Alan, there just might be a way.
Alan Greenspan was on the Daily Show last night, promoting his memoirs – The Age of Turbulence – and highlighted that human behavior is the key driver of economies. As such the key to forecasting did not lie in giant, sophisticated econometric models, but in gauging the collective state of mind of society (at 6:30 on clip):
“If I could figure out a way to determine whether or not people are more fearful, or changing to euphoric and I have a third way of figuring out which of the two things are working, I don’t need any of this other stuff [big mathematical economic forecasting models.] I could forecast the economy better than any way I know. The trouble is that we can’t figure that out.”
Now this isn’t exactly news (just ask James) but interesting nonetheless that Mr. Greenspan lends his credibility to this view, especially in such a widely viewed forum. However, I wonder whether or not there is (or soon will be) a way to objectively measure and quantify this collective state of mind. Directly. And pre-emptively. (As opposed to inferring it from prices in asset markets.) By harvesting and analyzing the enormous and growing amount of behavioral and emotional data currently being recorded on the digital substrate that is the internet. I’m not suggesting this would be easy to do, but it is becoming possible to do so. And applying Kurzweil’s Law of Accelerating Returns – if the problem is unsolvable today, it won’t be tomorrow. Google (GOOG) has built itself into a $170bn company by harvesting and analyzing society’s collective behavior just to help us pitch and be pitched relevant goods and services. What if someone could tell us what was fear/exuberance index was for any given population? That’s got to be worth a few (hundred?) billion… Put that in your social graph and smoke it!
Of course there is a potential complication – the circular nature of this particular economic function. If we know that the index is tipping one way or the other, this will be reflected in market prices and so the $10 bill ceases to exist. On the other hand, while returns from this knowledge would almost certainly diminish over time (as the market finds a new equilibrium which includes this input), I think there would be plenty of time for the owner of such a technology to build a tidy nest egg. Or two.
Then again, I wouldn’t have expected Alan to consider this eventuality. Indeed, Bloomberg reports that as part of his 2030 vision, Alan predicts that innovation will decline going forward. Let’s just say I’m happy to take the other side of that bet, if he wants to put his ($8.5 million dollar advance) money where his mouth is.
