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wonderpup

The Paradox Of Economic Forecasting

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Everyone knows about the time travel paradox- it's the scenario where you go back in time and kill your father before you are born- at which point you don't exist and so could not have gone back in time and so could not have killed your father which means-therefore- that you father lived meaning that you do exist so you could have gone back to kill him. It's a paradox that seems impossible to resolve.

But how about the future? Suppose-for example- it were possible to make accurate predictions concerning the economy and the markets? A lot of people are paid a lot of money on the assumption that this is possible- and they are paid that money by other people who hope to gain an advantage from their insights.

But there is a problem; If economic forecasting actually worked then everyone would know exactly what stocks to buy and which companies or sectors to invest in- there would be no risk. But if everyone knows what to buy then everyone will be wanting to buy the same thing- so who are the sellers going to be? Who is going to sell a stock they know is going to rise in value?

If economic forecasting really worked there would be no market since the market only exists due to a divergence of opinions concerning the future between those who are buying and those who are selling.

So the paradoxical reality is that the commercial viability of the economic forecasting industry depends on it's manifest inability to forecast the economic future, the resulting uncertainty being what gives rise to the need for their services in the first place. If they could do what they claim to be able to do then there would be no market for their services since all investors would have perfect insight- all would take the same position on every asset and trade would no longer be possible.

Put more simply; they are paid to do what they cannot do because they cannot do it. If they could do it then no one would have any reason to pay them for doing it. So it's a business model that only works to the degree that it doesn't. :blink:

Edited by wonderpup

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Very good post. Forecasts are ********.

I repeat this ad-nauseam at every board meeting or conference I go to.

Vested interests (forecasters and speculators) don't want it to change as it's their livelihood. CFOs and all that type of control freaks find reassurance in predictions, which is the biggest contradiction of all. they prefer a pack of lies than the truth "I don't know".

our brain works by taking shortcuts about everything. It's predictive so that we can place a foot in front of the other without having to assess the terrain at every steps. It takes chances.

That's why we find forecasts sensible. It's a projection of how our brain works. Yet, it's totally illogical.

Now, a PLAN is a totally different thing.

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Everyone knows about the time travel paradox- it's the scenario where you go back in time and kill your father before you are born- at which point you don't exist and so could not have gone back in time and so could not have killed your father which means-therefore- that you father lived meaning that you do exist so you could have gone back to kill him. It's a paradox that seems impossible to resolve.

But how about the future? Suppose-for example- it were possible to make accurate predictions concerning the economy and the markets? A lot of people are paid a lot of money on the assumption that this is possible- and they are paid that money by other people who hope to gain an advantage from their insights.

But there is a problem; If economic forecasting actually worked then everyone would know exactly what stocks to buy and which companies or sectors to invest in- there would be no risk. But if everyone knows what to buy then everyone will be wanting to buy the same thing- so who are the sellers going to be? Who is going to sell a stock they know is going to rise in value?

If economic forecasting really worked there would be no market since the market only exists due to a divergence of opinions concerning the future between those who are buying and those who are selling.

So the paradoxical reality is that the commercial viability of the economic forecasting industry depends on it's manifest inability to forecast the economic future, the resulting uncertainty being what gives rise to the need for their services in the first place. If they could do what they claim to be able to do then there would be no market for their services since all investors would have perfect insight- all would take the same position on every asset and trade would no longer be possible.

Put more simply; they are paid to do what they cannot do because they cannot do it. If they could do it then no one would have any reason to pay them for doing it. So it's a business model that only works to the degree that it doesn't. :blink:

This is the efficient market hypothesis.

The EMH was widely disparaged as a cause of the financial crisis, although I never understood why.

The EMH says you can't beat the market, and the mass of traders couldn't, their forecasts were nonsense. To me the financial cash was damn good evidence for the EMH.

Of course if you make money as a trader, you don't want to believe it, and you don't want anyone else to either.

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This is the efficient market hypothesis.

The EMH was widely disparaged as a cause of the financial crisis, although I never understood why.

The EMH says you can't beat the market, and the mass of traders couldn't, their forecasts were nonsense. To me the financial cash was damn good evidence for the EMH.

Of course if you make money as a trader, you don't want to believe it, and you don't want anyone else to either.

EMH states thbast current price reflects all information known. Don't disagree with that.

There is an important wrinkle - it does not claim that the information is correct.

So you get thundering of herds on a wild goose chase.

EMH is a bit of economic BS. Sounds good at first hearing. Digging down a bit it's just lightweight crap, like the rest of Economics.

