by Steve Roth, Superforecaster
So, you’re in a business that’s interest-rate sensitive and you just read this passage in the August 25, 2015, issue of the New York Times from a respected economist:
The current bout of market turmoil, if it continues, might persuade the Fed to hold off on raising interest rates in September,” Paul Ashworth, chief North America economist at Capital Economics, wrote on Monday. “Since that volatility doesn’t reflect any genuine economic slump, however, we wouldn’t be surprised if it proved short-lived, leaving the way open for the Fed to begin raising rates at some point this year.
The forecast that market turmoil “might persuade the Fed to hold off raising rates in September” is vague and likely to be interpreted differently by different people. And different interpretations lead to different business decisions.
One may be good, the other bad; one may be right, the other wrong; one may be profitable, the other a losing proposition. Rinse and repeat in the next passage, which reads, “we wouldn’t be surprised if it proved to be short-lived, leaving the way open for the Fed to begin raising rates at some point this year.”
What does all this mean to you? What probability does the economist place on an interest rate hike in September? Is that what you think based on the quote? Would others in your company interpret it the same way or differently? If they don’t do it in September, what is the probability that the economist in question places on rate increase later in the year? And, most importantly, what would you do?
That’s where superforecasters take a different approach. Rather than squishy verbal vagaries, they provide probabilistic forecasts with hard numbers that range from not-a-chance 0% to dead-certainty 100%, with careful gradations in between. Armed with a clear and calibrated forecast, decision-makers can take what they think is an appropriate course of action with greater confidence.