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Prediction: The Long and the Short of It

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  • Antony Millner
  • Daniel Heyen

Abstract

Commentators often lament forecasters' inability to provide precise predictions of the long-run behavior of complex economic and physical systems. Yet their concerns often conflate the presence of substantial long-run uncertainty with the need for long-run predictability; short-run predictions can partially substitute for long-run predictions if decision-makers can adjust their activities over time. So what is the relative importance of short- and long-run predictability? We study this question in a model of rational dynamic adjustment to a changing environment. Even if adjustment costs, discount factors, and long-run uncertainty are large, short-run predictability can be much more important than long-run predictability.

Suggested Citation

  • Antony Millner & Daniel Heyen, 2021. "Prediction: The Long and the Short of It," American Economic Journal: Microeconomics, American Economic Association, vol. 13(1), pages 374-398, February.
    • Handle: RePEc:aea:aejmic:v:13:y:2021:i:1:p:374-98
    DOI: 10.1257/mic.20180240
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    References listed on IDEAS

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    Cited by:

    1. Linsenmeier, Manuel & Shrader, Jeffrey G., 2023. "Global inequalities in weather forecasts," SocArXiv 7e2jf, Center for Open Science.
    2. Anand, Vaibhav, 2022. "The Value of Forecast Improvements: Evidence from Advisory Lead Times and Vehicle Crashes," MPRA Paper 114491, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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