So, bottom line: economic forecasters would profit from thinking a bit more about history before gazing into their crystal balls, or at least before telling us what they see. Don’t get me wrong - I realise how hard making predictions is, especially about the future. So, one last point: if economic seers don’t want to think more historically or use empirical data more rigorously, they should at least hedge their bets. As a piece in The Wall Street Journal advised last year, put the chances of something happening at 40 per cent. If that something does in fact happen, one looks good. If it doesn’t, one can always say: ‘Hey, look, all I meant was that it was a strong possibility.’

Using historical data to make informed decisions about how things may be in the future is an example of making predictions.1 pointTrueFalse

One approach to forecasting returns is to use historical data. What are three (3) limitations of this approach?

Had economics not largely abandoned the history of economic thought, more practitioners would have recalled what Joseph Schumpeter had to say about history. In his History of Economic Analysis (1954), the great Austrian economist noted that what distinguished ‘scientific’ economists from others is ‘a command of techniques that we class under three heads: history, statistics, and “theory”.’ According to Schumpeter: ‘The three together make up what we shall call Economic Analysis … Of these fundamental fields, economic history - which issues into and includes present-day facts - is by far the most important.’Not theory, not statistics, but history - what happened and why. While theory and statistics can help explain ‘why’ questions, first comes systematic study of the ‘who, what, where, when and how’ questions - purportedly quotidian questions to which many economists have, to their detriment, long given short shrift. Had they not spurned or, at best, passed lightly over history, more economists would have sensed in the run-up to the 2007-9 financial crisis that the situation, as Rinehart and Rogoff suggest, maybe wasn’t so different from earlier financial crises after all.To be sure, Rinehart and Rogoff were not arguing that the 2007-9 financial crisis was exactly the same as earlier financial crises. Rather, they believe that the present is not free-floating but bounded, that the past matters, and that it can provide important lessons to those who study it in a systematic, or at least disciplined, manner. In other words, economists - not to mention sociologists and political scientists - would do well to supplement their stock-in-trade, analytical rigour, by thinking more historically. Here, they could do worse than to begin by familiarising themselves with Richard Neustadt and Ernest May’s classic Thinking in Time: The Uses of History for Decision Makers (1986), which would equip them with tools that would help to prevent forecasting bloopers and authoritative-seeming blunders due to egregiously incomplete information, misguided linear extrapolation, misleading historical analogies and spurious ‘stylised facts’.Thinking historically, of course, entails both temporal and contextual dimensions and, in addition, often requires a significant amount of empirical work. Indeed, finding, assembling, analysing and drawing accurate conclusions from the bodies of evidence that historians call data is not for the weak of heart or, more to the point, for those short of time.So, bottom line: economic forecasters would profit from thinking a bit more about history before gazing into their crystal balls, or at least before telling us what they see. Don’t get me wrong - I realise how hard making predictions is, especially about the future. So, one last point: if economic seers don’t want to think more historically or use empirical data more rigorously, they should at least hedge their bets. As a piece in The Wall Street Journal advised last year, put the chances of something happening at 40 per cent. If that something does in fact happen, one looks good. If it doesn’t, one can always say: ‘Hey, look, all I meant was that it was a strong possibility.’

One approach to forecasting returns is to use historical data. What are three (3) limitations of this approach? use 2 sentences

If expectations are formed rationally, then individualsA) will have a forecast that is 100% accurate all of the time.B) change their forecast when faced with new information.C) use only the information from past data on a single variable to form their forecast.D) have forecast errors that are persistently low.