Beware of Geeks bearing gifts

by Robert Wood – Sociologist - 

Many years ago my English father bet on the outcome of “the pools”. He tried to predict the outcome of football (soccer) games in the National lottery. Sometimes he was tempted to buy “systems” which guaranteed a certain number of correct “rights” and money “wins” if he followed the suggested system to the letter.

Prediction software 

On 15^th January 2020 I received from World Gold Council: Gold Outlook 2020 with the teasing title and contents: 

Risk appetite amid high uncertainty 

Our new report examines how the interplay between market risk and economic growth will drive gold demand in 2020. In particular, we focus our attention on:

Financial uncertainty and lower interest rates

Weakening in global economic growth

Gold price volatility

We also explore the performance of gold across various hypothetical macroeconomic scenarios implied by Quarum our innovative web-based quantitative valuation tool.

For a Sociologist predictive quantitative data are valuable tools. Usually such tools show trends which will turn out as true if the basic assumptions are not changed by something unexpected. The trends can be quite accurate such as “Trump will be reelected”. But sometimes a new reality shows its ugly face. Let’s say, for the sake of arguments, that someone invented a matter duplicator. Within a week gold would be more common than pebbles, and the commodity markets would crash the moment the news of the new invention went viral. Chaos would reign.

How does Quarum work? 

World Gold Council claims that Quarum is a web-based quantitative tool that helps investors intuitively understand the drivers of gold’s performance. Specifically, Quarum demonstrates how gold may react across different macroeconomic environments.

A Game of Chance 

In other words: Quarum is a modern betting system. Much fancier than the paper-based betting systems my father bought in the days of old, but the principles are the same.

   Now, I do not claim that a tool like Quarum does not work, but there is a built-in paradox in all such software tools. Why on Earth should you tell anybody about the fantastic software you have developed if its predictions are accurate? Why not keep it secret, use it yourself and become filthy rich?

   On the other hand: If Quarum is able to demonstrate how gold markets may react, then the program is able to predict the future. For example, if Quarum demonstrates that the price of gold will increase, then everybody will want to buy gold. Furthermore, why should anybody want to sell their gold if they know for sure that they will profit more by selling their gold the day after tomorrow? The prices will soar because demand will exceed supply. This is defined as a Self-fulfilling prophecy. It refers to the socio-psychological phenomenon of someone "predicting" or expecting something. And this “prediction” or expectation comes true simply because owners of such software believe it will happen (in this case belief in Quarum ans suchlike), and their resulting behaviors align to fulfill those believes. People’s expectations influence their actions, something we see on Wall Street every day. Belief is stronger than web-based quantitative tools. Use your head!  Quarum