Using math to predict the future

From Good Magazine….

If you listen to Bruce Bueno de Mesquita, and a lot of people don’t, he’ll claim that mathematics can tell you the future. In fact, the professor says that a computer model he built and has perfected over the last 25 years can predict the outcome of virtually any international conflict, provided the basic input is accurate. What’s more, his predictions are alarmingly specific. His fans include at least one current presidential hopeful, a gaggle of Fortune 500 companies, the CIA, and the Department of Defense. Naturally, there is also no shortage of people less fond of his work. “Some people think Bruce is the most brilliant foreign policy analyst there is,” says one colleague. “Others think he’s a quack.”

The man has a better track record then most quacks. From later on in the article….

He is wildly controversial, though. As one of the foremost scholars of game theory—or “rational choice,” as its political-science practitioners prefer to call it—Bueno de Mesquita is at the center of a raging hullabaloo that has taken over some of the most prestigious halls of learning in this country. Exclusive, highly complex mathematically, and messianic in its certainty of universal truths, rational-choice theory is not only changing the way political science is taught, but the way it’s defined.

To verify the accuracy of his model, the CIA set up a kind of forecasting face-off that pit predictions from his model against those of Langley’s more traditional in-house intelligence analysts and area specialists. “We tested Bueno de Mesquita’s model on scores of issues that were conducted in real time—that is, the forecasts were made before the events actually happened,” says Stanley Feder, a former high-level CIA analyst. “We found the model to be accurate 90 percent of the time,” he wrote. Another study evaluating Bueno de Mesquita’s real-time forecasts of 21 policy decisions in the European community concluded that “the probability that the predicted outcome was what indeed occurred was an astounding 97 percent.” What’s more, Bueno de Mesquita’s forecasts were much more detailed than those of the more traditional analysts. “The real issue is the specificity of the accuracy,” says Feder. “We found that DI (Directorate of National Intelligence) analyses, even when they were right, were vague compared to the model’s forecasts. To use an archery metaphor, if you hit the target, that’s great. But if you hit the bull’s eye—that’s amazing.”

The whole article is an interesting read. All I have to say on the issue is that quants make predictions about the stock market in a manner similar to Mr. de Mesquita. In the financial markets, this method works until it doesn’t. And when it stops working, the people who depend on the quants are up a river without a paddle.

I imagine that Mr. de Mesquita’s method will have another problem similar to the quants. What happens when everyone starts using his methods?

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