cpsp forecasting 1
TRANSCRIPT
Forecasting
Creating and Presenting Strategic Plans
Forecasting
Difficult
Vital
Approaches
Numbers Descriptive Adaptive Models
Forecasting
Numbers
Numbers
Precise estimates
http://www.worldbank.org/en/publication/global-economic-prospects/summary-table
Numbers
February 2015There are considerable uncertainties surrounding the projections of GDP growth and CPI inflation published in the Inflation Report. This uncertainty is reflected by the presentation of projections as fan charts. The fan charts are derived from the MPC's projected probability distributions for the annual rate of CPI inflation and four-quarter growth rate of GDP.
Estimates with probabilities
http://www.bankofengland.co.uk/publications/Pages/inflationreport/irprobab.aspx
6%
What’s to be done?
…The MPC’s recent forecast performance has been noticeably worse than prior to
the crisis, and marginally worse than that of outside forecasters. The forecast
errors of the MPC have been characterized by persistent over-prediction of output
growth and persistent under- prediction of CPI inflation…
….The central model used by staff for processing news and judgments .. is a
Dynamic Stochastic General Equilibrium (DSGE) model with a relatively
parsimonious 16 variables at its core…
…there may be too few incentives and opportunities for staff to seriously
challenge the MPC
…Some former MPC members… reported that they encountered difficulties
getting divergent points of view to be seriously considered in the forecasting
process.
Report on Monetary Policy Committee’s Forecasting Capability, 2012
Source: REVIEW OF THE MONETARY POLICY COMMITTEE’S FORECASTING CAPABILITY Report by David Stockton http://www.bankofengland.co.uk/publications/Documents/news/2012/cr3stockton.pdf
The ECB record
Date Event ECB Forecast
9 August 2007
BNP Paribas ceases trading in 3 US hedge funds
specialising in US mortgage debt
‘The outlook for the external environment…remains favourable’
15 Septembe
r 2008
US Government allows Lehman Brothers to go
bankrupt‘…..growth in the world economy is expected to remain relatively resilient.’
2 April 2009
G20 Summit agrees $5tn fiscal expansion of $1.1tn to
help IMF‘….However, the risks to global activity appear to be broadly balanced.’
9 May 2010
Governments declared insolvent: Financial aid to
Greece debt crises
‘Global economic prospects remain subject to high levels of uncertainty. On the one hand, there are concerns that the financial market turmoil could have a greater impact on the real economy, as well as fears that protectionist pressures could intensify ….On the other hand, there may be stronger than anticipated positive effects due to the decrease in commodity prices…
5 August 2011
America’s debt loses triple A status
Looking ahead, the expected gradual retreat of some adverse transitory factors should support world economic activity in the second half of the year.…. In emerging economies, the growth outlook remains buoyant…’https://www.ecb.europa.eu/pub/economic-bulletin/mb/html/index.en.htmlSource:
Forecasting: An astonishing record of complete failure
2001: The accuracy of economic forecasts in the 1990s
1. All much the same: IMF, World Bank and private forecasters.
2. The predictive record of economists was terrible. “The record of failure to predict recessions is virtually unblemished.”
An astonishing record – of complete failure By Tim Harford: Source http://www.ft.com/cms/s/2/14e323ee-e602-11e3-aeef-00144feabdc0.html
The accuracy of economic forecasts from 2007
2008: no recessions in 2009: most of world.
2011 Spring: no recessions in 2012:15 occurred.
Conclusion on Forecasting Numbers
Dreadful
Forecasting
Descriptive
Why?
‘If you know all possible conditions of a physical system you can, in theory,
project its behavior into the future. But this only concerns inanimate objects.
We hit a stumbling block when social matters are involved. It is another matter
to project a future when humans are involved if you consider living beings and
endowed with free will. …However. if you believe in free will you can’t truly
believe in social sciences and economic projection. You cannot predict how
people will act….
… In orthodox economics, rationality became a straitjacket. Platonified
economists ignored the fact that people might prefer to do something other than
maximise their economic interests. This led to mathematical techniques such as
‘maximization’ or ‘Optimization’ on which Paul Samuelson built much of his work.
I would not be the first to say that this optimisation set back social science by
reducing it from the intellectual and reflective discipline that it was becoming an
attempt be an ‘exact science’. By ‘exact science’ I mean a second rate
engineering problem for those who want to pretend that they are in the physics
department - so-called physics envy. In other words an intellectual fraud.’Source: Taleb, N. N. (2007), The Black Swan: The Impact of the Highly Improbable, Penguin books.
2007: Published: Before the banking crisisSeismic Shocks
What’s to be done?
‘As a result of demographics, the Soviet Union thus faces internal problems for which communism has no answers. It will have to retrench either
industrially or militarily, or it will have to reform the collective farm, which can hardly be done without political convulsion. It cannot escape the rising tensions between the populations of a developed European Russia and the fast-growing populations of an Asian Russia. Within the next twenty five years, the Soviet Union will be faced with the same kind of racial, ethnic, religious and cultural tensions that have split apart all other nineteenth
century empires since World War II.’
Drucker, P., (1980), Managing in Turbulent Times, p. 90 Heinemann, London.
1980: 11 years before the end of the Soviet Union December 1991
Process and structure
Process: listening to people
No figures or mathematical models
Unfairness: Poverty, food, religion, regions, race
Forecasting
Adaptive Models
Adaptive models
Adapt to change
Build ‘What if’ scenarios
Discussion before numbers
Disruptive change
Stage 1: Descriptive
Just words
Scenarios
Those involved
Group diversity
Listening
Sales 201X to 201Z
By Product
By Territory
By Customer
Stage 2: Adaptive Model
Sales 201X to 201Z
By Product
By Territory
By Customer
Ratios
Profitability
Assets
Liquidity
Leverage
Income Statement
For Firm
Balance Sheet
For Firm
Cash Flows
For Firm
Sales 201X to 201Z
By Product
By Territory
By Customer
Discussion leading to this
Expected
Best
Worst
For each scenario
A commentary on risk
The end