Why So Few Got This Economic Crisis Right.

Article in Tuesday's Financial Times about why so few saw this financial crisis coming. I've linked to it here:
http://www.ft.com/cms/s/0/1c1d5a9e-bb29-11dd-bc6c-0000779fd18c.html?nclick_check=1

Three excerpts. The first deals with rationalization of events.

".....The natural tendency {is} to seek rationales for events as they unfold, rather than question whether they are sustainable. Kenneth Rogoff, a Harvard professor who is also a former IMF chief economist, thinks the tendency to look on the bright side is particularly prevalent on Wall Street, where “it is difficult to make a living as a mega-bear”. "

The 2nd deals with those few Cassadras who manage to get the gist of a crisis right.

"Still, you might think there would be large rewards for those who succeed in anticipating these events. You would be wrong. People who worried before 2000 that the “new economy” was a bubble, or warned of the terrorist threat before September 11 2001, or saw that credit expansion was out of control in 2006, were not popular. They were killjoys.
Nor were they popular after these events. If these people had been right, then others had been blind or negligent, and the latter preferred to represent themselves as victims of unforeseeable events. As John Maynard Keynes observed, it is usually better to be conventionally wrong than unconventionally right."

The 3rd deals with the thought process of mean reversion & extrapolation in forcasting events.

"{E}conomic crystal ball-gazing remains unscientific. The trend is the forecaster’s friend. Extrapolation assumes that the future will be like the past, only more so. We project current preoccupations – the rise of China and India, global terror, climate change – with exaggerated speed and to an exaggerated degree. We forget that our preoccupations change. The people who worry about these issues today would 20 years ago have worried about the coming economic hegemony of Japan and the cold war. These issues were resolved in ways that few predicted......


...If extrapolation is the forecaster’s friend, mean reversion is the forecaster’s crutch. Much of the time, you can predict that next year’s figure will be somewhere between this year’s level and the long-run average. But mean reversion never anticipates anything out of the ordinary. Every few years, out-of-the-ordinary things happen."