https://doi.org/10.1140/epjst/e2015-50095-3
Regular Article
Forecasting in the presence of expectations
1 Department of Economics, University of California, San Diego, 9500 Gilman Drive, San Diego, CA 92093, USA
2 School of Global Policy and Strategy, University of California, San Diego, 9500 Gilman Drive, San Diego, CA 92093-0519, USA
a e-mail: jgshrade@ucsd.edu
Received: 29 April 2015
Revised: 8 February 2016
Published online: 25 May 2016
Physical processes routinely influence economic outcomes, and actions by economic agents can, in turn, influence physical processes. This feedback creates challenges for forecasting and inference, creating the potential for complementarity between models from different academic disciplines. Using the example of prediction of water availability during a drought, we illustrate the potential biases in forecasts that only take part of a coupled system into account. In particular, we show that forecasts can alter the feedbacks between supply and demand, leading to inaccurate prediction about future states of the system. Although the example is specific to drought, the problem of feedback between expectations and forecast quality is not isolated to the particular model–it is relevant to areas as diverse as population assessments for conservation, balancing the electrical grid, and setting macroeconomic policy.
© EDP Sciences, Springer-Verlag, 2016
