Thursday, February 10, 2011

They missed the crash because they counted the wrong units

Although very few economists, if any, predicted that this would take place in 2008, many of them probably assigned a positive probability to a crisis occurring at some point in the not too distant future.
This is another study on why experts miss so many disruptive events. Bottom line, they count in units of time when the correct units are sequences of trades. Ask the economists what sequence of events will occur before the next crash, not how long before the next crash. When they count possible events, they divide up the partition of possible future paths and get a likelihood result.

Example:  We know the Tea Party will go through a series of budget attempts and march down a chain of discovery until they face the welfare demands of their own supporters. They will learn about 60% of these contradictions in the next few budget attempts, and then split into two groups, Debt Loving Populists and Big Government Conservatives, by a 5 to 3 margin.

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