The philosophical failings of forecasting

THIS time of year is peak forecasting season - holiday retail sales, lists of stocks you should buy this year and of course, market forecasts all keep economists, strategists and analysts busy. I always make time to mock some of the sillier approaches to prediction-making. Indeed, I have been doing this for so long that some pushback has developed against the idea of critiquing the annual forecasting follies.

For today, let's skip the usual bashing of forecasting; it is too easy. Instead, I want to look at the underlying cognitive and philosophical failings that are associated with the forecasting industry. This context should provide a framework for understanding the problems and investing risks of forecasting.

My interest in the prediction business traces back to William Sherden's 1998 book, The Fortune Sellers: The Big Business of Buying and Selling Predictions. That book makes the point that even 5,000 years ago, "forecasting was widely practiced in the ancient world in the form of divination, the art of telling the future by seeing patterns and clues in everything from animal entrails to celestial patterns".