Forecasting Methods: Difficulties and Discontinuities

Physicist Niels Bohr is reported to have said “Prediction is difficult, especially about the future”. While significant strides have been made in weather forecasting and predicting at least the frequency of earthquakes over the past 100 years, predictions relating to human behaviour and economics remain direly inaccurate. As statistician Nate Silver says in his excellent book The Signal and the Noise (2012), “we are unable to predict recessions more than a few months in advance, and not for want of trying”. He observes that in December 2007, economists on The Wall Street Journal forecasting panel predicted only a 38% likelihood of recession in the next year, which was remarkable because the data would later show that the economy was already in recession at the time…