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System economics: Overcoming the pitfalls of forecasting models via a multidisciplinary approach

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  • Orrell, David
  • McSharry, Patrick

Abstract

In areas from medicine to climate change to economics, we are faced with huge challenges and a need for accurate forecasts, yet our ability to predict the future has been found wanting. The basic problem is that complex systems such as the atmosphere or the economy can not be reduced to simple mathematical laws and modeled accordingly. The equations in numerical models are therefore only approximations to reality, and are often highly sensitive to external influences and small changes in parameterisation -- they can be made to fit past data, but are less good at prediction. Since decisions are usually based on our best models of the future, how can we proceed? This paper draws a comparison between two apparently different fields: biology and economics. In biology, drug development is a highly inefficient and expensive process, which in the past has relied heavily on trial and error. Institutions such as pharmaceutical companies and universities are now radically changing their approach and adopting techniques from the new field of systems biology to integrate information from disparate sources and improve the development process. A similar revolution is required in economics if models are to reflect the nature of human economic activity and provide useful tools for policy makers. We outline the main foundations for a theory of systems economics.

Suggested Citation

  • Orrell, David & McSharry, Patrick, 2009. "System economics: Overcoming the pitfalls of forecasting models via a multidisciplinary approach," International Journal of Forecasting, Elsevier, vol. 25(4), pages 734-743, October.
  • Handle: RePEc:eee:intfor:v:25:y:2009:i:4:p:734-743
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    References listed on IDEAS

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    Cited by:

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    2. Makridakis, Spyros & Taleb, Nassim, 2009. "Decision making and planning under low levels of predictability," International Journal of Forecasting, Elsevier, vol. 25(4), pages 716-733, October.
    3. Prasad, Ravita D. & Bansal, R.C. & Raturi, Atul, 2014. "Multi-faceted energy planning: A review," Renewable and Sustainable Energy Reviews, Elsevier, vol. 38(C), pages 686-699.
    4. Makridakis, Spyros & Hogarth, Robin M. & Gaba, Anil, 2009. "Forecasting and uncertainty in the economic and business world," International Journal of Forecasting, Elsevier, vol. 25(4), pages 794-812, October.
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    6. Peter Nielsen & Liping Jiang & Niels Gorm Malý Rytter & Gang Chen, 2014. "An investigation of forecast horizon and observation fit's influence on an econometric rate forecast model in the liner shipping industry," Maritime Policy & Management, Taylor & Francis Journals, vol. 41(7), pages 667-682, December.
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    8. Jan Kwakkel & Gönenç Yücel, 2014. "An Exploratory Analysis of the Dutch Electricity System in Transition," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 5(4), pages 670-685, December.
    9. Arora Siddharth & Little Max A. & McSharry Patrick E., 2013. "Nonlinear and nonparametric modeling approaches for probabilistic forecasting of the US gross national product," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(4), pages 395-420, September.
    10. Wright, George & Goodwin, Paul, 2009. "Decision making and planning under low levels of predictability: Enhancing the scenario method," International Journal of Forecasting, Elsevier, vol. 25(4), pages 813-825, October.
    11. repec:eee:streco:v:45:y:2018:i:c:p:30-36 is not listed on IDEAS
    12. -, 2011. "An assessment of the economic impact of climate change on the tourism sector In Barbados," Sede Subregional de la CEPAL para el Caribe (Estudios e Investigaciones) 38602, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    13. Roberto Savona & Marika Vezzoli, 2015. "Fitting and Forecasting Sovereign Defaults using Multiple Risk Signals," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(1), pages 66-92, February.
    14. Olga Kiuila, 2011. "Interactions between trade and environmental policies in the Czech economy," Working Papers 2011-16, Faculty of Economic Sciences, University of Warsaw.
    15. Zanoli, Raffaele & Gambelli, Danilo & Vairo, Daniela, 2012. "Scenarios of the organic food market in Europe," Food Policy, Elsevier, vol. 37(1), pages 41-57.
    16. Arvydas Jadevicius & Brian Sloan & Andrew Brown, 2013. "Property Market Modelling and Forecasting: A Case for Simplicity," ERES eres2013_10, European Real Estate Society (ERES).

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