Expert prediction: flipping a coin is better

Let me begin this post by two endearing quotes about economists:

An economist is expert who will know tomorrow why the things he predicted yesterday didn't happen today

Lawrence J. Peter

Economics is an extremely useful form of employment for economists

John Kenneth Galbraith

Media has reported on economists and investors who called the crises and profited from it. Some of those people are John Paulson the famed hedge fund manager who made multi billion dollar in 2007 betting against sub prime. Another is Prof. Roubini who "predicted" the crises and continue to give sound bites to the media.

I always enjoy reading about the newly minted expert of a crises or an episode of the economy. Before Paulson and Roubini there was Abby Joseph Cohen, the famed Goldman Sachs strategist, who called the S&P during its bull run in the 1990s and was hailed by media as the market genius. Internet companies had their prophets as well. There are a host of so called "experts" who came and gone. Those experts rode their once in a life time call on economic or market matters but disappeared into the sunset when they tried to do it again. I reckon that Roubini and Paulsn will face the same fate.

Lets look at these experts in another light. If there are 20,000 experts, why does only one guy have this figured out? What is special about them?

Walk into some big arena filled with 20,000 people each standing and holding a quarter. Ask them to flip it one time: heads you remain standing, tails you sit down. Repeat the trial 14 times among the people who remain standing only. A normal distribution of outcomes would say after fourteen trials you would reasonably expect one person to be standing up, actually 1.22 to be exact. Ladies and gentlemen, I give you Professor Nouriel Roubini, Andrew Lahde Capital, who saw his accomplishment for what it is and called it quits, andPaulson.

My point of the post is economists and the "expert" of the day had his/her lucky call, odds are stacked against his next call to be right. Do not chase expert and their performance as predictions are always harder when it is about the future!