II Subjective Information and Expectations

Judgmental Forecasting is the most common method of actual forecasting, especially when: -- the decision to be undertaken is critical -- is the exact data required is unavailable or unreliable -- if the forecaster views himself as an expert in the area -- may be based on theory and/or actual analysis of data, but, no formal decision rule exists to lead to ultimate forecast -- sometimes argued that subjective analysis is useful in times of structural change as statistical methods are too slow to pick up the change. -- this view is challenged by O'Connor, Remus and Griggs [I.J. of F., 1993] as subjective analysis puts too much weight on random fluctuations 1. Multiple Scenarios Use of multiple scenarios beneficial in long-term planning (See Godet [J. of F., 1982] and Bauers and Weber [J. of F., 1988] -- key is to attempt to identify all possible outcomes -- put subjective probabilities on all outcomes -- leads to use of Bayes Theorem to update or re-evaluate predictions -- particularly useful in new product introduction scenarios

a) use of theory many forecasters believe that theory is essential others believe that there is only one important criterion --RESULTS!! i.e., who cares why a method works as long as it does -- problem here is that just because a method has worked well in the past does not mean it will continue to work in the future example: Over a five year period we observe that students wearing blue clothes to ECON603 exams get A's and those wearing red clothes get D's. Would you use this model to predict the grades from this year's class? No! if believe result is from random chance Yes! if we believe there is a reason but we just do not know it i.e., it is my model and it biases my grading

b) advantages --key advantage of the use of multiple scenarios is the use of decomposition a) it may allow us to understand the problem more clearly b) it allows us to split up the forecast exercise c) it allows more accurate theories as to the exact behaviour of the individual parts of the problem d) it allows for error cancellation -- allows multiple breakdowns, i.e., disaggregate consumption by type of good or by household -- one key disaggregation is between forecast of change and current status c) problems -- major disadvantage is one of cost and duplication.

2. Use of Survey Data and Methods in Forecasting

a)

Intentions and Anticipations Forecasts i) when useful

data is the result of questions asking people to indicate what their planned actions will be under certain conditions intentions forecasts are then formed on the basis that the plans will be realized in economics this method is frequently used for investment decisions, the government sector, consumer durables [Jonsson and Agren, J of F, 1994] conditions favouring use: ------event is important responses can be obtained respondent has a plan respondent reports correctly respondent can fulfil the plan new information is unlikely to change the plan

ii) special problems There are three major problems with this type of sampling:

A. sampling error the sample may be to small or not representative of the population therefore it may not be possible to forecast population behaviour as a bias may be present B. nonresponse error individuals may not answer key is whether there is a systematic difference between the group that responds and the group that does not C. response error individuals may lie may occur if the individual has no fixed plan but states his intentions anyway or, if the individual thinks the response will be used against him i.e., the intentions are illegal or immoral, or if knowledge will reduce market power

b) Opinion Forecasts i) when useful not based on direct plans but on subjective evaluation of conditions intentions data used when respondent has control over events opinions data used when respondent is a "disinterested" observer some research has been done into question of how to optimally weight individual opinions in making forecasts [Figlewski, REStat, 1982] ii) special problems sampling problems not as important often use only one judge -- ourselves main problems: A. bias -- letting our own vested interests or desires influence the forecasts, and B. anchoring or conservatism -- leads to an underestimation of change C. value of expertise -- belief that expert's opinions more important than others. Beyond very low level of knowledge does not seem very useful

However, experts are particularly good at identifying the current status of events, and at selecting and evaluating the confidence intervals for various forecasting methods.

3. Judgmental Forecast Methods a) types of sample surveys and scaling The most important issues in survey design concern avoiding sampling errors and overcoming problems of bias or anchoring via the choice of questions. Issues in sample design: to avoid sampling errors: i) random samples In simple random samples each items has an equal chance of being selected. The theory of sampling distributions allows us to determine the size of sample that is required so that sample statistics may be reliable estimates of population parameters, based on the nature of the population distribution. Simple random samples are generally preferred, but, may be costly. ii) systematic samples A systematic sample is very useful when the analyst has a complete list of the sample items in a random order. In this techniques the forecaster selects a random starting point and then every nth object is selected until

the desired sample size is obtained. iii) stratified samples Stratified random sampling is undertaken when there are important subgroups in the data, each subgroup is homogeneous but the relationship between groups is heterogeneous. Within each group random samples are drawn. The size of each random sample depends on statistical properties. iv) cluster samples In cluster sampling, the data are grouped into clusters and a random number of clusters are then surveyed.

v) quota samples and judgmental samples These nonrandom samples are derived on the basis of the forecaster rather than chance determining who will be sampled. Such methods are cheap and may be reliable, but, there is no way to statistically test whether the sample is representative of the population.

Issues in survey design: to avoid problems of bias, anchoring, etc:

vii) use of decomposition ask questions on current status, then direction of change, then on magnitude use rephrased and repeated questions to access reliability reverse question ordering as a test of reliability use direct and indirect questions to test for consistent responses

viii) use of scaling do not ask yes or no questions use of five categories supported by research as giving optimal chance to express meaningful strength of feelings or belief

ix) method of survey should questions be asked via direct in face personal interviews, via telephone interviews, or via mail surveys important tradeoffs in terms of costs, timeliness, interaction with surveyor,

b) Delphi methods an iterative mail survey of experts major features: -- the respondents are experts in the field -- there is more than one round of questioning -- there is controlled feedback of earlier responses -- average values are reported to the group -- those whose opinions are outliers are asked to justify -- process continues until a consensus is reached, or interviewer is satisfied with consistency of responses

c) traditional and structured meetings Traditional meetings are most common forum for forecast analysis -- tend not to be effective -- in general one does not prepare and group leader tends to dominate -- structured meeting based on modified version of the delphi method tends to be more useful

4. Use of Judgmental Adjustment with Other Methods Many of the so-called statistical method we will study have significant judgmental components. Some will relate to choice of inputs or specification. Other to subjective corrections based on knowledge or analysis of residuals Often judgmental corrections are a cost efficient alternative to complete re-specification and re-estimation of the model Often used as a temporary measure or, when the better specification is unknown

5 Indicators of Economic Activity (optional,

not covered in class, not on first

mid-term exams)
a) leading indicators Leading indicators are series that have the same periodic properties as the series we are interested in, but which move in anticipation of the series of interest. This pattern is sometime the result of cause and effect relationships.

b) lagging indicators Lagging indicators are series that have the same periodic properties but which move after the series of interest. Such series are often used a measures to confirm previous estimates or events. If the cycles are stable, lagging indicators may be powerful leaders of the next cycle. c) coincident indicators Coincident indicators are related series that have the same periodic properties as the series of interest. Such series may be used as a test of the analysis, or they may be available more timely. i.e., monthly coincident indicator of quarterly series. d) examples: Series in Canadian Leading Indicator: 1. Retail trade in furniture & appliances 2. New motor vehicle sales 3. the residential construction index 4. New orders, durable products 5. the U.S. composite leading index 6. the shipments to inventory ratio in manufacturing 7. average hours/week in manufacturing 8. percentage change in price per unit labour cost in manufacturing 9. TSE300 stock price index (excluding oil and gas) 10. the money supply (M1) in constant dollars See Rhodes [Current Economic Analysis, Stat. Can., May, 1982] for discussion of mean lead and number of false signals from each and the leader as a whole.