It is July. It’s hot outside and people complain about having a hard time thinking straight. So what better topic for a post than probability and statistics? As investors, we constantly have to deal with probabilities. There is no investment that is guaranteed to make a profit, no matter what some people may say. Not even US Treasuries are guaranteed to make a profit because there is a very small probability that the United States government will default on its promise to pay its debt. The probability is so small that it is irrelevant in practice, but it is not zero.
There is an element of herding in forecasting, motivated by institutional reputation and protecting ones career. If the analyst makes an “outlier” forecast that turns out to be spot on, this is likely to capture a lot of attention in the financial media, raising the prospect of the analyst being recruited by a rival firm touting a bigger salary and an even bigger bonus. However, set against this is the risk of being fired (or at least having a few rungs taken from under the career progression of a young analyst) for a bad call.
Forecasting, like others human activities, is influenced by human Nature and behaviour. Forecasting inflation is even harder because is influenced (or ttry to be) by polítics. The Key is to constantly access predictions with New data. Theories help a Lot, as also (see Kondratiev)
Reminds me of when British authorities took the hyper extreme modelling of Ferguson et al. for their covid scenario planning. The models were alarmist and detached from common sense but the government had to be seen to cover their arses and play along with the numbers.
There is an element of herding in forecasting, motivated by institutional reputation and protecting ones career. If the analyst makes an “outlier” forecast that turns out to be spot on, this is likely to capture a lot of attention in the financial media, raising the prospect of the analyst being recruited by a rival firm touting a bigger salary and an even bigger bonus. However, set against this is the risk of being fired (or at least having a few rungs taken from under the career progression of a young analyst) for a bad call.
Forecasting, like others human activities, is influenced by human Nature and behaviour. Forecasting inflation is even harder because is influenced (or ttry to be) by polítics. The Key is to constantly access predictions with New data. Theories help a Lot, as also (see Kondratiev)
Reminds me of when British authorities took the hyper extreme modelling of Ferguson et al. for their covid scenario planning. The models were alarmist and detached from common sense but the government had to be seen to cover their arses and play along with the numbers.