Friday, September 03, 2010
What If Economists Thought More Like Weather Forecasters?
A group of University of Iowa researchers thinks that economists and investors might find it useful to take a cue from meteorologists.
The researchers -— economics and finance professors in the Tippie College of Business -— are looking at a new way of using economic and financial models to more accurately predict stock returns. In the post mortem of the Crash of 2008, economists were reminded that economic models are fallible when it comes to predicting the future, especially when a black swan starts swimming in the risk pool. The hope is that with a more accurate tool, the chance of model failures will diminish.
Rather than using a single model to make economic or financial forecasts, the Tippie researchers are testing the theory that researchers and investors run several different models when they formulate an economic forecast. Their early work suggests that these model pools are better at predicting future trends than any one single model.
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