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EMH states thbast current price reflects all information known. Don't disagree with that.

There is an important wrinkle - it does not claim that the information is correct.

So you get thundering of herds on a wild goose chase.

EMH is a bit of economic BS. Sounds good at first hearing. Digging down a bit it's just lightweight crap, like the rest of Economics.

Not sure I agree. The EMH doesn't claim prices are correct, just that you can't profitably forecast any better.

I think the abuse of the word efficient leads people to believe that the theory says something it doesn't. Markets arent efficient in any kind of meaningful way, only that they are optimal forecasts in a very specific sense.

Edited by BuyToLeech

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Not sure I agree. The EMH doesn't claim prices are correct, just that you can't profitably forecast any better.

I think the abuse of the word efficient leads people to believe that the theory says something it doesn't. Markets arent efficient in any kind of meaningful way, only that they are optimal forecasts in a very specific sense.

Its a bit more subtle than that.

A few people beat the market. These are times when the consensus becomes some sort of faith than sense.

Soros in 92 betting agianst the pound.

Guy who bet against US mortgage securities.

EMH has a bit of truth in it - but not enoguh to make a good investement.

In fact EMH is just a tarted up vresion of - 'People know shit'

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Everyone knows about the time travel paradox- it's the scenario where you go back in time and kill your father before you are born- at which point you don't exist and so could not have gone back in time and so could not have killed your father which means-therefore- that you father lived meaning that you do exist so you could have gone back to kill him. It's a paradox that seems impossible to resolve.

But how about the future? Suppose-for example- it were possible to make accurate predictions concerning the economy and the markets? A lot of people are paid a lot of money on the assumption that this is possible- and they are paid that money by other people who hope to gain an advantage from their insights.

But there is a problem; If economic forecasting actually worked then everyone would know exactly what stocks to buy and which companies or sectors to invest in- there would be no risk. But if everyone knows what to buy then everyone will be wanting to buy the same thing- so who are the sellers going to be? Who is going to sell a stock they know is going to rise in value?

If economic forecasting really worked there would be no market since the market only exists due to a divergence of opinions concerning the future between those who are buying and those who are selling.

So the paradoxical reality is that the commercial viability of the economic forecasting industry depends on it's manifest inability to forecast the economic future, the resulting uncertainty being what gives rise to the need for their services in the first place. If they could do what they claim to be able to do then there would be no market for their services since all investors would have perfect insight- all would take the same position on every asset and trade would no longer be possible.

Put more simply; they are paid to do what they cannot do because they cannot do it. If they could do it then no one would have any reason to pay them for doing it. So it's a business model that only works to the degree that it doesn't. :blink:

What your saying is in essence similar to the "Lucas Critique":

https://en.wikipedia.org/wiki/Lucas_critique

which states that any model loses predictive power once economic agents use its results to takes decisions. One of the few things I learnt in my economics degree that is still very useful to recall on an almost daily baisis

The collapse of the MBS market was a classic example of this. All those "Monte Carlo" simulations showing that it was "all OK" failed to recognise that everyone else thought it was "all OK" too and was loading up on mortgages, hence increasing demand and driving down underwriting standards such that the assumptions underpinning the original models and simulations no longer bore any relation to real life.

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EMH states thbast current price reflects all information known. Don't disagree with that.

There is an important wrinkle - it does not claim that the information is correct.

So you get thundering of herds on a wild goose chase.

EMH is a bit of economic BS. Sounds good at first hearing. Digging down a bit it's just lightweight crap, like the rest of Economics.

Fama original work on this stated that the conditions of knowing all the information was impossible it was a totally theoretical construct about a market if these conditions existed.

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EMH joke:

An economist and a normal person are walking down a street. The normal person says “Hey, look, there’s a $20 bill on the sidewalk!” The economist replies by saying “That’s impossible- if it were really a $20 bill, it would have been picked up by now.”

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Some participants are able to forecast. I mean the people who have the power to make changes happen such as the central bank heads. OK even they can't know precisely and exactly but they have a pretty good idea because they have more information.

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This is the uncertainty principle writ large, isn't it? You cannot predict exactly where an electron will be - and if you try to measure it you're distorting its path.

But there is still value in prediction as you can say with some certainty that the electron will be somewhere in a defined orbital.

Perhaps economic predictions are the same. You can say with considerable certainty that house prices will crash, but exactly when, where and by how much is far less predictable.

I think Funn3r is also correct. Those with the power to move the market can predict it. Trouble is, I suspect those people almost never go public, or if they do it's not the advantage of the public.

