Home > Uncategorized > The advantages and limitations of forecasting

The advantages and limitations of forecasting

from Lars Syll

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.’

  1. May 12, 2020 at 3:20 pm

    Forecasting is a treacherous business. Anyone who says otherwise hasn’t done much of it.

  2. Ken Zimmerman
    May 29, 2020 at 3:37 pm

    Funny story about the useless forecasts and the General’s need to plan. In my view, that an economist told it to show the impossibility of effective forecasting shows something else about economists. Just as the areas of work become interesting and pertinent too many economists give up the investigation. Deciding that, like forecasting the project is impossible. Instead, l suggest we take the General seriously and look at the entire project in which forecasting weather is involved. Let us look at another war to explain by thesis. In the latter part of the 16th century the English were at war with Spain and they knew an invasion was coming involving both an armada of ships and a large Spanish army. They knew the plans of the Spanish army and navy. They also understood the part the weather of the English Channel (a notoriously stormy patch of water) could play in the naval part of the war. How could the English anticipate, rather accurately not just the actions of Spain but also the weather in the English Channel? Sure, they had forecasters, more the alchemist variety rather the statistical variety discussed here. But they also had “on the ground intelligence” (spies) in Europe and even in Spain. They also had years of experience both sailing the Channel in war and peace and in commerce and fishing. They kept records of all this experience. They also observed the world-wide empire of Spain and had detailed understanding of its goals and methods of operation. They also understood in detail the strengths and weaknesses of both the Spanish and English armies and navies. Finally, the English understood the English coastal waters and coastline where the battles would be fought (naval and army). From this and other sources the English could “make a good guess” about when and where an attack on England might come and what its targets would be. Using this information, they could also plan to delay the armada’s sailing to have the greatest chance of a storm hurting, perhaps even (as it did) forcing the fleet to turn around. Some historians contend England’s defeat of the Spanish Armada in 1588 and its prevention of the landing of a Spanish Army in England was mostly luck. It was actually some good fortune combined with detailed and closely studied multiple sources of intelligence. What is it about such detailed investigation that seems to frighten economists?

    • Robert Locke
      May 30, 2020 at 7:09 am

      read von clausewitz on war.

      • Robert Locke
        May 30, 2020 at 7:33 am

        [PDF] Reassessing the basis of economics
        RR Locke – real-world economics review, 2012 – researchgate.net
        This essay’s hypothesis is that neglect in the English-speaking world of the ideas on
        economics of the nineteenth century Prussian strategy theorist Carl von Clausewitz deprives
        the discipline of very useful knowledge and moral content. Repairing that neglect would …
        Cited by 3 Related articles All 9 versions

      • Ken Zimmerman
        May 30, 2020 at 11:33 am

        Robert, I have always thought von Clausewitz overly prescriptive when it comes to war (in all its parts). Each war is unique in terms of adversaries, conditions, knowledge, and in the friction of which von Clausewitz wrote so eloquently. In the late 16th century a war between Phillips’ Spain and Elizabeth’s England involved much less uncertainty and friction for England than the 20th century war between the US and Vietnam, for example. England had not only detailed and prescriptive knowledge of Spain, her government, her armies and navies, and her ambitions and objectives but also one of the most effective spying and information networks ever invented to gain and check new information (interestingly the result mostly of the early financial markets in England). Add to this Spain’s utter unsuitability as a world power and you have a recipe for a devastating Spanish defeat. The US in its war with Vietnam had none of this, despite is great advantage in soldiers and materials. Plus, it totally misunderstood the reasons the Vietnamese fought the war. The fog of war was deep and nearly impenetrable for the US in Vietnam. The English/Spain war of the late 16th century was by comparison a sunny day.

        As to von Clausewitz’s impacts on the creation of economic ways of life (not just scholarly activities to study these ways) I would mention just these few items. First, a morally cohesive society is not a given result in the creation of any society. That is certainly the case for the US. Up to this very day the US is not a morally cohesive society. Perhaps it never will be. Second, to place public good over private interests requires a continuing choice to create relationships this way. During portions of US history, the choice of public good over private interests won the day. But the stream of US history, particularly the initial creation of the country made it impossible to sustain this choice. The US is not only the most culturally diverse country in history before the USSR, it also included many cultures that did not trust or tolerate one another. Many of these cultures among the most intolerant and politically active in the world. This makes it surprising that the public good ever dominated the public square in America, since there has never been an agreed upon definition of public good. The men who wrote the Constitution recognized these issues and attempted to design a document that could at least hold private interests (factions) in check. They did not anticipate a general failure of the “checks and balances” of government segments (Presidency, Congress, Courts) they set up for this task. Which is precisely the situation both major political parties have attempted since the end of World War II. With the Republicans being greatly more effective at bringing it off.

      • Robert Locke
        May 30, 2020 at 2:18 pm

        Great power rivalry, clausewitz devined, in the age of the french revolution and napoleon, required a different economics than did the London based trade emporium, although they occurred in the same time frame. Germans believed in the visible hand, not the invisible one, and they tried to create a Beamtentum that could look after the general interest of the nation. They were wrong, of course, as the failure of this Beamtetum to stand up to Hitler, so shamefully demonstrates. But so were the Americans who let the special interest of business and finance take over their democracy. If as Clausewitz and Napoleon perceived, in great power rivalry moral is superior to physical in the establishment of dominance, both, perhaps all great powers, in the end following Acton’s dictum, failed.

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