Saturday, April 25, 2009

Economical Forecasting

The weather forecast for tomorrow has shifted again

200904251143.jpg

If this holds, then the rain has shifted to Monday and the weather for tomorrow's marathon looks "ok" - not great, but ok.

But, I did wonder today whether both of these paragraphs are true:

The weather is a complex system for which there are many variables. It takes a great deal of computing power to figure out even very localised immediate forecasts, let alone system wide forecasts. And forecasts - even at a trend level (i.e. the next few days will see more sun than rain) - are notoriously inaccurate. Such predictions frequently get duration and severity wrong and their results are often the exact opposite of what actually happens. Forecasters will hate the use of that word "prediction" which implies crystal ball gazing rather than the use of multi-faceted models built by the brightest people in the land backed by years of research. But the empirical data says they're wrong more often that they're right.

The economy is a complex system for which there are many variables. It takes a great deal of computing power to figure out even very localised immediate forecasts, let alone system wide forecasts. And forecasts - even at a trend level (e.g. house prices will next rise, rather than fall) - are notoriously inaccurate. Such predictions frequently get duration and severity wrong and their results are often the exact opposite of what actually happens. Forecasters will hate the use of that word "prediction" which implies crystal ball gazing rather than the use of multi-faceted models built by the brightest people in the land backed by years of research. But the empirical data says they're wrong more often that they're right.

No wonder we're not sure if the economy is coming out of recession, going deeper, stabilising, growing or shrinking. House prices up? Down? Flip a coin? Build a model? Play Baccarat as a cipher for prediction?

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