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The problem is that the underlying rules and behaviours of the system under study are not constant, they are subject to change (by humans) and can change as a result of the predictions.

Any long term model should have a game theory element.

Whereas if trading is about feeling out the current trends, then I'd expect simple machine learning to replace all the humans pretty soon.

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EMH joke:

An economist and a normal person are walking down a street. The normal person says Hey, look, theres a $20 bill on the sidewalk! The economist replies by saying Thats impossible- if it were really a $20 bill, it would have been picked up by now.

And typically, you don't find £20 notes lying around, not to the extent you could earn a living from it, because they have already been picked up.

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Some participants are able to forecast. I mean the people who have the power to make changes happen such as the central bank heads. OK even they can't know precisely and exactly but they have a pretty good idea because they have more information.

I suspect that sustainably beating the market requires some form of rent-seeking or rule breaking.

My vote for the most overlooked aspect of economics goes to rent-seeking. I have come to believe that politics and monopoly are the major driving forces, and that free markets are a relatively minor sideshow.

The EMH only applies to the sideshow.

Edited by BuyToLeech

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And typically, you don't find £20 notes lying around, not to the extent you could earn a living from it, because they have already been picked up.

See my paying off the mortgage thread... but yes unfortunately you can earn a living doing it.

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This is the uncertainty principle writ large, isn't it? You cannot predict exactly where an electron will be - and if you try to measure it you're distorting its path.

But there is still value in prediction as you can say with some certainty that the electron will be somewhere in a defined orbital.

Perhaps economic predictions are the same. You can say with considerable certainty that house prices will crash, but exactly when, where and by how much is far less predictable.

I think Funn3r is also correct. Those with the power to move the market can predict it. Trouble is, I suspect those people almost never go public, or if they do it's not the advantage of the public.

And there lies the irony.

Throughout the 1980s and 1990s the mantra from many economic forecasters was that the state and politicians should not interfere in the free market. The problem was that when bubbles appeared and burst as they inevitably do in such a situation then they suddenly wanted as much political interference and taxpayers money as they could get. Given they are all charlatans they may as well hire me to predict the future by looking at chicken entrails.

The one saving grace of markets is that they are inherently chaotic systems. That is they follow patterns but that those patterns are not always predictable from previous patterns. Minor changes can therefore lead to major phase changes. So while politicians and vested interests attempt to rig them the outcomes are not necessarily going to be what they want or intend. In fact as with the weather most market participants act on the assumption that things tomorrow will be very similar to today which will normally be correct until it isn't. This mentality is what drives bubbles to illogical extremes. Professional weather or market models may beat persistence in accuracy over the very short term so possibly can confer advantages to those who need a temporary advantage such as ice cream salesmen and very active market traders but they become increasingly unreliable the further out they are pushed over time.

Edited by stormymonday_2011

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Everyone knows about the time travel paradox- it's the scenario where you go back in time and kill your father before you are born- at which point you don't exist and so could not have gone back in time and so could not have killed your father which means-therefore- that you father lived meaning that you do exist so you could have gone back to kill him. It's a paradox that seems impossible to resolve.

But how about the future? Suppose-for example- it were possible to make accurate predictions concerning the economy and the markets? A lot of people are paid a lot of money on the assumption that this is possible- and they are paid that money by other people who hope to gain an advantage from their insights.

But there is a problem; If economic forecasting actually worked then everyone would know exactly what stocks to buy and which companies or sectors to invest in- there would be no risk. But if everyone knows what to buy then everyone will be wanting to buy the same thing- so who are the sellers going to be? Who is going to sell a stock they know is going to rise in value?

If economic forecasting really worked there would be no market since the market only exists due to a divergence of opinions concerning the future between those who are buying and those who are selling.

So the paradoxical reality is that the commercial viability of the economic forecasting industry depends on it's manifest inability to forecast the economic future, the resulting uncertainty being what gives rise to the need for their services in the first place. If they could do what they claim to be able to do then there would be no market for their services since all investors would have perfect insight- all would take the same position on every asset and trade would no longer be possible.

Put more simply; they are paid to do what they cannot do because they cannot do it. If they could do it then no one would have any reason to pay them for doing it. So it's a business model that only works to the degree that it doesn't. :blink:

Stop over analysing. Its a forecast. All known variables at a certain point in time. Obviously these things change.

But the purpose of forecasting is so that you can make decisions earlier if things arnt going to plan.

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EMH joke:

An economist and a normal person are walking down a street. The normal person says “Hey, look, there’s a $20 bill on the sidewalk!” The economist replies by saying “That’s impossible- if it were really a $20 bill, it would have been picked up by now.”

