Why Economic and Financial Forecasts are Almost Always Wrong!
Our September Reflections letter is out and its a good one - on the folly of forecasting!
..... economic and financial forecasts do not have the luxury of relying solely on knowable facts. One of their most important inputs, if not the most important - people’s feelings about the future - is especially hard to gauge in the present and becomes quickly unknowable further out.
This key factor, which drives demand and economic activity, is purely psychological. As there is no physical limit to the "amount" of exuberance or pessimism that can be experienced by people there is no real limit on how high or how low they might push a market or a price – notwithstanding reality.
Furthermore, events of no tangible consequence for the real economy can affect people’s feelings. Because changes in feelings can easily become self-reinforcing we can quickly face a very different economic environment than the one that was expected based on the continuation of what was before.
The description by a former IMF economist of economics as "applied psychology with a bit of statistics around it" should give a proper sense of what can be expected from financial forecasts. People’s mood shifts are not predictable. To Read the Full Letter Click Here