The Fortune SellersThe Fortune SellersFall 2004Fall 2004MIS 696aMIS 696a

Ahmed AbbasiAhmed AbbasiJessica Bagger Jessica Bagger

Daning Hu Daning Hu Xin LiXin Li

Jon Marthaler Jon Marthaler Nicole Forsgren Meek Nicole Forsgren Meek

Matthew Pearsall Matthew Pearsall David Shimko David Shimko

Tao Wang Tao Wang Jerod Wilkerson Jerod Wilkerson

Weather ForecastingWeather Forecasting

“No verifiable skill exists in forecasting day-to-day weather changes a month or a season in advance.”

-Policy statement of the American Meteorological Society

Weather Forecasting - Weather Forecasting - SummarySummary

Very Short Term (less than an hour) – Very accurateVery Short Term (less than an hour) – Very accurate 18 minutes of lead time on severe thunderstorms 18 minutes of lead time on severe thunderstorms

80% accurate80% accurate 21 minutes of lead time on flash floods 63% accurate21 minutes of lead time on flash floods 63% accurate

Short Term (24 – 48 hours) – Reasonably accurate and Short Term (24 – 48 hours) – Reasonably accurate and improvingimproving

Mid Term (> 48 Hours) – Not much better than chanceMid Term (> 48 Hours) – Not much better than chance Long Term (Seasonal) – No better than naïve forecastLong Term (Seasonal) – No better than naïve forecast

Seasonal forecasts – About the same as naïve Seasonal forecasts – About the same as naïve forecastforecast

Almanacs – Worse than naïve forecastAlmanacs – Worse than naïve forecast

Weather Forecasting - Weather Forecasting - ExamplesExamples

The average error rate of predicting The average error rate of predicting hurricane landfall location 72 hours in hurricane landfall location 72 hours in advance is plus or minus 293 miles.advance is plus or minus 293 miles.

The Climate Analysis Center makes The Climate Analysis Center makes temperature predictions with only a 5% temperature predictions with only a 5% greater than pure change likelihood of greater than pure change likelihood of occurring (i.e. 38%), and produces maps occurring (i.e. 38%), and produces maps that cannot actually occur.that cannot actually occur.

Weather Forecasting - Weather Forecasting - CritiqueCritique

Positives:Positives: Describing the current state of weather Describing the current state of weather

forecasting and the methods used.forecasting and the methods used. Weather forecasting beyond 24 – 48 hours in Weather forecasting beyond 24 – 48 hours in

advance is useless.advance is useless. Long-range forecasts are no better than the Long-range forecasts are no better than the

naïve forecast.naïve forecast. Negatives:Negatives:

Only specific examples of missed forecasts.Only specific examples of missed forecasts. Not adequate information to assess the validity Not adequate information to assess the validity

of his conclusions.of his conclusions.

Economic ForecastingEconomic Forecasting

In a pamphlet written in 1850, Carlyle referred to economists as those “respectable Professors of the Dismal Science.”

Economic Forecasting - Economic Forecasting - SummarySummary

Major economic forecasterMajor economic forecaster Government Government Big 3Big 3 Bank / Insurance companyBank / Insurance company Individual companyIndividual company

The problem of economic forecastThe problem of economic forecast Economics is complex, not chaotic, system.Economics is complex, not chaotic, system. Forecasting skill on average is about as good as Forecasting skill on average is about as good as

guessguess Forecasting skill has not improved over the past Forecasting skill has not improved over the past

three decadesthree decades

Economic Forecasting - Economic Forecasting - ExamplesExamples

Source: The Labor Market, Unemployment, and Inflation by Fernando Quijano and Yvonn Quijano

The theory behind the Phillips Curve is that there is a trade-off between inflation rate and unemployment rate

Economic Forecasting – Economic Forecasting – CritiqueCritique

Pros: this chapter pretty well covers the reasons why the performance of economic forecasting was not good in the past.

Cons: it ignores the possibility of the improvement of future forecasting on economy due to Computing capacity keeps growing New theories emerge every day Information technology development

Stock Market ForecastingStock Market Forecasting

Stock Market Forecasting - Stock Market Forecasting - SummarySummary

Stock market has two major campsStock market has two major camps:: Fundamentalists: evaluate “true” value of stock from Fundamentalists: evaluate “true” value of stock from

projected earningsprojected earnings Technicians: use charting to capture mass psychology of Technicians: use charting to capture mass psychology of

marketmarket

Efficient Market HypothesisEfficient Market Hypothesis The market collectively knows everything knowable and The market collectively knows everything knowable and

prices reflect that knowledgeprices reflect that knowledge Strong, Semi-strong, and Weak levels of hypothesisStrong, Semi-strong, and Weak levels of hypothesis