Thats only in a strongly efficient market. Most markets are semi strong no?

There may be a few investors that beat the market, but the vast majority dont. Im a beleiver in random walk. Technical analysis is nonsense

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...

But there is a problem; If economic forecasting actually worked then everyone would know exactly what stocks to buy and which companies or sectors to invest in- there would be no risk. But if everyone knows what to buy then everyone will be wanting to buy the same thing- so who are the sellers going to be? Who is going to sell a stock they know is going to rise in value?

If economic forecasting really worked there would be no market since the market only exists due to a divergence of opinions concerning the future between those who are buying and those who are selling.

Not all economic forecasters agree in a market.

We make our own market decisions, including deciding who are good sources of information for likely performance.

Some have gone whole hog to the economy-guru-forecaster guy from Sheffield who "is getting into housing" a couple of years ago, and the champagne ripple of HPI to come. Say hello to Section 24 / 3% stamp duty hike / political desire to see them squeal.

Now they might be the sellers going forwards. From BTL expansion glory in the forever HPI, to selling off properties and bankrupted by CGT.

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The future cannot be predicted in anything more than the vaguest terms, and if that. And that is the crux of why central planning is always a disaster. At least a free market has a chance of correcting quite quickly a bad choice. The central govt moves like treacle and mistakes can take decades to unwind , usually only after they have devastated the economy and our lives.


The best analogy is the successful individual speculator. It is not because they are always guessing the future correctly , the very best are usually only 60% correct, it is because they can sooner recognize that they are wrong and then quickly do something about it. The micro economy of the individual, who has his own skin in the game, will always react quicker than a bureaucrat playing with other peoples' money.


We need to abolish central govt, they absolutely cannot operate because of this forecasting problem. We need smaller more nimble local govts only and if any of them gets it badly wrong they don't take the whole country down like central govts

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The future cannot be predicted in anything more than the vaguest terms, and if that. And that is the crux of why central planning is always a disaster. At least a free market has a chance of correcting quite quickly a bad choice. The central govt moves like treacle and mistakes can take decades to unwind , usually only after they have devastated the economy and our lives.
The best analogy is the successful individual speculator. It is not because they are always guessing the future correctly , the very best are usually only 60% correct, it is because they can sooner recognize that they are wrong and then quickly do something about it. The micro economy of the individual, who has his own skin in the game, will always react quicker than a bureaucrat playing with other peoples' money.
We need to abolish central govt, they absolutely cannot operate because of this forecasting problem. We need smaller more nimble local govts only and if any of them gets it badly wrong they don't take the whole country down like central govts

You saying i might live forever ,and there will be no night when day finishes in a few hours here in Wales :P

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Disagree. And a lot on the 'skin in the game' have no interest - proven by such low inventory on the market - of cashing in/selling up, from long wave 70s+ hpi mad gainz. They'll leave it too late. The losses, when they come, will see lot of those mad-gainz become far less so. Only some individuals cash out of a bubble at 90% peak value. The vast vast majority ride it to the end. And you can't find a scapegoat for that in 'economic forecasters'.

Know that many market participants always want bailing out for their choices. Many saw the QE, 0.5% and later HTB as a signal that Gov always supports house prices, to further double down, putting their 25% into BTL... with their own homes on the line. Surprise S.24 / 3% stamp duty hike. Banks in a much stronger position next time, to allow wider correction.

We have some market participants forecasters with solid genuine productive forecasts that have performed in market. Others crashed out. Some want it just easy 100% forecasters right. Even Gov tells lies, or suggests things - you're own choice if you believe all OBR comes out with.. not carrying others for their own complacent 'good times forever / if you don't buy a house now things going to get much worse for you' naivety either.

There is prejudice against any theory that highlights the interconnectedness of life in a nonmagical way. Many minds balk at any long chain of reasoning, whatever the character of conclusions it supports. This prejudice is all the more emphatic when logic suggests that certain political or social developments are broadly deterministic, or that each stage of human history does not afford the same possibilities. In part, this disregard for causes and consequences is a form of intellectual evasion. What is truly random cannot be predicted or explained. By pretending everything is random, we paradoxically allow ourselves to shirk responsibility for those circumstances where our own actions could have an effect in altering outcomes for the better. To those who do not wish to understand, all news is a surprise.

[..]There is a widespread assumption that economic progress since World War II has become permanent. ..... unargued conviction that another crash is no more likely than an invasion from Mars. ... illusion is a general overestimation of the powers of governments. ...

