The advantages and limitations of forecasting

8 May, 2020 at 23:36 | Posted in Economics | 2 Comments

Businesswoman standing on a ladder looking through binocularsIn New York State, Section 899 of the Code of Criminal Procedure provides that persons “Pretending to Forecast the Future” shall be considered disorderly under subdivision 3, Section 901 of the Code and liable to a fine of $250 and/or six months in prison.

Although the law does not apply to “ecclesiastical bodies acting in good faith and without fees,” I’m not sure where that leaves econometricians and other forecasters …

I came to think about this nineteenth-century New York law the other day when interviewed by a journalist working on a series on Great Economic Thinkers. We were discussing the monumental failures of the predictions-and-forecasts-business. But — the journalist asked — if these cocksure economists with their ‘rigorous’ and ‘precise’ mathematical-statistical-econometric models are so wrong again and again — why do they persist wasting time on it?

In a discussion on uncertainty and the hopelessness of accurately modelling what will happen in the real world — in M. Szenberg’s Eminent Economists: Their Life Philosophies — Nobel laureate Kenneth Arrow comes up with what is probably the right answer:

It is my view that most individuals underestimate the uncertainty of the world. This is almost as true of economists and other specialists as it is of the lay public. To me our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness … Experience during World War II as a weather forecaster added the news that the natural world as also unpredictable.DGTdKgwUIAI8AIIAn incident illustrates both uncer-tainty and the unwilling-ness to entertain it. Some of my colleagues had the responsi-bility of preparing long-range weather forecasts, i.e., for the following month. The statisticians among us subjected these forecasts to verification and found they differed in no way from chance. The forecasters themselves were convinced and requested that the forecasts be discontinued. The reply read approximately like this: ‘The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.’

2 Comments

  1. Shadow banks sell bets that the weather forecast, say, is right or wrong, and use the premiums to make opposite bets. The worst they can do is lose the premium they earned by selling bets; the best they can do is often unlimited, or at least many times greater than the potential maximum loss. Using this strategy in volume guarantees a profit. Private insurance arrangements cover counterparty default risk, implicitly guaranteed by the Fed’s proven power of unlimited liquidity.

    Comment by Robert Mitchell— 9 May, 2020 #

  2. “Experts of various schools were telling us in 1939 that the Maginot Line was impregnable, and that the Russo-German Pact had put an end to Hitler’s eastward expansion; in early 1940 they were telling us that the days of tank warfare were over; in mid 1940 they were telling us that the Germans would invade Britain forthwith; in mid 1941 that the Red army would fold in six weeks; in December, 1941, that Japan would collapse after 90 days; in July, 1942, that Egypt was lost – and so on, more or less indefinitely.

    Where now are the men who told us those things? Still on the job, drawing fat salaries. Instead of the unsinkable battleship we have the unsinkable Military Expert. . . . (Quoted from volume III, p. 59, of As I Please: The Collected Essays, Journalism and Letters of George Orwell, New York: Harcourt Brace Jovanovich.)”

    Comment by Jan Wiklund— 9 May, 2020 #


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