Editorial: the pain and pleasure of predicting

Ennustaja

PHOTO: SCANPIX

Throughout the ages, predicting the future by the past and present has been a riveting pastime. Oh the oracles, the crystal balls, the soothsayers and the like. For the fans of stuff more sophisticated, try delving into the «Foundation» series by Isaac Asimov where genius-mathematician Hari Seldon invents a discipline for precision knowledge of the future – psychohistory. By the which he predicts the collapse of the Galactic Empire.

When it comes to treatment of economic forecasts, history is no less severe. Still, these are often read with utmost seriousness being based on certain models and are dealing with a year or couple-of-years perspective of certain specific indicators.

In practice, predicting economic indicators is needed to make plans for the future – like a national budget, for instance. And, in the real life, the result often proves precise enough so social life can for a while be ordered around such plans. Should the forecasts always and altogether flop, no-one would bother.

Therefore, it makes sense, at times, to see the competitive side of the forecasting. Whoever is better at it, has a competitive edge. When able to more precisely predict economic events, it isn’t too difficult to convert the advantage into monetary gain.    

Hence the million dollar question: how be better than the rest? The economist Hardo Pajula, when writing on the perils of predictions, has said that there’s little benefit in real life in attempts to predict the future by scientific measures, often to the tenths. Remembering: buy overly trusting such the mathematical calculations, the investments fund LTCM – one following strategies by economic Nobel Prize guys – lost billions of dollars back in 1998.

And, there’s always the chance of something happening that couldn’t be considered. Let’s take the annexation of Crimea last year – a happening which, according to Nassim Taleb’s theory might come under the «black swan» category: something that was not expected yet had a vast impact. As early as February 2014, nothing seemed to point to that. Who might have guessed that, a mere month after Vladimir Putin spent over $50bn to host Sochi winter Olympics – aimed to skyrocket Russia’s global image – he would write the whole investment off and basically pick a fight with a large part of the world? Oh for the precision of the hindsight wisdom...

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