Forecasting: Subject definition List

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Forecasting is the weakest part of economics as a science. Investment is the most influential and capricious fuel to any economy, and individual investors size its input reacting on what they expect to sell in the future. By means of a complicated social information structure, consumers and investors talk each other into some level of expectations. The way they do this is hard, not to say impossible to model.

If, for instance, it becomes expected that interest will rise, potential lenders wait, and potential borrowers rush. As a result, the interest rises, may be even faster than the original expectation (self-fulfilling forecast). If it becomes expected that next year, oil will be scarce and hence oil investments will yield substantially above average returns, oil investments now may well cause that this will not happen (self-destroying forecast).

Nevertheless, economists do engage in the tricky business of forecasting. What are the problems here? This is what this subject group is about.

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