Tue, Jun 19, 2012 - Page 8 News List

Do not ignore wisdom of the crowd

By Jason Yeh 葉家興

At the start of April, CPC Corp, Taiwan (CPC) increased its fuel prices by NT$3.1 per liter.

The increase raised inflationary pressure and set off price increases across the country, including hikes in the cost of daily necessities and dining out.

International oil prices collapsed just after this was implemented, and while CPC has lowered fuel prices 10 weeks in a row, the prices of other commodities will not return to what they were before the fuel price hikes.

The Consumers’ Foundation recently stated that CPC’s policy could be the main culprit behind rising prices and that senior members of CPC management should resign as a result of the mistake.

The company defended its action by saying that “CPC is not an expert when it comes to predicting fuel prices” and that “predicting fuel prices is both a science and an art,” in an attempt to absolve itself of all responsibility.

There is no doubt that the government’s decision to freeze fuel prices before the January presidential election and then raise prices in one fell swoop after losses had been incurred went against the market mechanism, but it seems to think two wrongs make a right.

At the time, CPC cited forecasts from HSBC, Merrill Lynch, Goldman Sachs and JPMorgan for this year’s first quarter and said fuel prices could skyrocket because of tensions in the Middle East.

That is what it based its reports to the government on about the possible trend of fuel prices and it was also the reason why the government decided that a substantial price hike was necessary, rather than incremental increases.

Many people are unaware that the price predictions made by international financial institutions are often wildly inaccurate.

Manipulation by financial speculators contributed to the fuel price bubble, which burst around the time of the 2008 financial crisis and led to many lawsuits.

One possible reason why their financial research reports were so inaccurate was the highly complex and interwoven conflicting interests involved in the crisis.

In his essay The Hedgehog and the Fox, English philosopher Isaiah Berlin quotes the ancient Greek poet Archilochus, who said: “The fox knows many things, but the hedgehog knows one big thing.”

If the fox represents street smarts, the hedgehog represents book smarts, and what is interesting about this is that the fox, which knows a little bit about everything, is more capable of accurately predicting the future than the hedgehog, which specializes in just one area.

In his 2005 publication titled Expert Political Judgment, University of Pennsylvania psychology professor Philip Tetlock talks about predictions about the future made by various experts.

In the study, he tested more than 80,000 predictions made by 284 experts on politics, economics, history and the media. He came to the conclusion that experts did not perform any better than dart-throwing chimps.

Why is it that experts are so bad at making predictions? Why is the fox smarter than the hedgehog? Why are street smarts better than book smarts?

Is it because the fox is attuned to the wisdom of the crowd, and two heads are better than one?

It is obvious that the world is a chaotic, random and ever-changing place.

There are innumerable interfering and confusing variables and the complexity of human behavior is far greater than the atoms and molecules that exist in the physical world.

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