The 2 Things Every Economic Forecaster Should Know – Big Banks And Excess Information | Exploring Markets

The 2 Things Every Economic Forecaster Should Know – Big Banks And Excess Information

Economists, financiers, technologists, and even sports critics all attempt the great science of forecasting.

In its simplest form, forecasting starts when someone inputs both what they know in the present and what they've learned in the past into a model that predicts what will happen in the future.

We recently stumbled across a fantastic essay by James Surowiecki about forecasting, and he points out the two most important things every forecaster must be aware of. The article is directed at financial and economic pundits but its meaning can be extrapolated for just about any profession. Here's what he says:
"The first is the outsized economic role, and increased complexity, of the financial sector. The enormous amounts of leverage that banks and other financial institutions now use have amplified the consequences of their decisions, as has the increased importance of derivatives. But the financial sector is, relatively speaking, opaque—it’s difficult for regulators and next-to-impossible for investors to get a real handle on the kinds of risks financial institutions are taking and the kinds of bets they’re making. If you want to predict how a potential crisis will play out, you have to be able to predict how it will affect the country’s big banks. 
The second problem that forecasters face today is more subtle, but perhaps no less important: that there may actually be too much information out there. But the reality is that investors and businesspeople are now constantly assailed by a high-volume clang of market info and economic data. More important, they’re bombarded by news about what other investors and businesspeople think, and the predictions they’re making. Once upon a time, executives could make decisions based primarily on their own, private information—what they sensed about local business conditions, what they were seeing from their customers. Investors could pay attention chiefly to fundamental data. These days, it’s harder, in psychological terms, to do that, because you're constantly exposed to the opinions of others." 
- James Surowiecki, Democracy Journal, a piece on economic forecasting -- its follies and history