TOTD 2018-02-07: Experts

Ever since the 19th century, the largest industry in Zambia has been copper mining, which today accounts for 85% of the country’s exports.  The economy of the nation and the prosperity of its people rise and fall with the price of copper on the world market, so nothing is so important to industry and government planners as the expectation for the price of this commodity in the future.  Since the 1970s, the World Bank has issued regular forecasts for the price of copper and other important commodities, and the government of Zambia and other resource-based economies often base their economic policy upon these pronouncements by high-powered experts with masses of data at their fingertips.  Let’s see how they’ve done.
World Bank forecasts of copper price vs. actual price, 1970–1995

The above chart, from a paper [PDF] by Angus Deaton in the Summer 1999 issue of the Journal of Economic Perspectives shows, for the years 1970 through 1995, the actual price of copper (solid heavy line) and successive forecasts (light dashed lines) by the august seers of the World Bank.  Each forecast departs from the actual price line on the date at which it was issued.

Over a period of a quarter of a century, every forecast by the World Bank has been totally wrong.  Further, unlike predictions made by throwing darts while blindfolded, where you’d expect half to be too high and half too low, every single prediction from the 1970s until 1987 erred wildly on the high side, while every one after that date was absurdly pessimistic.  You’d have made a much better forecast for the period simply by plotting a random walk between 50 and 100.

And yet people based decisions upon these forecasts, and those in the industry or who depended upon it for their livelihood suffered as a result.  Did any of the “experts” who cranked out these predictions suffer or lose their cushy jobs?  I doubt it.

In the investment world, firms and forecasters are required to warn potential customers that “past performance is no guarantee of future results”.  But in a case like this, past performance is a pretty strong clue that the idiots who turned it in are no more likely to produce usable numbers in the future than a blind monkey firing a shotgun at the chart.

Now, bear in mind what Michael Crichton named the “Murray Gell-Mann Amnesia Effect”:

You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them.

In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.

The next time you hear a politician, economist, or other wonk confidently forecast things five or ten years in the future, remember the World Bank and copper prices.  Odds are the numbers they’re quoting are just as bogus, and they’ll pay no price when they’re found to be fantasy.  Who pays the price?  You do.

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TOTD 1/2: Small Business

Mine, that is.  Today is the fifteenth anniversary of the startup of my LLC, and also marks the year my total of independent employment exceeds my years as an employee of others.  Although the legal details were prepared and registered (quietly) in December of ’02, fifteen years ago today, three of my peers and I simultaneously resigned from the industrial systems integration firm of which we were senior employees.

We each had discussed our frustrations with the 51% owner’s management style, and his apparent intention to never yield any more ownership to future partners.  Gaining ownership was a five-year goal I had stated outright when I interviewed for that job, with that owner, four years before.  Or more precisely, when asked for my five year goal, I answered “Ownership of or partnership in a company like yours.”

The early years were quite difficult, as we had taken the high road with existing customer relationships — no hint whatsoever what was to come prior to our actual startup.  A few customers followed us to the new company, but most took a wait-and-see approach to the new startup.  And our old boss wasn’t shy about sharing his feelings about his former staff.  Our partnership’s (actually an LLC operated as an S-Corp) size fluctuated in the first few years as the rigors of full independence exposed some flaws and highlighted some opportunities.  The LLC stabilized at three members by the end of 2006.

The downturn of 2008 hit my last two partners quite hard, as their customer relationships were dominated by residential and commercial building products manufacturers.  With Obama’s economy failing to bring any normal recovery, they both left in 2011.  The first solo year for me was a great year, as I discovered that my own projects were quite profitable under the new low-overhead regime.

Juggling multiple customers entirely alone does have its downsides, and I put a fair amount of effort into cultivating complementary relationships with other contractors with related skill sets.  I also expanded the scope of the business to include more software content (SCADA in particular), something my less-geeky former partners were never comfortable pursuing.  The slowly morphing direction of the company has inspired other changes: for the first time, the company (me!) hired an actual non-owner full-time employee.  Given that one can’t actually hire someone out of any engineering school with the combination of skills that make me valuable in the market, I went outside normal procedures and hired a non-degreed whiz kid that I knew from a Linux users’ group.

I’ve not regretted it.  First, a non-degreed employee is cheaper to hire.  Second, you don’t get any mistraining in industrial concepts that engineering schools are prone to produce.  And if you pick someone with demonstrated self-motivation and an aptitude for technology, you can expect their skills to match a degreed individual in relatively short order.  I’ll probably have to pay this kid’s way through a tech degree to keep him, but I expect it to be worth it.  I’ve poured more resources into the company this past year than in any previous year (training the new minion, mostly), and am looking forward to the rewards of business risk-taking.

It almost certainly wouldn’t have happened if Hilary had won.

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