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Of Sheep, Foxes, and Hedgehogs

As Edgar R. Fiedler wrote about the art and science of economic forecasting in The Three Rs of Economic Forecasting — Irrational, Irrelevant and Irreverent (1977):

The herd instinct among forecasters makes sheep look like independent thinkers.

At FinEx, we don’t believe our record of forecasting is better than anybody else’s record.  We don’t pretend to possess the answer.  If we did, we would be incredibly wealthy and probably wouldn’t be interested in sharing the secret through consulting work.

What we understand is that there isn’t one particular answer.  One forecast doesn’t work.

For a more entertaining treatment of this idea, here is a podcast from Freakonomics on “The Folly of Prediction.”

Fiedler wrote:

If you have to forecast, forecast often.

So why bother?  There is only one reason:  though imperfect, forecasting is important because it helps inform our efforts to understand what is likely to occur in the future.  From Henri Poincaré in The Foundations of Science:

It is far better to foresee even without certainty than not to foresee at all.

At FinEx, we distinguish our forecasting methods in important ways:

  1. we constantly ask ourselves if we are following the herd and correct our efforts
  2. we calculate forecasts not as specific values but as a range of probable values

As for foxes and hedgehogs, that comes from the ancient Greek poet, Archilochus, who wrote:

The fox knows many things; the hedgehog one great thing.

Which is a pretty good way of categorizing forecasters when you think about it.

For a more entertaining treatment of this idea, listen to this Freakonomics podcast on “The Folly of Prediction.”