Davos and the Perils of Prediction

by | January 22, 2024

Another Davos gathering of the World Economic Forum has come and gone. As in years past, thousands of the world’s political, business, and social elites came to the snowy and expensive Swiss Alps to network, pontificate, and party. Now that their private jets have departed, the ‘Davos Consensus’ is filtering down from the mountaintop. 

Predicting the future is almost always a fool’s errand, no matter how smart or informed one may be. The world is simply too complex and dynamic, and we humans are too prone to cognitive heuristics that befuddle our thinking. This stew for uncertainty is particularly noxious today, with nearly half of the world’s population set to vote in elections over the next 12 months, spanning more than 60 countries. It is akin the infamous three-body problem in physics, in which chaos is the only predictable outcome. 

Yet, awareness of human limitations is not at the top of the list of traits identified with the ‘Davos Man’. And so this year, as has been the case for over five decades now, the World Economic Forum’s latest conclusions are circulating as gospel truths. Trump will win the US presidential election in 2024 and it won’t be a cause for concern. Artificial intelligence will change the world more than anything in our lifetimes and will increase inequality. Geopolitics will slow global economic growth. The financial markets will do great in 2024, heralding banner years for mergers and acquisitions as well as for initial public offerings (IPOs). 

Often, and most probably reflecting the collective hubris of its attendees, Davos consensus views are famously wrong. A few notable examples suffice. In 2016, the conference was united in the view Hilary Clinton would be elected US President. In 2020, it was smooth economic sailing ahead, even as the COVID-19 pandemic arrived in full force. In 2023, the big takeaway was to buckle up for a global recession. 

Why is it that a gathering of the world’s wealthiest and most powerful people tends to produce such an inability to predict the future?

Perhaps the answer lies with Socrates, who noted that the only true wisdom is knowing you know nothing, a reflection of humility unlikely to be found in Davos.

But wealth and its close companion ego aside, we have spent decades in the pursuit of predictions in the financial markets and the political economy (usually to humbling results), and along the way, we’ve come to recognize and appreciate at least a half dozen common cognitive traps into which ‘Davos Man’ is likely to fall.

First, Davos is an echo chamber of the curse of knowledge. This whammy of flawed thinking results from having been successful in prior work, which convinces you that your way of seeing things and reaching conclusions is the right one. When elites and would-be elites gather in rarified air to implicitly celebrate each other, they are ripe for falling for this ruse and in turn amplifying its tendency in each other. 

Second, Davos is a yummy casserole for ‘conformity bias’. Poor decision-making and groupthink are notorious outcomes of bringing together a subset of similar-enough people. While the very international gathering at the WEF might look diverse by some measures, the socioeconomic regression of the participants is stark. 

Third, Davos is akin to an anthropological experiment in ‘authority bias’, which applauds ideas coming from those in authority. When a small group of people are told they are special and then isolated and ranked according to ‘importance’ by the visible color of their badge, it is no surprise that ‘ideas’ and conclusions from the apex participants (no matter how conventional or shallow) get the most attention. The dynamic is amplified by the ‘bandwagon effect’, in which recent comments and ideas gather traction and support, and at increasing speed. 

Fourth, ‘framing bias’ is acute at Davos. In this trap, we are influenced by the style, not the substance. If someone gives a slick presentation, we are impressed, even if the substantive content is underwhelming. At Davos, famous names make high-conviction declarations from dramatic stages, surrounded by security, media, and acolytes. It is no wonder their prognostications get around, regardless of their insight.  

Fifth, when trying to boil the ocean, ‘ambiguity bias’ is not your friend. At Davos, the crowd is ambitious and strives to reduce the world’s noise to a collection of soundbites. This means Davos prognosticators are prone to ‘known knowns’ – paths of reasoning based on past patterns that appear plausible reflections of what the future could be. But as any experienced investor knows, past performance is not a good indicator of future performance. The ambiguity that is implicit in trying to reason and predict unknowns (the future) cannot be replaced by dubious assurances that the future will resemble the past. 

Finally, ‘anchoring bias’ is a Davos specialty. When surrounded by comments from famous people, it is a natural reaction to be influenced by what one just heard, in turn undermining original thinking and anchoring participants to recently declared statements.

