The strong demand for charlatans
In the improbable event of ever being invited to give a commencement address, my advice to graduates wanting a lucrative career would be: become a charlatan. There has always been a strong demand for witchdoctors, seers, quacks, pundits, mediums, tipsters and forecasters. A nice new paper by Nattavudh Powdthavee and Yohanes Riyanto shows how quickly such demand arises.
They got students in Thailand and Singapore to bet upon a series of five tosses of a fair coin. They were given five numbered envelopes, each of which contained a prediction for the numbered toss. Before the relevant toss, they could pay to see the prediction. After the toss, they could freely see the prediction.
The predictions were organized in such a way that after the first toss half the subjects saw an incorrect prediction and half a correct one, after the second toss a quarter saw two correct predictions, and so on. The set-up is similar to Derren Brown's The System, which gave people randomly-generated tips on horses, with a few people receiving a series of correct tips.
And here's the thing. Subjects who saw just two correct predictions were 15 percentage points more likely to buy a prediction for the third toss than subjects who got a right and wrong prediction in the earlier rounds. Subjects who saw four successive correct tips were 28 percentage points more likely to buy the prediction for the fifth round.
This tells us that even intelligent and numerate people are quick to misperceive randomness and to pay for an expertise that doesn't exist; the subjects included students of sciences, engineering and accounting. The authors say:
Observations of a short streak of successful predictions of a truly random event are sufficient to generate a significant belief in the hot hand.
It's easy to believe that this happens in real life. For example, the people who are thought to have predicted the financial crisis of 2008 are invested with an expertise which they might not really have.
Of course, there are other reasons why people might want to pay for forecasts; maybe they want a false sense of security of a predictable world, or they want someone to blame if things go wrong. This paper, however, suggests that these are not the only motives. Instead, people are too quick to perceive skill and thus to pay for something that doesn't exist. The demand for forecasters and tipsters substantially exceeds the real ability such pundits actually have.