What is econometric prediction or forecasting?
Econometric prediction is a model used by economists to forecast future developments within the economy. It involves measurements of past relationship-based variables such as household income, employment, consumer expenditure, interest rates, and tax rate to establish how changes in some variables impact the future course of others. There are steps involved to calculate and make use of an econometric prediction model to forecast future developments. A study on how different economic factors interact with each other is predetermined as the theory is applied to remedy and give a future prediction on the outcomes. An example of econometric forecasting relates to the Adam Hartung article, where he provides attributes on how president Obama predicted a true state of the United States market only for the Wall Street forecasters to blow their 2013 predictions (Hartung, 2013). However, the two predictions justified that all econometric models are not truly complete due to certain variables that are vulnerable to outside forces.
Why is econometric prediction or forecasting difficult and/or inaccurate in the real business world?
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Despite the econometric prediction, building confidence, and certainty in an economy, sometimes it turns out inaccurate in the real business world. First, the global uncertainty environment is part of the outside force that leads to erroneous forecasting in the real business world. Second, the presence of additivity and linearity makes the model invalid and descriptively incorrect as econometricians dwell on assumptions. Third, social systems in the real world are not governed by capacities and stable causal mechanisms and thus transforming econometric theoretical modeling as useless. Reflecting on John Hartung's article, the author indicates that numbers are often the route to failure (Hartung, 2013). In most cases, the econometric prediction model reduces the economy and market to numbers on spreadsheets that, in turn, gives inaccurate results in the real business world.
References
Hartung, A. (2013). “President Obama’s Miracle Market – and Why Wall Street Forecasters Blew Their 2013 Predictions?” Forbes. Retrieved on 26 May 2020, from
https://www.forbes.com/sites/adamhartung/2014/01/15/president-obamas-miracle-market-and-why-wall-street-forecasters-blew-their-2013-predictions/#1b9e35c41f63
