Forecasting and Prediction (Managerial)

Forecasting and Prediction

Prediction is much more general than forecasting.  Forecasting is used primarily in business (particularly marketing and sales) and also in meteorology.  In sales, forecasts are done with moving averages, exponential smoothing, and linear trend models or linear regression.  I.e., the history of sales and the current year is used to project the next several years.  This is very important for a business to calculate their future revenue streams.  Marketing departments do market forecasts and Engineering departments try to forecast or predict where the technology is going.   This is based upon what is possible with the technology, what has been developed, what is being discussed at industry consortia and standards bodies, etc...

Prediction may be used in many contexts, notably in science.  Predictions in science are often stated in the language of statistics and probability.  However, they may be stated in the language of algebra or calculus as well.  For example, predicting where a projectile (such as a missile) will land, given a certain degree of force and direction, can indicate a vector which predicts EXACTLY where it will land.  This prediction comes from the algebraic or calculus basis of vectors in physics.  It is often said that science just describes.  Not so, it also explains and predicts.  Many celestial events have been accurately predicted by astronomers many years in advance.  Because of the regularity of many celestial events, calculations can determine when an event will take place next.

Infamous Prediction:  The 1929 Stock Market Crash

Several economists predicted a stock market crash in 1929.  This occurred and the depression followed it.  The reasons for their belief in this crash had to do with the over-extension of credit and weak government policies and controls over the stock market.  Remember that 1929 was at the end of the roaring 20's where money abounded and so did over-spending and over-loaning.  See the causes of the 1929 crash below.

Two Forces that Created the 1929 Stock Market Crash

Economic:  Over-extension of bank credit and loans.  This is somewhat similar to factors that caused the housing collapse of 2008.  Here also too many loans were given which were underfunded.  Almost anyone could get a loan (the sub-prime crisis):  people with no money down, people without jobs, people with bad credit.  Since most of these people couldn't possibly make mortgage payments, they defaulted and hence we had the housing crash.  

Figure 1:  Credit Booms as in 1929 followed by Recessions and Depressions

Political:  The crash of 1929 occurred when Hoover was president, a republican.  Similar to 2008, when the republican Bush was in office, Republicans who are usually business friendly and anti-government, reduced regulations on business tremendously, as did Hoover.  At the time of the 1929 crash there was no Security and Exchange Commission that could look into stock purchase abuses.  Any sort of regulation of the stock market or any sort of regulation that would prevent or temper its fall did not exist.  

References

1929 Stock Market Crash:  http://www.economicshelp.org/blog/76/economics/wall-street-crash-1929/

Wade, W. (2012).  Scenario Planning:  A Field Guide to the Future.  John Wiley and Sons, Inc.,   Hoboken, New Jersey.

Davila, T., Epstein, M. (2014).  The Innovation Paradox.  Berrett-Koehler Publishers, Inc., San     Francisco, California.