Cpsp forecasting 1
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This document discusses different approaches to forecasting, including numbers, descriptive scenarios, and adaptive models. Numbers-based forecasting using precise estimates and models is described as dreadful due to its poor track record. Descriptive scenario-based forecasting involves qualitative discussions without figures to explore what could happen. Adaptive models combine descriptive scenarios with quantitative models to generate expected, best, and worst case projections along with risk commentary. The document advocates starting with descriptive scenarios to incorporate diverse perspectives before developing any models or projections.
Cpsp forecasting 1
- 1. Forecasting Creating and Presenting Strategic Plans
- 5. Numbers February 2015 There 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%
- 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
- 7. 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 September 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:
- 8. 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.
- 9. Conclusion on Forecasting Numbers Dreadful
- 11. 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 crisis Seismic Shocks
- 12. 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
- 13. Process and structure Process: listening to people No figures or mathematical models Unfairness: Poverty, food, religion, regions, race
- 15. Adaptive models Adapt to change Build ‘What if’ scenarios Discussion before numbers Disruptive change
- 16. Stage 1: Descriptive Just words Scenarios Those involved Group diversity Listening
- 17. 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
- 18. For each scenario A commentary on risk
- 19. The end