Forecasting and Swans

We are naturally born forecasters: we need to anticipate tomorrow to calculate appropriate actions today.

In vain, therefore, should we pretend to determine any single event, or infer any cause or effect, without the assistance of observation and experience.1

The human understanding is, by its own nature, prone to abstraction, and supposes that which is fluctuating to be fixed.2

Most people drastically and severely underestimate the uncertainty of the world, argues American economist Kenneth Arrow (b. 1921). According to Arrow, the trap of believing in non-existent certainties is a plague that infects not only the common layperson, but is equally contracted by professionals, academics, economists, and the like.3

One of Arrow’s favourite stories highlighting “both uncertainty and the unwillingness to entertain it” occurs during World War II, while he is working as a weather forecaster with the military. He recalls that some of his colleagues were responsible for supplying the General with long-range weather forecasts. After a rigorous statistical review, it was demonstrated that their forecasts were, in fact, no better than random – rolling dice would be just as effective for predicting the weather a month in advance! Convinced that their predictions were useless, the forecasters submitted a request to their superiors, appealing that the long-range weather reports simply be discontinued altogether.

The reply came back: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”4

The glorious absurdity of this response eloquently captures a dilemma of the human condition. In our most honest moments, we must confess that we have absolutely no clue what the future holds. Zero. Since we cannot know everything, we simply cannot compute all the variables. The future is eternally foggy. However, we must make plans for this uncertain future nonetheless. Thus no one is immune from the tendency to predict the future because everyone needs to imagine themselves in the future.

The problem is that prediction relies on induction: forming ideas about the future based on what we have observed thus far. As David Hume argued, inductive reasoning is that it is entirely limited by experience itself. John Stuart Mill later reformulated the problem this way: if every swan you had ever seen was white, it seems fair to predict that all swans are white, however…
That all swans are white, was an uniform experience down to the discovery of Australia.5 That all swans are white, cannot have been a good induction, since the conclusion has turned out erroneous.6

If every swan you have ever seen is white, you cannot anticipate the existence of a black swan until you see one. And herein lies the dilemma: black swans do exist, regardless of whether or not you personally have seen one. Likewise, events will occur that are impossible to imagine on the radar of possibility: they just happen, despite the fact that no one could have predicted them.
The weather is not obligated to follow our forecasts. Our predictions about what is going to happen tomorrow do not actually control future events. Forecasts and predictions serve one purpose: they give us framework to act and make decisions now. If we can predict a thunderstorm, we can carry umbrellas. If we can predict a market fluctuation, we can leverage our investments. As in Arrow’s story, the quality of the predictions mean very little compared to their necessity and utility – they are what enable us to make decisions and draw plans. Predictions are necessary, even though the variables themselves can never be certain.

Accepting the possibility of black swans means tempering every prediction about the future with an enormous caveat: it is thoroughly impossible to hold any degree of certainty. As an economist, accepting uncertainty led Arrow to embrace the following maxim: “I consider it essential to honesty to look for the best arguments against a position that one is holding.”7

If, in fact, nothing is certain, then the opinions and predictions of others – regardless of how variant their views are from your own – technically warrant no less consideration.

To be certain is to insist that you have seen every swan that has ever existed.

  1. Hume, David. (1907[1748]). An enquiry concerning Human Understanding and selections from A Treatise of Human Nature. Illinois: The Open Course Publishing co. Pp. 28-29 

  2. Bacon, Francis. (1902[1620]). Novum Organum. New York: P.F. Collier & Son. Aphorism LI, p. 27 

  3. Szenberg, Michael (ed). (1993[1991]). Eminent Economists: Their Life Philosophies. Cambridge University Press. P. 46 

  4. Ibid p. 47 

  5. Mill, John Stuart. (1889[1843]). A System of Logic Ratiocinative and Inductive: Being a connected view of the principles of evidence and the methods of scientific investigation. London: Longmans, Green, and Co. p. 174 

  6. Ibid p. 205 

  7. Ibid. Szenberg 1993[1991] p. 47 

Cite this page:
Shelley, James. (2020). 'Forecasting and Swans' (in System Thinker Notebook). Originally published on August 5, 2020. Accessed on September 29, 2020. Licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. Permalink:
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