# Why Can We Predict Stars But Not Wall Street

January 15, 2009 by kltangen

Filed under Featured Articles

Some predictions are easier to make than others. Accurately predicting the movement of the stars and planets is possible because they maintain regular patterns. The planets have relatively set paths around the sun. There is some variation but the pattern is well established and occurs repeatedly. Similarly, stars follow consistent projectories. They don’t jump erratically; they maintain reliable courses.

Star and planet data fit the assumptions of prediction well. They have set courses, reliable patterns, and replicable observations. Statistics work well on data that fit these parameters. Any behavioral pattern that is consistent is relatively easy to predict.

In humans, scores on intelligence tests are quite consistent. Year after year, you tend to get about the same score. Moods, however, change quickly, and don’t follow a consistent pattern. Consequently, predicting moods is very hard to do.

Financial markets would be predictable if they were consistent. But stock prices jump, fall, slowly rise, and fade away. There are too many twists and turns for good prediction. So don’t blame statistics for not predicting the next major financial collapse. The data simply doesn’t meet the requirement of consistency.

If it’s any comfort, statistics is equally bad at predicting financial turnarounds. Prosperity could suddenly appear. A new discovery could be about to happen. Great news could be at hand. Statistics can sometimes explain patterns of the past but it’s not very good at seeing into the future.

# Using Excel’s Summary Statistics

Sometimes it is nice to use software to generate summary statistics. It’s quick and easy. And appropriate when your assumptions and the software’s assumptions agree.

Here’s a demo of how to use Excel’s Analysis Toolpak to get descriptive statistics.

# How To Activate Excel Analytics

Microsoft Excel has a wonderful collection of statistical procedures that typically come with the product but are not installed. Provided as an add-on, the Analysis ToolPak lets you easily obtain descriptive statistics (means, standard deviations, etc.) with only a few clicks.

In this demo, I show you how to install the Analysis ToolPak, and how to create a scatterplot of data.