About 5 years ago,1 I started reading a book filled with humorous anecdotes that were highly instructive about the limitations of human decision-making. “Adventures in the Screen Trade,” by screenwriter William Goldman, explained in vivid, delightful details exactly why “nobody knows anything.”
I was so excited about it I had to share:
“The book’s first mention of that line, which is repeated throughout, referred to the many studios that passed on films that would go on to be blockbusters. Every studio in Hollywood but one (Paramount) turned down “Raiders of the Lost Ark.” It became one of the highest-grossing films of all time, and was nominated for nine Academy Awards. “Star Wars” was passed on by the largest Hollywood studio at the time, Universal. It grossed $1 billion, and spawned a franchise with five films that are in the all-time top 100 in gross box office sales. Eventually, Walt Disney Co. purchased the Star Wars production company Lucasfilm, for more than $4 billion.”
That quote is applicable to today’s Employment Situation report. The huge upside surprise — still awful employment situation, but improved — was a shocker to most. The details:
• 2.5 million new jobs in May, versus expectations of 7.5 million jobs lost;
• Unemployment rate declined to 13.3%, versus a 20% consensus;
• Unemployed persons fell by 2.1 million to 21.0 million;
• Hourly earnings for private payrolls fell by 29 cents to $29.75;
• Labor force participation rate increased by 0.6 percentage in May to 60.8%
All of these, except perhaps the decrease in hourly wages, were wholly unexpected. It is worth noting that the ADP private job report (which I am not big fan of) showed a loss of 2.76 million jobs for May; jobless claims numbers are also still rising. So some of this may be a modeling/measuring issue.
Regardless, we can look at from three different contexts:
1) We are terrible at making forecasts and predictions. This is my default position, and there is not a whole lot to debate here. The world is too variable and random to consistently forecast anything that matters one quarter or one year out. We can try to make more intelligent forecasts, and make better probabilistic bets, but overall, we are not good at this. We are not much better at imagining the world decades or centuries into the future either.
2) The proclivity to make forecasts reflects a lack of humility. It is more than mere marketing, it is arrogance to believe we can foretell the future. This does not stop us many of us from trying. Indeed, there is a robust industry that claims to have some insight into the future. If you could predict the future, I suspect there is a more lucrative way to monetize that skill than selling those predictions to the public.
3) However, we want to believe someone else can predict the future. We are fearful about the unknown. Despite the inherent uncertainty of the future, we insist on people telling us what is going to happen. And, the more self-confident and specific they are, the more we tend to believe them. This is obviously a self-defeating tendency, and yet it persists.
Mr. Market has arguably done a better job than most forecasting the economy and what was coming next, but even he gets it wrong on a regular basis.
The best way to avoid surprises is not to have expectations that any one seer can forecast the future. Assume you don’t know, and work from the data forward.
William Goldman explains why nobody knows anything.
1.I know it was 5 years ago, because Teddy was a puppy then, and PWD tend to chew anything they can get their jaws on. The paperback was destroyed, and so I re-ordered a new hardcover — and kept it off low tabletops.
Update: June 8, 2020
Empire Strikes Back: How Star Wars nearly wasn’t (June 7,2020)
Nobody Knows Nuthin’ (May 5, 2016)
What Models Don’t Know (May 6, 2020)
Nobody Knows Nothing (May 26, 2020)