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Sunday, March 16. 2014

The economists’ confession

Economists sort-of confess that their predictions are not very good.



 In an autobiographical essay published 20 years ago, the left-leaning economist Kenneth Arrow recalled entering the Army as a statistician and weather specialist during World War II. “Some of my colleagues had the responsibility of preparing long-range weather forecasts, i.e., for the following month,” Arrow wrote. “The statisticians among us subjected these forecasts to verification and found they differed in no way from chance.”

Alarmed, Arrow and his colleagues tried to bring this important discovery to the attention of the commanding officer. At last the word came down from a high-ranking aide.

“The Commanding General is well aware that the forecasts are no good,” the aide said haughtily. “However, he needs them for planning purposes.”


Posted by The Barrister in Hot News & Misc. Short Subjects at 12:32 | Comments (5) | Trackbacks (0)

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I'd have to say any Economist who thinks their predictions are meaningful is a bit out of touch.

I never worked with any that felt their predictions were meaningful - just useful. For planning purposes. And this actually makes sense.

Example - I prepare forecasts for the coming year. I have 3 of them. Best, Medium, Worst. I have degrees of probability for each one based on a variety of assumptions which are knowable and impactful at the point in time they are made.

None are ever 100% accurate.

Each is used as a strategy to prepare for the coming year. We prepare for the best - accept the medium as the most likely, and plan for the worst.

In this way, we avoid massive failures which could hamstring our business and prepare tactical incentives to take advantage of opportunities which exist at any given time.

The only thing you can plan on - and this is purely broad range stuff - is to know that if demand goes up, you're going to have to either increase production or raise prices. The reverse is true if demand falls. Knowing which factors may come into play to increase or decrease demand help you plan strategies and tactics to take best advantage of each situation.


But while I am a trained economist and I have a particular view on where the economy will go in the coming year - it's just my view and I know I have to be prepared to alter that as conditions change.

People like Krugman are not really economists. He has the degree and the laureate. But nobody really takes him that seriously because he is so heavily biased, and hedges his opinions and predictions so intensely, he can never be truly 'wrong' even when he is horribly wrong.

Good economists, really truly good ones, recognize the weaknesses in the applications of the field and refrain from making broad, sweeping predictions.

I think you'll find most of these are of the Austrian School.
#1 Bulldog on 2014-03-16 13:55 (Reply)
And Paullie "The Beard" Krugman will have contradicted himself on that very topic some years before (because Republican!).
#1.1 Sam L. on 2014-03-16 18:12 (Reply)
So, was the point that weather predictions are the same as economic predictions? As in, equally unreliable? I sorta figured as much when looking back at the long line of economic doomsayers. We have a large contemporary crop of them, but I can't put much stock in what they say. Sure, I guess the end is coming, but it's anyone's guess when that will be.
#2 KommiKillr on 2014-03-16 18:21 (Reply)
There is a very significant difference between predicting the weather and predicting economic events. That is the human free will. We cannot change the weather it is what it is our ability to predict or not predict is never thwarted by humans changing the weather. But economics can be changed and what may have been a good prediction thwarted by human actions. This is in fact what the government is doing right now; trying to change our economic future. Some of the predictions for our economic future are grim and the Fed, congress and the administration are trying to change the course we are on and prevent those grim predictions from becoming reality. Everyone changes or at least tries to change their own economic destiny, every business and every country tries to change their economic course. So predicting an economic path or even a single event in the future is very tricky indeed.
#3 GoneWithTheWind on 2014-03-17 10:18 (Reply)
http://www.zerohedge.com/news/2014-03-18/five-year-fantasy-ending

This is the kind of 'good' economic work that is worth discussing.

It doesn't 'predict' anything - well, yes it does. However, I think most of us here at Maggie's are in agreement that the 'prediction' being made here is relatively accurate and based on some logic, as well as hard evidence.

There won't be a new Dark Ages. But we're sure going to have some rough sledding at some point.
#4 Bulldog on 2014-03-18 13:18 (Reply)

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