The Pastafarian Uncertainty Principle

The FSM has given us the Pastafarian Uncertainty principle which states that all economic forecasters are liars or fools or both. Only the FSM knows the future and he’s not telling.

The fools include the modern alchemists and those people who are like the lottery winner who has gotten lucky picking a few numbers in the past and so he thinks he’s a genius.

The liars include those people who know that they can’t predict the future, but they are paid to do so and hence make a very good living, keeping a straight face and always sounding plausible. They are very careful not to keep a track record of how their earlier predictions faired.

To help understand the Pastafarian teaching on financial uncertainty, we start by considering the problem of forecasting the change in stock price between tomorrow’s closing price and a year from now. Today’s stock price is determined using all existing market information. If some new data comes out or we have a new way of analyzing existing data, then that will move the market before tomorrow’s close of trading. The move in price after tomorrow will be driven by new information, which we fundamentally can’t know now.

The same is true for predictions of any freely traded item: from foreign exchange rates to the price of oil. We cannot know what will happen to prices in future. So we do not know what future inflation will be like. Equity prices, FX rates and indeed inflation are all very significant factors that drive the economic growth and they cannot be predicted. So there is no point in trying to predict economic growth.

Just as there is no point trying to pin point exactly where and when a forest fire will start, we don’t know when an economic crash will happen. But we can do the following:
* Ensure that people behave in such a way as to minimize the risk.
* Understand where there is an increased risk.
* Have mechanisms in place that mitigate the effects when they do happen.

People put in a lot of time and effort into making financial forecasts. However they are wasting their time and your money. You are paying for them, either as a tax payer or as a consumer.

When a forecaster makes a statement, it often gets lost in translation. For example I could say to a pregnant woman that I expect her child will have one testicle.
Something may well have been lost in translation. The statistician could come along and say that there is a 50% chance of having a girl with none and a 50% chance of having a boy with two. So the (statistical) expectation is 1 testicle. But that’s not the way the word ‘expect’ is used in standard English, hence the misunderstanding.
So we need to be careful. A central banker could release a statement that he expects economic growth to be 5% next year. He might just forget to mention that he reckons there is a 20% of a 10% contraction in the economy. But the probabilities of both an economic contraction and bubble are included in the ‘expected 5% growth’.

If you want to know for sure that your friendly economist or financial advisor is to be trusted or if he’s in the liar/fool category, then ask him for a prediction. If he gives you one, then it is time to walk out of his office. It is only a trivial detail whether he’s in the liar or fool subcategory. You can respect the man who says he doesn’t know the future.

People have understood and accepted the Pastafarian Uncertainty principle for years. A very valid question is: if the economy is known to be fundamentally unpredictable, then why do institutions embarrass themselves by making forecasts? The answer is the same reason that newspapers soil their pages by publishing horoscopes. The bottom line is that there is a demand for forecasts and indeed astrology. Where there’s a demand there’ll be a supply. When people are investing their money they don’t like the feeling of throwing their life savings into a random number generator, hence they pay for a financial advisor who’ll do what he’s paid to do: make predictions. The difference between the financial advisor and the astrologer are the clothes they wear.

When it comes to determining the exact location and velocity of an electron, Heisenburg has told us that there is some fundamental uncertainty that we can’t overcome. The problem is not that we aren’t clever enough nor that our instruments aren’t good enough. We just can’t violate the Heisenburg Uncertainty principle.

In the same way precise economic forecasting violates the Pastafarian Uncertainty Principle.

Nerdy Appendix:

It is left as a rather simple exercise to the mathematically inclined reader to come up with a short list of assumptions required to prove that a stock price is fundamentally unpredictable. You should make use of the concepts of a ‘sigma-algebra’ and a ‘filtration’.