Matthew Syed, for those who are not aware, was a world class table tennis player who turned into a foremost writer on sports psychology and his latest book, Black Box Thinking, he tries to understand why we don’t learn more from our failures. He does agree that some industries are better than others at learning from failures, the airline industry is one he focusses on. As an illustration he refers to use of one not two black boxes, in a plane to identify as much information as possible. Pilots voluntarily write reports on any incident. The medical industry, in his opinion, is an industry that is not good at learning from its errors, too quick to blame external factors and less to blame faults in methods.
Mathew also believes economists fail to learn from previous errors, as an example he recalls how many market professionals failed to predict the crash in 2007. Googling “why do economists fail” there are plenty of articles which have tried to answer this question. Davos 2011 invited 5 economists to defend their industry, in an attempt to analyse the issue. At the forum one economist argued that it’s not the forecast that is wrong, it’s the timing they can’t get right. The trouble is timing is vital, buy or sell at the wrong point, as every fund manager is aware can have implications for years.
Economic Predictions research project is a non-profit organisation whose aim is to promote the development and accuracy of economic research and financial journalism. This body tried to identify who correctly predicted the 2007 crisis ahead of the time and not post the event. Their first conclusion was that no central bankers or governments correctly predicted the crash, nor did the world of investment banking. They did identify that there were at least three credible early warning signs. One went early and appeared to lose confidence, the second was little known but appeared the most accurate and the third an investment manager.
Markets fail for the same reason banks do, people lose confidence in them. Baer Stearns collapsed as lenders stopped lending to them and clients started to withdraw funds, counterparties basically lost confidence in the bank.
The 1987 stock market crash could have happened at any moment, at the time there appeared to be no discernible catalyst, no momentous event to create the sell-off. Not unlike 2007, at the time not many appeared to see the fall coming.
Last week equity markets around the globe fell between 3 to 4%, this week before Friday the Ftse 100 had regained nearly all of last week’s losses. Not a great deal on the face of it has changed in the past five days from the previous five days to create this change in mood. At the start of the week, not too many would have predicted that. When the next major market correction comes, this time it feels like everyone will have predicted this one, again it’s all about timing.