, Management, "Forecasting is not a respectable human activity and not worthwhile beyond the shortest of periods."
The chaotic path that the future takes is captured especially well in the old verse, "But for a nail the shoe was lost, but for a shoe the horse was lost, but for a horse the soldier was lost, but for a soldier the war was lost, but for a war the kingdom was lost." This verse perfectly describes the tumultuous events that led to the unpredicted fall of East Germany. But for a 100,000 intrepid protesters, a few East German generals disobeying orders to attack them, and Soviet premier Gorbachev's refusal to intercede--unlike his predecessors in similar circumstances in Hungary, Czechoslovakia, and Poland--the crown jewel of the iron curtain for fifty years toppled, hastening the fall of the rest of communist Eastern Europe. So many quirks of fate emerged from the complex geopolitical system that the experts failed to predict this momentous event.
Although chaos and complexity theories alone are sufficient to doom prediction, there are other barriers that obscure our view of the future, such as "situational bias": the phenomenon by which our thinking is so obscured by present conditions and trends that we cannot been to see the future. For example, for many months following the stock market crash of 1987, economists and market analysts continued to put forth gloomy forecasts even while the economy and the stock market were on their way to record highs. Similarly, after the harsh winter of 1994, meteorologists generally predicted a cold spring and late summer. The weather ended up being unusually warm and pleasant. I. F. Clarke, a historian of future thinking, characterized situational bias well, as follows:
Traditional beliefs, professional attitudes, customary roles, inherited symbols, sectional and national interests--these make it extraordinarily difficulty for all but the most original of minds to break away from patterns of thought and go voyaging on the unknown seas of the future. In consequence it is a rare forecast that makes any allowance for the essential waywardness of human affairs and does not insist on a strict, continuity between self-evident present and the evidential future."
This rain of forecast error has a far greater cost than the approximately $200 billion that consumers and businesses spend on predictions. Individuals, businesses, and governments bear significant financial risk when they use faulty forecasts to make important decisions. As individuals, we pay a large psychological cost when doom-and-gloom predictions gives us needless anxiety. Then there is the cost of just plain being duped.
VOODOO ECONOMICS
Banking on faulty predictions is hazardous business. Yet there are few significant decisions made by governments, businesses, and individuals that are not accompanied by some type of forecast.
Governments continually make major decisions based on faulty forecasts, with disastrous effects that businesses and individuals pay for in higher taxes, increased inflation, and other ways. Reaganomics, for example, was a costly strategy based on a failed economic prediction that a massive tax cut would so stimulate the economy that total tax receipts would increase, thus enabling the administration to spend like crazy on national defense while still balancing the federal budget. George Bush aptly called this idea "voodoo economics." By the time the Reagan administration left office eight years later, it had converted the $1 trillion deficit it inherited from President Carter into a $3 trillion deficit.
Businesses are similarly vulnerable to faulty forecasts, especially when making long-term investments. One hapless executive I know invested heavily in building a new plant for refining copper ore, on advice from a leading economic consulting firm that predicted a substantial increase in copper prices over the long term. At the time, the decision was perfectly logical, except for one small detail: The prices for copper and other commodities fluctuate randomly. Unfortunately, copper prices plunged, making the new plant a financial disaster.
Decision makers in business and government also rely on faulty technology forecasts, to great cost. In the 1980s, for example, a number of leading corporations wasted hundreds of millions of dollars developing videotext technology for home shopping services that experts said would be the wave of the future. The technology failed to win customers, and the videotext ventures folded.
Ten years ago, one CEO bet his company on developing a product for home banking, based on a leading consultant's prediction that home banking would follow in the wake of ATMs and become the next wave in high-tech banking. Home banking failed to catch on, and his firm when bankrupt. Even now, home banking remains an unproved concept with minimal customer interest; only 1 percent of Personal Computer users claim to have ever used some form of home banking services.
Any farmer who bets his ranch on weather forecasts going out more than one or two days could just as well use a roulette wheel. For all our high-tech investment in satellites, radar, supercomputers, and computer models, meteorologists have gained little save for improvements in forecasting weather over the next twenty-four to forty-eight hours. The real gains have mostly been in observing--as opposed to predicting--the weather: knowing what is happening now rather than trying to figure out what will happen in the future.
Nevertheless, many organizations involved in farming, construction, transportation, fishing, commodities, and even the armed services rely on long-term forecasts for the coming month, season, and year. These forecasts are prepared by the National Weather Service or one of the many private forecasters, or drawn from The Old Farmer's Almanac.
