Whether we like to admit it or not, we all take forecasts way too seriously. It's natural to want the maximum ROI on our investments of time and money in both our businesses and personal lives. Ignoring specific forecasts for weather, the economy, sales and even astrology -- I'm serious, some people take the celestial forecasts seriously -- can make us feel a bit uncomfortable and even irresponsible at times. But what does this say about the accuracy of forecasts in general and the role they should play in our lives?
Sure, some forecasts turn out to be fairly accurate. Especially when the factors that go into them are relatively non-volatile such as a "large high pressure system" in meteorology and even in short-term economic forecasting when employment and GDP are high and debt is low. Ironically, these are also the conditions under which forecasting matches our instincts and is least relevant to our lives.
Here on the East Coast this past year, we've had more than our share of precipitation and this coincided with my attempting to perform a good deal of exterior house maintenance. My biggest frustration was not the actual weather but the inability of local meteorologists to come close in their forecasts even half the time. It seems that nearly every day that showers where predicted they didn't occur and vice versa -- making planning, by their prognostications, impossible. To make matters worse -- with my middle-class blues rant -- this was also true when visiting my home at the Jersey shore. I'm not looking for sympathy, but I would just once like to hear a mid six figure meteorologist say "boy, we really blew it yesterday".
On a more serious note, I ran across a fascinating analysis the other day regarding the Obama Administration's pre-stimulus economic projections compared to what actually occurred. The IEA Blog of the Institute of Economic Affairs reprinted a graph from the Innocent Bystanders blog that depicts the Obama forecast of unemployment with and without the recovery plan. The graph shows actual unemployment of about 7.5 beginning in Q1 2009 moving to approximately 9.4% by September ’09 without and about 7.2% with a recovery plan while actual unemployment in September was 9.8%.
The IEA's take on this is "The Obama Administration indicated in advance the positive effects its stimulus package would provide. The stimulus has shown itself not to have worked, at least so far as its original projections are concerned. The Obama Administration has since stated conditions had actually been worse than originally thought, but that is only an after-the-fact rationale. [and goes on to say] It is just as plausible to argue the stimulus has not only not worked but has made conditions worse than they would have been had no stimulus been applied. For those who argued the stimulus would actually cause harm, this is a confirming experience, while those who think the situation should have improved must now find explanations for this obvious failure in forecasting."
All of which leads me to the conclusion that forecasting is mostly bunk and we might all make more wise and less costly decisions by simply following our instincts -- in procurement, commodity markets and even in our personal lives.