Sunday, October 08, 2006
How is it possible to forecast the long run if you cannot predict the short run?
People always ask what is going to happen next quarter, next year and I think it is really hard to have the faintest of an idea. In general, the short term is unknowable and in an uncertain world, it should be unknowable.
For instance in a financial frenzy, it would certainly not end pleasantly, though we do not know when it will ends. These things are predictable but at uncertain horizons. In other words, you can predict how the ending will be but not the way there or when it will happen.
So why is it so hard to predict the short term than the long term? After all, the long run is made up of a series of short runs.
Think of yourself standing on the edge of a high building in a hurricane with a bag of feathers. Throw the feathers in the air. You don't know much about those feathers and how far they will go. Above all, you don't know how long they will stay in the air. Yet, you know one thing for absolute certainty: eventually on some unknown flight path, at some unknown time, at an unknown location, the feathers will hit the ground, absolutely guaranteed.
There are situations where you absolutely know their outcome in the long run but not the short run of when and how it will ends up to be. Though you cannot predict what happens in the short run, tomorrow, next month or next year. What you can predict with certainty is certain situations will end up in a certain way at an unknown time. What determines when this happens is all dependent on human emotions and madness.
Like Isaac Newton said: "I can calculate the movement of stars but not the madness of men."