Financial Gurus use fame from one or two publicized Financial Gurus use fame from one or two publicized predictions to build reputation and newsletter predictions to build reputation and newsletter advice businessadvice business

Stock Market Forecasting - Stock Market Forecasting - ExamplesExamples Roger Babson – Predicted Crash of 1929Roger Babson – Predicted Crash of 1929

Joseph Granville – Granville Market NewsletterJoseph Granville – Granville Market Newsletter Used technical analysisUsed technical analysis Calls for market crashed missed large upturnsCalls for market crashed missed large upturns

Elaine Garzarelli – Predicted 1987 Market CrashElaine Garzarelli – Predicted 1987 Market Crash Gained unfounded reputationGained unfounded reputation Future predictions poorFuture predictions poor

Peter Lynch - Managed Fidelity’s Magellan Fund 23 Peter Lynch - Managed Fidelity’s Magellan Fund 23 yearsyears

Increased fund 2700% during Increased fund 2700% during his managementhis management

Stock Market Forecasting - Stock Market Forecasting - CritiqueCritique

Good overview of prevailing theoriesGood overview of prevailing theories

Chapter concludes with practical advice for Chapter concludes with practical advice for avoiding irrational escalation of avoiding irrational escalation of commitment, market timing, and attributing commitment, market timing, and attributing success to skill rather than lucksuccess to skill rather than luck

While lambasting “gurus” the author makes While lambasting “gurus” the author makes a case for professional guidance in making a case for professional guidance in making long-term, diversified investmentslong-term, diversified investments

Demographic ForecastingDemographic Forecasting

Checking the “Unchecked Checking the “Unchecked Population”Population”

Demographic Forecasting - Demographic Forecasting - SummarySummary

Demographic forecasters cannot predict Demographic forecasters cannot predict population trends with any skill; they can population trends with any skill; they can only extrapolate present trends.only extrapolate present trends.

Population forecasters are thus usually Population forecasters are thus usually only accurate within a quarter-century or only accurate within a quarter-century or so.so.

Nobody knows exactly what’s coming, past Nobody knows exactly what’s coming, past a certain point at which the naïve forecast a certain point at which the naïve forecast is still accurate.is still accurate.

Demographic Forecasting - Demographic Forecasting - ExamplesExamples

It’s easy to predict the number of 35-It’s easy to predict the number of 35-year-old people in 2030, because year-old people in 2030, because those 35-year-olds already exist.those 35-year-olds already exist.

Prediction error rates for groups that Prediction error rates for groups that already exist (such as the already exist (such as the aforementioned 35-year-olds) is aforementioned 35-year-olds) is about 1-3%; for those that do not about 1-3%; for those that do not exist, the error rate is between 30-exist, the error rate is between 30-50%.50%.

Demographic Forecasting - Demographic Forecasting - CritiqueCritique

Seems more certain and more willing Seems more certain and more willing to believe what he’s told.to believe what he’s told.

Later, he takes several predictions as Later, he takes several predictions as true, while dismissing other, equally true, while dismissing other, equally credible predictions.credible predictions.

In general, he seems to be advocating In general, he seems to be advocating policy or action for the first time in the policy or action for the first time in the book; he dismisses very optimistic book; he dismisses very optimistic predictions, and instead points to predictions, and instead points to more dismal demographic predictions more dismal demographic predictions as “unassailable”.as “unassailable”.

Technological ForecastingTechnological Forecasting

Technological Forecasting - Technological Forecasting - SummarySummary

Inability to predict important technological Inability to predict important technological breakthroughsbreakthroughs

Electricity Electricity TelephoneTelephone Radar Radar

Focuses on false technological predictions made Focuses on false technological predictions made by:by:

Government (e.g. Japan’s MITI)Government (e.g. Japan’s MITI)• Laser holographyLaser holography

Forecasting Firms (e.g. Rand Corporation)Forecasting Firms (e.g. Rand Corporation)• Habitable lunar baseHabitable lunar base

Futurists (e.g. Herman Kahn, H.G Wells)Futurists (e.g. Herman Kahn, H.G Wells)• Artificial moon lighting systemArtificial moon lighting system

Media (mostly an outlet for other people’s predictions)Media (mostly an outlet for other people’s predictions)

