economics
CFA Level III Page 1 of 6 © Gillsie
The Nature of Effective Forecasts
flashcard concepts
• Forecasters fail due to three human Weaknesses
Linear Perception
Group Think
Messenger Syndrome
• A Consensus forecast is a view into the ‘mind of the market’ or a the average forecast
Weakness - tends to miss important economic turning points such as a recession
Use - can ask yourself if the consensus makes sense. If not, be a contrarian
• A Scenario forecast allows user to assign probabilities to several potential economic
outcomes or ‘states of nature.’ A forecast of several economic variables underlies the forecast
for each state
Weakness - too many potential events or states may occur. How to assign probabilities
Use - can evaluate the effects of low probability events
• Rate of Change Data should be used in lieu of the absolute levels of economic activity.
Moving averages are an effective method to employ rate of change data
Problem Set: Nature of Effective Forecasts by Bostian
1. DESCRIBE why judgment is needed in spite of the existence of econometric models for
forecasting
• The human element in economic decision making may lead to break down of any models
based on historical data. Unexpected events and policy changes also need to be accounted
for in any forecasting method
2. EXPLAIN the use of evaluating past forecasts.
• A feedback control system is required to analyze what changes are needed in the
forecasting variables to increase their accuracy and fine-tune them
3. STATE how macroeconomic forecasts help in security analysis.
• The environment in which a corporation operates affects its profitability. Thus accurate
forecasts could help in better determining the company’s revnues/sales and costs and
hence, its stock price.
Developing a Recommendation for a Global Portfolio
Flashcard concepts
• Labor costs have been becoming more