Finally, there is the voodoo economics of the forecasting business. I have long had a curious question about forecasters: If they are so smart, why aren't they incredibly rich? Though generally a well-heeled lot, forecasters do not in tact rank among the world's richest people. The answer, of course, is that the predictors would quickly go broke gambling on their fallacious forecasts. Instead, they make their money selling advice to others on how they should spend their money. Although the experts do not get rich quickly, they are in a much safer business because their clients take all the risk.
EVE OF DESTRUCTION
Faulty predictions also have a nonmonetary cost: needless anxiety. We are continually inundated with doom-and-gloom predictions because sensationalism sells. Every segment of the prediction industry has its purveyors of imminent disaster, telling us we are going to go broke, starve, freeze or try, drown, or suffer countless other horrors. Although these predictions of doom prove to be false, they add a new layer of exploitive and irresponsible fear and stress to our already pressured lives. Shock therapy as fiction is entertaining; when sold as scientific fact, it breeds needless anxiety.
Dreadful forecasts abound in every medium, from seemingly authoritative articles in the legitimate press and front-page stories in tabloids, experts' newsletters, to many best-selling books such as The Great Depression of 1990, The Population Bomb, and Future Shock.
The Great Depression of 1990 is a perfect example of the literature that predicts the imminent demise of our economy. Written by Ravi Batra, the book warns that we are "moving toward the greatest worldwide depression in history, in which millions of people will suffer catastrophic financial reversals ... a disaster of the same severity [as the Great Depression], if not greater, is already in the making. It will occur in 1990 and plague the world through at least 1996."
Batra tells us that he is not out to exploit the reader: "I have written this book not to scare you, but to warn you of the impending cataclysm. The evidence I will present ... is overwhelming, and can be ignored only at your own peril.... I am an economist, trained in scientific analysis, not a sensationalist or a Jeremiah ... [but] unless we take immediate remedial action the price we will have to pay in the 1990s is catastrophic."
Like a gun-toting survivalist, Batra's advice to businesses and individuals is the economic equivalent to building bomb shelters and hoarding food and weapons: avoid long-term investments--"You shouldn't begin projects that will pay off in the 1990s"--and diversify business by pursuing repair-oriented services--"which has a better survival chance in a depression than many other businesses."
If you adopted his remedy, however, you would have been worse off than the predicted disease, since few businesses could endure such corporate chemotherapy. The way I interpret this is that he tells us to do nothing to grow our businesses for ten years. At least he was consistent: if we followed his advice and made nothing new, there would be quite a business opportunity in fixing up all our antiquated stuff.
Paul Ehrlich is a professor of demography at Stanford University and the author of several best-selling books, including The Population Bomb, published in 1968. In The Population Bomb, Ehrlich predicts that by the 1990s, war and pestilence, and possibly famine, would do us in. He told us to expect that "500 million deaths--one out of every seven people--is not inconceivable." He predicts that a "killer smog" in Los Angeles will bump off 90,000 people; that the polar ice caps will melt and raise the ocean levels by twenty feet, killing many more; and that a nuclear war will finish us off by making the northern two-thirds of the earth uninhabitable. Finally, "The most intelligent creatures ultimately surviving this period are cockroaches." Scary stuff.
Ehrlich does offer a ray of hope: "Pope Pius XIII, yielding to pressure from enlightened Catholics, announces that all good Catholics have a responsibility to drastically restrict their reproductive activities. He gives his blessing to abortion and all methods of contraception."
Boston Globe columnist Jeff Jacoby called Ehrlich "the nation's most shameless fear monger ... [who has] been richly rewarded for his almost perfect record of getting things wrong." In tact, though famine exists in parts of the world, our ability to grow food today has outstripped population growth; on average, humans are better nourished today than ever before.
After writing his bestseller, Future Shock, in 1970, Alvin Toffler became the icon of futurology, and today he remains highly influential within the futurist movement. Recently, he is reported to have influence with the Speaker of the House, Newt Gingrich.
In Future Shock, Toffler told us that by the 1990s, we were going to experience psychological meltdown. We would fail to keep up with the escalating pace of change and the ephemeral nature of our relationships and institutions. Toffler told us, "In the three short decades between now and the twenty-first century, millions of ordinary, psychologically normal people will face an abrupt collision with the future." We were to suffer "the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time." We were to have "disposable spouses" and short-lived relationships. We were to succumb to the "the disease of change" and become psychologically disturbed strangers in the strange land of accelerating change.