Technological Forecasting - Technological Forecasting - Examples Examples

Herman The LunaticHerman The Lunatic PredictionsPredictions

Lunar lighting/habitationLunar lighting/habitation Extensive underground/underwater Extensive underground/underwater

habitationhabitation Excessive use of nuclear explosives for Excessive use of nuclear explosives for

energy/excavationenergy/excavation Programmed dreamsProgrammed dreams Memory/learning enhancing chemicalsMemory/learning enhancing chemicals Improved educational propaganda Improved educational propaganda

techniquestechniques

Technological Forecasting– Technological Forecasting– CritiqueCritique

Herman The Scientist?Herman The Scientist? Herman Kahn was a military strategist and nuclear Herman Kahn was a military strategist and nuclear

warfare expert during the cold war.warfare expert during the cold war. Most of these predictions were based on social Most of these predictions were based on social

circumstances.circumstances. Threat of nuclear war (explains alternate habitat predictions)Threat of nuclear war (explains alternate habitat predictions) Anti-Communist movement (explains mind controlling Anti-Communist movement (explains mind controlling

predictionspredictions Additional Predictions (supported by statistical analysis)Additional Predictions (supported by statistical analysis)

Digital librariesDigital libraries Population growth rates and GDPPopulation growth rates and GDP Challenged mainstream view that automation = unemploymentChallenged mainstream view that automation = unemployment Many of the “outrageous” predictions were quoted from other Many of the “outrageous” predictions were quoted from other

peoplepeople

Societal ForecastingSocietal Forecasting

Societal Forecasting - Societal Forecasting - SummarySummary

Social prediction began in Europe during Social prediction began in Europe during the 18the 18thth and 19 and 19thth centuries. centuries.

H.G. Wells started the modern practice of H.G. Wells started the modern practice of futurology by writing predictions of the futurology by writing predictions of the future.future.

Today's social forecasters could include Today's social forecasters could include commercial trend spotters – Futurist for commercial trend spotters – Futurist for hire.hire.

The rate for the successful prediction is The rate for the successful prediction is not better than chance.not better than chance.

Societal Forecasting– Societal Forecasting– ExamplesExamples

The modern practice of futurology The modern practice of futurology started with H.G.Wells’s non-fictional started with H.G.Wells’s non-fictional predictions: predictions: Anticipations of the Anticipations of the Reaction of Mech and Scientific Progress Reaction of Mech and Scientific Progress upon Human Life and Thought.upon Human Life and Thought.

By the 1920s, it became fashionable for By the 1920s, it became fashionable for famous people like Henry Ford to provide famous people like Henry Ford to provide their version of social prediction.their version of social prediction.

The current most famous futurist is Alvin The current most famous futurist is Alvin Toffler (“Toffler (“The Third Wave,The Third Wave,” 1980).” 1980).

Misleading social predictions can be Misleading social predictions can be harmful.harmful.

Societal Forecasting - Societal Forecasting - CritiqueCritique

We may not be able to predict future We may not be able to predict future change of our society precisely.change of our society precisely.

If we can prepare for all possibilities If we can prepare for all possibilities of major social changes, then no of major social changes, then no matter how society changes, we will matter how society changes, we will survive and succeed.survive and succeed.

Sherden’s own agenda: Need Sherden’s own agenda: Need education to deflect the dangerous education to deflect the dangerous effects of false prophecies effects of false prophecies

Corporate Corporate ForecastingForecasting

Corporate Forecasting - Corporate Forecasting - SummarySummary

FutureFuture is something we can is something we can influence rather than predictinfluence rather than predict

Present Present opportunityopportunity is something is something we should graspwe should grasp

VisionVision is ability to foresee the is ability to foresee the opportunities that existopportunities that exist

Developing an organizationDeveloping an organization

Corporate Forecasting - Corporate Forecasting - ExamplesExamples

GE Corporate Planning DepartmentGE Corporate Planning Department The department was downsizedThe department was downsized

European Central PlanningEuropean Central Planning Bankrupt command economies & Bankrupt command economies &

crippled industriescrippled industries Planning Programming Budgeting Planning Programming Budgeting

SystemSystem ““Failed everywhere at all times”Failed everywhere at all times”

Corporate Forecasting - Corporate Forecasting - CritiqueCritique

Behavioral theory could be used in Behavioral theory could be used in directing the organization's directing the organization's management. management.

Information system could be used in Information system could be used in helping organization’s information helping organization’s information acquisition and share.acquisition and share.

Short-term, low granularity Short-term, low granularity predictions are needed for grasping predictions are needed for grasping future opportunity.future opportunity.

ConclusionConclusion

Yearly, industry showers society with Yearly, industry showers society with $200 billion in information. $200 billion in information.

They are mostly wrong. Why? They are mostly wrong. Why? Because many of the systems that are Because many of the systems that are

beingbeingforecast are chaotic or complex (and forecast are chaotic or complex (and then there is situational bias)then there is situational bias)

Can we predict anything?Can we predict anything? Short-term weather forecasting and Short-term weather forecasting and

demographic projections seem to do ok. demographic projections seem to do ok.