All of these inherent flaws in the Davos process ought to make us wary of what comes out of that lovely Swiss mountain village at the start of each new year. 

And—we daresay—there may be another more conventional form of bias at work in Davos, beyond those identified by behavioral sciences. How many of those forecasts, above all those regarding political outcomes, reflect the elite currying favor with candidates in the hope that kind words will be one day rewarded? 

Trump may yet be elected US President. Artificial intelligence may indeed prove to be a paradigm-shifting change for our species. And perhaps the stock market will do great in 2024. 

Or maybe none of those things will happen. 

It has been said that no one is as smart as everyone, that there is wisdom in crowds. That is probably true, but it does not mean that the crowds of mostly like-minded and bias-prone elites that gather at Davos reflect a genuine co-mingling of logic, science, empiricism, independent thinking and, above all, humility that is our species’ best hope of gaining wisdom, to say nothing of making predictions. 

It’s time to come down from the mountain top.

Filed Under: Economics . Featured . Politics

About the Author

Alex Friedman

Alex Friedman is the co-founder of Jackson Hole Economics, LLC, a private research organization which provides analysis on economics, politics, the environment and finance, and develops actionable ideas for how sustainable growth can be achieved. Friedman is a senior leader with two decades of experience growing and transforming organizations in the financial and non-profit industry. He was the CEO of GAM Investments in London and chairman of the firm’s executive board. Previously, he was the Global Chief Investment Officer of UBS Wealth Management in Zurich, chairman of the UBS global investment committee, and a member of the executive board of the private bank. Before moving to UBS, Alex Friedman served as the Chief Financial Officer of the Bill & Melinda Gates Foundation. He was a member of the foundation’s management committee, oversaw strategic planning, and managed a range of the day-to-day operating functions of the world’s largest philanthropic organization. Friedman also created the foundation’s program-related investments group, the largest impact investing philanthropic fund in the world. He started his career in corporate finance at Lazard. Friedman served as a White House Fellow in the Clinton administration and as an assistant to the U.S. Secretary of Defense. He is a member of the board of directors of Franklin Resources, Inc. (Franklin Templeton), a member of the Council on Foreign Relations, Chairman of the Advisory Board of Project Syndicate and a board member of the American Alpine Club. Friedman is a regular contributor to a range of newspapers and thought leadership groups and is also the author of Babu’s Bindi, and The Big Thing, both children’s books. He is an avid mountaineer and rock climber and led the first major climb to raise money for charity through an ascent of Mt. McKinley. Friedman holds a JD from Columbia Law School, where he was a Harlan Fiske Stone Scholar, an MBA from Columbia Business School, and a BA from Princeton University.

Larry Hatheway

Larry Hatheway has over 25 years experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, LLC, which offers commentary and analysis on the global economy, policy & politics, and their broad implications for capital markets. Prior to co-founding Jackson Hole Economics, LLC Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making and multi-asset investment strategy. Larry was also the lead investment manager for various mandates, funds and an actively managed multi-asset index. Larry also served on the GAM Group Management Board, was Chairman of the GAM London Limited Board and served as member of the GAM Investment Management Limited Board. Larry was also Chairman of the GAM Diversity & Inclusion Committee. During his tenure at GAM, Larry was based in London, UK and Zurich, Switzerland. From 1992 until 2015 Larry worked at UBS Investment Bank as UBS Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). During his tenure at UBS, Larry was also a standing member of the UBS Wealth Management Investment Committee. While at UBS, Larry worked in Zurich, Switzerland, London, UK (various occasions), Singapore and Stamford, CT. At both GAM Investments and UBS Investment Bank Larry was widely recognized for his appearances on Bloomberg TV, CNBC, the BBC, CNN and other media outlets. He frequently published articles and opinion pieces for Bloomberg, CNBC, Project Syndicate, and The Financial Times, among others. Before joining UBS in 1992, Larry held roles at the Federal Reserve (Board of Governors), Citibank and Manufacturers Hanover Trust. Larry Hatheway holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and a loving Cairn Terrier, and resides in Wilson, WY.

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