The Rock Star Economist

http://www.boston.com/bostonglobe/ideas/articles/2011/01/09/that_guy_who_called_the_big_one_dont_listen_to_him/?page=full

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"The devil doesn't have to steal anything from you, all he has to do is make you take it for granted." (Max Lucado)

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When we first saw that Nouriel Roubini was graciously accepting credit for calling the worldwide financial crisis in 2007, our reaction was that anybody that predicted that level of "doom" for 25 consecutive years was bound to find a year when his predictions would actually come to pass.

Now we have Joe Keohane's article in the Boston Globe about "Dr. Doom" (Roubini) where Keohane happily points out that Roubini has picked up where he left off continuing to spread "doom" but unaffected by the fact that he's wrong. In October of 2008, he predicted that hundreds of hedge funds would fail and that the government would have to close the markets for a week or two to cope with the shock. Oops: did not happen.

In January of 2009, he predicted that oil prices would stay below $40 for all of 2009 arguing that car companies should rev up production of gas-guzzling SUVs. By the end of the year, oil was a hair under $80, Hummer was on the way out, and auto makers were tripping over themselves to develop electric cars. Oops: did not happen.

In March of 2009, he predicted the S&P 500 would fall below 600 that year. It closed at over 1,115 which was up 23.5% year over year, the biggest single year gain since 2003. Oops:did not happen.

Keohane goes on to point out that a recent study concludes people who successfully predict extreme events ... don't do so because their judgment is so sharp. They do it because it's so bad.

A study of the semi-annual WSJ Economist Survey concluded that "economists" who had a better record at calling extreme events had a WORSE record in general. Analogously, this becomes the situation where the broken clock is right twice a day.

So, those who correctly predict extreme events have a greater tendency to make extreme predictions; and those who make extreme predictions spend most of their time being wrong.

Keohane has so much more to say, especially about studying "success," but for today lets settle for Dr. Doom being not quite as perfect at predicting as he and others think.

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Paranthetically, we would like to thank Myles Reilly, an outstanding graduate of our business school for remembering how I feel about Dr. Doom and bringing this article to my attention! It's people like Myles that continue to inspire me to share what I can with students.