Why Forecasts Don’t Make Sense

Not everything is a forecast although it seems. This is especially true for the market and the economy, so a reasonable definition of the forecast is as follows: it refers to a specific asset or class of assets and / or a series of economic data at a set price / level and set time period. The forecast must also be refuted. A statement that cannot be proved or disproved has nothing to do with the forecast; this is a theoretical academic debate.Consider the following statements: “Stocks show a rising trend” or “recessions are cyclical.” These are not forecasts, since there are no specific details. On the other hand, the statement: “Dow Jones will reach 25,000 in the second quarter of 2018,” meets all the forecast criteria, and it will either be confirmed or noWe are unable to predict Examples are everywhere: economic forecasts, profit estimates, market forecasts, expectations from future technologies, not to mention election forecasts. All data show that man, as a whole, is very poor at predicting.We predict our own behavior even worse Whenever someone tries to predict their behavior, you can only rely on a subjective assessment of the emotional state of that person. Whether it’s a holiday shopping, a job search, a vote in the elections – people say what they feel at the time the question is asked, and this does not allow them to predict what they are going to do in realityRandom events are bad for forecasts Try to study the forecasts made years or decades ago. Most of them are inaccurate due to accidental or unforeseen events.Technology is not easy We are especially bad at technological forecasts. This story dates back to the distant past: at the end of the XIX century, many were convinced that no one would ever need a phone, and cars would not replace horse carts. And people continue making this mistake: remember at least Steve Ballmer from Microsoft, who said in 2007 that the iPhone would be of no interest to anyone.Forecasts are about marketing If forecasts are so useless, why are they so common? Elementary: the forecast, as a rule, goes hand in hand with an attempt to sell something. Marketing companies need forecasts, that’s all.Random luck People tend to overestimate results without thinking about the process. Therefore, the emphasis shifts to successful assumptions, although they were random and cannot be reproduced.Asymmetric risk Bad forecasts are quickly forgotten, while those who, on a happy occasion, managed to make an accurate forecast, gain fame. This principle underlies why people make predictions at all — especially radical and menacing. A successful guess will bring a reward, and poor forecast will hardly promise any losses.

Failure to admit a mistake Many people make decisions as their inner self wills, which leads to a deplorable result. Instead of admitting a mistake, they prefer to invest based on their forecasts rather than follow a reasonable strategy. This is stated in the book by Ned Davis with the evocative title of “Being Right or Making Money.

Make forecasts better There is some hope for improvement. Philip Tetlock, author of Superforecasting: The Art and Science of Prediction, researches how weather men can use logic and databases to increase the likelihood of achieving the desired result. Note: “probability,” not “prediction”.