Uncertainty winning the battle of predictability

Our economics professors warned us about the dangers of prediction even though their supply and demand charts worked out perfectly every time and arrived at a place of “equilibrium” where the world was perfect and Dorothy and Toto landed back in Kansas.

Well we’re not in Kansas anymore.

Billion dollar bank failures. Technology that aims to eliminate hard currency. Unpredictable predictors of weather and the higher risk of growing food. Off the chart migrations of bugs and people and pandemics where “when” is the operative word rather than “if.”

And on top of all that, rationality has been abducted by social media.

Welcome to the new world order in business.

In microeconomics they taught the simple cause and effect of price and demand. If more bread is demanded, the price will go up. The upper level courses dealt with caveats. The bread calculus is crippled if the big discount store makes the price of bread their loss leader.

That is the lesson of ceteris paribus, a Greek word that means “all other things being equal.”

The price of bread can go up if demand increases only if all other things remain equal.

And that is where the nuances began. Simple supply and demand doesn’t work when all other things are “not equal.” The big discount store defies the demand curve by making the prices of bread cheaper to lure the customers into their store to buy other things and gain more profit.

The lesson of ceteris paribus today is that the only thing that seems predictable today are there are more nuances, a higher degree of complex nuances and our limited ability to quantify or measure those differences across many business models.

That things can be uncertain is no revelation to anyone who has to navigate today’s business world, but we might do well to rely less on cause and effect to a degree that can be risky and unhealthy to the bottom line.

Predictability was the next lesson. We can take the unpredictable nature of supply and demand in a given market if we collect data and put it through a regression equation that measures the influence of Action A - the number of times bread is discounted - by the Outcome Bthe price.

At this point we may get a beautiful computer generated calculation that says the price of bread goes up 10 cents the less it is sold at a discount. And your regression equation will tell you 75-80% of the price of bread can be explained by the rate of discounting.

What about the other 20 to 25% of the explanation? You’re on your own. And yes, we increasingly feel more on our own in the business world with the complexity of the real world around us.

And the unpredictable variables seem to be rising. Inflation. Interest rates. Environmental impact of all the things that keep us alive and healthy. Climate change. Water scarcity. All are daunting.

But there have been these kinds of problems in the past. Remember stagflation? Gone. Acid rain? Gone. Industrial dumping in rivers. Not allowed. Monopolies? Broken up in about 12 years from 1900 to 1912 where almost everyone running was on the “progressive ticket” headed by Theodore Roosevelt, who, also by the way, gave us the beauty of national parks.

But monopolies seem to have emerged again, with little or no antitrust enforcement by the federal government.

Electric vehicles are becoming our solution to greenhouse gasses and climate change, as is solar energy. These are technologies many esteemed business leaders simply said would not work or were too expensive just a few years ago.

But someone has figured out how to make it work because they took the lesson that almost nothing is ceteris paribus and discounting bread raises all boats and reaps dividends.