A recent article in CFA Institute provides a list of ten guidelines to use when making economic forecasts:
- Data matters: “Always base your forecasts on data, not qualitative arguments.” Data-mining can present an alluring trap, the article says, so “torture the data until it confesses, but don’t frame the data to the story.”
- Don’t make extreme forecasts: “Remember that there are only two kinds of forecasts: Lucky and wrong.”
- Reversion to the mean: Extremes, the article notes, cannot last for long. “People trend toward average, and competitive forces in business lead to mean reversion.”
- Humans are creatures of habit: If something has worked before, people tend to stick to it. “It is incredible how long a broken system can survive,” the article notes, adding, “Just think of Japan.”
- We rarely fall off a cliff: In order for people to change their habits in the face of disaster, “the catastrophe must be salient, the outcome certain, and the solution simple.”
- Remember Occam’s razor: “The simplest explanation is the most likely to be correct. Ignore conspiracy theories.”
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