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Forecasting and uncertainty in the economic and business world

Author

Listed:
  • Makridakis, Spyros
  • Hogarth, Robin M.
  • Gaba, Anil

Abstract

Forecasts are crucial for practically all economic and business decisions. However, there is a mounting body of empirical evidence showing that accurate forecasting in the economic and business world is usually not possible. In addition, there is huge uncertainty, as practically all economic and business activities are subject to events we are unable to predict. The fact that forecasts can be inaccurate creates a serious dilemma for decision and policy makers. On the one hand, accepting the limits of forecasting accuracy implies being unable to assess the correctness of decisions and the surrounding uncertainty. On the other hand, believing that accurate forecasts are possible means succumbing to the illusion of control and experiencing surprises, often with negative consequences. We believe that the time has come for a new attitude towards dealing with the future. In this article, we discuss the limited predictability in the economic and business environment. We also provide a framework that allows decision and policy makers to face the future -- despite the inherent limitations of forecasting and the uncertainty, sometimes huge, surrounding most future-oriented decisions.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:intfor:v:25:y:2009:i:4:p:794-812
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    References listed on IDEAS

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    1. Makridakis, Spyros & Hibon, Michele, 2000. "The M3-Competition: results, conclusions and implications," International Journal of Forecasting, Elsevier, vol. 16(4), pages 451-476.
    2. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
    3. Antonio E. Bernardo & Ivo Welch, 2001. "On the Evolution of Overconfidence and Entrepreneurs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 301-330, September.
    4. Johnson, Eric J & Hershey, John & Meszaros, Jacqueline & Kunreuther, Howard, 1993. "Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
    5. Robin M. Hogarth & Spyros Makridakis, 1981. "Forecasting and Planning: An Evaluation," Management Science, INFORMS, vol. 27(2), pages 115-138, February.
    6. 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.
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    Citations

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    Cited by:

    1. Violetta Bacon-Gerasymenko & Russell Coff & Rodolphe Durand, 2016. "Taking a Second Look in a Warped Crystal Ball: Explaining the Accuracy of Revised Forecasts," Journal of Management Studies, Wiley Blackwell, vol. 53(8), pages 1292-1319, December.
    2. Vögele, Stefan & Hansen, Patrick & Poganietz, Witold-Roger & Prehofer, Sigrid & Weimer-Jehle, Wolfgang, 2017. "Building scenarios for energy consumption of private households in Germany using a multi-level cross-impact balance approach," Energy, Elsevier, vol. 120(C), pages 937-946.
    3. Savio, Nicolas D. & Nikolopoulos, Konstantinos, 2013. "A strategic forecasting framework for governmental decision-making and planning," International Journal of Forecasting, Elsevier, vol. 29(2), pages 311-321.
    4. Makridakis, Spyros & Taleb, Nassim, 2009. "Living in a world of low levels of predictability," International Journal of Forecasting, Elsevier, vol. 25(4), pages 840-844, October.
    5. Knüppel, Malte, 2014. "Efficient estimation of forecast uncertainty based on recent forecast errors," International Journal of Forecasting, Elsevier, vol. 30(2), pages 257-267.
    6. López, Ana M., 2016. "El papel de la información económica como generador de conocimiento en el proceso de predicción: comparaciones empíricas del crecimiento del PIB regional /The Role of Economic Information as a Generat," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 34, pages 543-572, Agosto.
    7. Petropoulos, Fotios & Goodwin, Paul & Fildes, Robert, 2017. "Using a rolling training approach to improve judgmental extrapolations elicited from forecasters with technical knowledge," International Journal of Forecasting, Elsevier, vol. 33(1), pages 314-324.
    8. Roberts, James P. & Middleton, Andrew, 2014. "Evolving products: From human design to self-organisation via Science Fiction Prototyping," Technological Forecasting and Social Change, Elsevier, vol. 84(C), pages 15-28.
    9. repec:spr:amsrev:v:7:y:2017:i:3:d:10.1007_s13162-017-0104-9 is not listed on IDEAS
    10. Julia P. Prims & Don A. Moore, 2017. "Overconfidence over the lifespan," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 12(1), pages 29-41, January.
    11. repec:kap:poprpr:v:36:y:2017:i:6:d:10.1007_s11113-017-9440-6 is not listed on IDEAS

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