[...]Taking a longer view, the crucial mistake that runs through contemporary perceptions of reality is the deep reluctance to face the all-embracing action and reaction of nature. Life is not static. It is turbulent to its very essence. Human societies, like all complex systems, are constantly fluctuating. This fundamental ebb and flow is the source of cycles in human affairs, including economic cycles. As Emerson says, there is a "deep remedial force that underlies all facts." At every point where something goes up, nature is constantly compensating by finding a way to bring it down. "Superinduce magnetism at one end of a needle; the opposite magnetism takes place at the other end. If the south attracts, the north repels. To empty here, you must condense there." Nature keeps its accounts in balance.

-Davidson

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As Emerson says, there is a "deep remedial force that underlies all facts." At every point where something goes up, nature is constantly compensating by finding a way to bring it down. "Superinduce magnetism at one end of a needle; the opposite magnetism takes place at the other end. If the south attracts, the north repels. To empty here, you must condense there." Nature keeps its accounts in balance.

It's a very reassuring belief. In fact - consider the opposite: the housing market, entirely unregulated by true market forces. Instinctively (naturally), we bristle against such a contrived setup. Every prop defies nature. And that's not enough. Then we have to listen to the supporters of such an artificial marketplace. Worse: people are taken in by their words. Conclusion: if instinctively you feel something is wrong, it probably is.

Edited by canbuywontbuy

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It's a very reassuring belief. In fact - consider the opposite: the housing market, entirely unregulated by true market forces. Instinctively (naturally), we bristle against such a contrived setup. Every prop defies nature. And that's not enough. Then we have to listen to the supporters of such an artificial marketplace. Worse: people are taken in by their words. Conclusion: if instinctively you feel something is wrong, it probably is.

You and others might be taken in by those words. (Although I don't think you have).

At these prices there is no innocence for me. If you can't see it.. houses vs incomes, then that's your own market view no matter what guru/forecaster they listen/read. BTLers unregulated market. OO take their own decisions. You don't need instinct imo to be fearful in this market, and of these house prices - but what do I know... could be HPI+++++ happydayz champagne ripples as some of the hpcers have until recently been suggesting. Now it is less likely, we're hearing more from them about 'BTLers are just human beings doing what they thought the Goverment wanted and I refuse to hate like you do, but they deserve our understanding and our pity if market goes against them.' Sheesh.

I'm coming to the view that such excuses for those who choose to make their own market decisions (buy shares / lose money / buy house don't lose money (for after all it's been years of HPI+++ and still same old victim story about being misled by others, buy BTL after BTL), are actually worse than the BTLers' own actions / involvement in the market. Makes me want to hug a BTLer for their honesty of their own actions, rather than those here offering up excuses for them.

Many boomers bought the houses that they'd live in for the rest of their lives, and raise their families in, at the beginning of their working lives, before they had families.

I feel that the kind of laddderism that you're assuming here is part of a perhaps unwitting attempt by society at large to turn a blind eye to the failure of the boomers to build sufficiently to ensure that their children, and pretty soon their children's children, enjoy the access to housing that boomers did nothing to earn but enjoyed nevertheless.

I think the other rather insidious idea lurking in your thinking is that it is somehow a problem if somebody pays too much for a house and ends up stuck in it. When so many hard working young people are totally excluded from even having the option to purchase property expecting any sympathy for people who not only had that option but acted on it is a dog that won't hunt as far as I am concerned.

We cannot have a housing market where there is no downside to paying too much, that way lies madness. If these people paid too much and were relying on calm economic waters forever so that they could build up some equity and trade up, f**k 'em. Houses are for living in. Taking on debt is about making and keeping promises. Some people will have bad luck; we can't protect people from the vagaries of chance, the idea that we can is stupid fantasy. The whole idea of starter homes and ladders strikes me as total boll0cks, cut from the same idiotic cloth as much of the rest of the apparently endemic HPI+++ for-f**king-ever madness

Take ownership of own decisions. Whatever the market. Much by way of transactions in recent years have been equity swap with little fresh debt, other than into BTL. If you take professional advice and it goes against you, know in advance what options you have. No advice, or reading something from a guru in Sheffield who forecasts HPI to the moon... own decisions.

Part of the reason the BTLers are reeling so hard with astonishment and squeals to Section 24 and stamp duty hike (and more), is they generally have no empathy. They honestly thought they were core-voters and young people Generation Rent Forever.

Some of the props have only been to get the BTLers/greed to double down in to the market, but that's yet to be proven. Looks good though with hit after hit on the BTLers during the last 300+ days.

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