The central theme of Toffler's prediction proved to be ... wrong. People today are not shocked by change, and in some cases they are embracing it with surprising ease. Perhaps the clearest example is the growing popularity of personal computers that give people a window on the world. The Internet and commercial network services provide all kinds of information (good and not so good), and interpersonal contact through electronic mail, various discussion groups, and message boards. Internet's user base doubles every year and links millions of people around the world. What Toffler failed to see was the ease with which anyone today can easily access advanced technology and how electronic linkages can bring people together in unforeseen ways. The only thing shocking about the future is thinking about how we ever got along without these high-tech tools.
These forecasts of our death were, of course, exaggerations. The doomsday predictions in each of these three popular books proved to contain hardly even an ounce of truth. In fact, the only difference between books like Future Shock and Aldous Huxley's Brave New World is that the former have been mistakenly sold as nonfiction. The selling of doomsday predictions is a huge business. Doomsday books sell in the millions, enriching authors and publishers, and they help sell television time and newspapers.
THE LAST OF THE TOOTH FAIRIES
Our belief in these everyday prophecies is the adult version of childhood belief in the Tooth Fairy or the Easter Bunny. So long as we believe in experts' ability to foretell the future, we go about planning and directing our lives according to false information and fictitious premises. Our belief in prophecy today is little better than the primitive superstitions of a thousand years ago.
We pay billions of dollars to acquire information that is mostly useless. Worse, when we rely on that information, we do so at great risk to ourselves, our businesses, and our governments, both financially and psychologically. So why do we persist in seeking that information?
The answer, according to leading psychologists who specialize in the area of human beliefs, is that we humans are a gullible lot. There is a lot of evidence to support this theory. A 1990 Gallup study found that nearly half of all Americans believe that psychic capabilities are possible and concluded that "Americans express a belief in the existence of paranormal, psychic, ghostly, and other worldly experiences and dimensions to a surprising degree." Superstition and the ancient art of divining the future, using anything from animal entrails to smoke, are thriving in many parts of the developing world today. Even in more advanced countries, astrology remains as popular as ever, and new strains of superstition like New Age philosophy attract large followings.
Daniel Gilbert, of the University of Texas, is a specialist in the psychology of belief and has concluded that we tend first to believe what we see and hear, and question it second--if at all.
Bertrand Russell similarly observed, "Believing seems the most mental thing we do." We find it very easy to believe--and difficult to doubt--everything we see and hear. We have a hard time discerning probabilities of events and cannot easily distinguish a long-shot prediction from something that is likely to occur by pure chance. And we are heavily influenced by authority figures. In short, we are vulnerable to being duped by experts' predictions, regardless of their poor track records.
This is as true today as it was in ancient times. Commenting on how readily his fellow Romans were duped by fortune-tellers, Cato the Censor observed, "I wonder how one augur can keep from laughing when he passes another."
However, just because we cannot predict it does not mean we can ignore the future. We must continue to plan for the future by considering scenarios of what might happen and adapting our plans accordingly. To do otherwise would be foolhardy. We cannot blind ourselves to all predictions, because some contain vital information about our environment--not necessarily what will happen but what could happen.
Our success in our work and personal lives depends to a large degree on which futuristic information we choose to believe and act on. We need to learn how to pluck the gold nuggets of advice, whether it comes as a warning sign or a clue to an opportunity, from the flood of erroneous and often sensational predictions. For example, it is important for us as citizens with some voice in our country's priorities to understand predictions of global warming, a subject that generates a continual flood of doomsday predictions. The nugget to pluck here is that scientists are concerned that the buildup of carbon dioxide and other greenhouse gases could seriously affect our future climate, but they currently do not know how, when, or even whether these effects will occur. There is a big difference between this forthright scientific perspective and, for example, Dr. Ehrlich's prediction that by the year 2000, global warming will melt Antarctica and put us under twenty feet of water.
This book is about how to select the nuggets of valuable future advice from among the $200 billion worth of mostly erroneous future predictions put forth each year, starting with weather forecasting, a familiar and at times frustrating subject.
Table of Contents
The Second Oldest Profession.When Chaos Rains.
The Dismal Scientists.
The Market Gurus.
Checking the "Unchecked Population".
Science Fact and Fiction.
The Futurists.
Corporate Chaos.
The Certainty of Living in an Uncertain World.
Notes.
Bibliography.
Index.