The tendency at this time of year for those in the financial industry to make predictions about what’s to come is characterized by Bloomberg columnist Barry Ritholtz as a “prelude to looking foolish.”
“Over the past years,” writes Ritholtz, “it has been my distinct privilege (and, truth be told, pleasure) to point out how silly this process is,” adding that some of the financial industry’s bigger firms and notable economists are jumping on the bandwagon. Referencing a client note written by UBS global chief economist Paul Donovan, Ritholtz cites the following takeaways:
- Models lack precision, but they can be useful if we recognize their limitations. While they allow us to “play” with a variety of possible scenarios, Donovan argues, “models create an imperfect depiction of whatever universe you are trying to simulate on a spreadsheet or a computer.” Economists must therefore closely examine the underlying assumptions used, the economist says, contending that “they need to consider the probabilistic range of what could happen; they cannot ignore variability and randomness in future outcomes.”
- Ritholtz highlights Donovan’s assertion that, at this time of year, there are “mobs of economists fighting to get their forecasts on air.” Given the inaccuracy of forecasts, such a push represents a veiled marketing effort.
- The attempt by economists to pinpoint predictions is an “enormous error.” Donovan writes: “We believe investors just need to know that the world is doing OK. Inflation may rise a little. Central banks will likely slowly tighten policy. Economics is exciting enough; there is no need to get dramatic about decimal points.”