A new method of evaluating the accuracy of economic forecasts

Conventional measures of forecasting accuracy reflect the view that forecast evaluation should concentrate on all large disturbances and ignore turning-point errors. Many forecasters, however, believe missed turns are the most grievous of all forecasting errors. Despite this consensus, no generally acceptable measure of this type of forecasting error exists. In this paper, such a measure—the probability of correctly forecasting directional change—is introduced. Values of this measure are computed for eleven well-known macroeconometric forecasting models. An inequality-type index of relative directional accuracy based on this measure is also presented and used to evaluate the models in terms of their relative accuracy.     

Interdisciplinary policy analysis in economic forecasting

Economic policy formulation suffers from many ills, not the least of which is a basic inadequacy in the methods of long-range economic forecasting. This article discusses the need for a longer time perspective in economic policy and the shortcomings of current methods in regard to philosophical assumptions, theoretical limitations, economic modeling problems, and institutional issues. Interdisciplinary policy modeling is suggested as a partial solution to these shortcomings, and two examples are offered—one in regional policy simulation and other in world food-supply modeling.     

Multiple method forecasts for discontinuous innovations

This paper argues for the development of more explicit forecasting methodologies that use the pragmatics of combining methods and the philosophical base of multiple perspectives. The increasingly common “wicked” problem of forecasting demand for discontinuous innovations (DI) at the concept testing stage of new product development is used to ground the discussion. We look to the interpretivist group-based inquiry methodologies in the management and information systems literature, and coupled this with discussions with forecasting managers, to provide evidence to support the adoption of this approach. Relativism is briefly critiqued and the accuracy of the combining methods forecasting literature reviewed. It appears that the managers interviewed could benefit from an explicit understanding of the multiple perspective approach, as they already appeared to have appreciated the need for a broader based approach than traditional forecasting techniques. It is therefore hoped that as a result of this paper, more managers involved with the “wicked” problem of innovative product forecasting will recognise the need to adopt a more explicit multiple perspective inquiry methodology in their efforts to combine forecasting methods.     

Economic theory and comparative economic systems: A partial literature survey

This paper surveys the more abstract literature on the newly developing theory of economic systems. Works from both pure economic theory and comparative economics are discussed. The principal thesis is that, while these two literatures have developed rather independently, they share an amazingly similar framework. What is emerging is a full-fledged theory of economic systems. Emphasis is placed on the three component structures of economic systems—the information, decision-making, and incentive structures–and the normative evaluation of economic systems. J. Comp. Econ., Dec. 1978, 2(4), pp. 355–381. Wayne State University, Detroit, Michigan. Journal of Economic Literature Classification Numbers: 024,053.     

Technology futures analysis: Toward integration of the field and new methods

Many forms of analyzing future technology and its consequences coexist, for example, technology intelligence, forecasting, roadmapping, assessment, and foresight. All of these techniques fit into a field we call technology futures analysis (TFA). These methods have matured rather separately, with little interchange and sharing of information on methods and processes. There is a range of experience in the use of all of these, but changes in the technologies in which these methods are used—from industrial to information and molecular—make it necessary to reconsider the TFA methods. New methods need to be explored to take advantage of information resources and new approaches to complex systems. Examination of the processes sheds light on ways to improve the usefulness of TFA to a variety of potential users, from corporate managers to national policy makers. Sharing perspectives among the several TFA forms and introducing new approaches from other fields should advance TFA methods and processes to better inform technology management as well as science and research policy.     

On Hayek's road to serfdom: 60 years later

Stimulated by recent work of Levy–Peart–Ferrant, Rosser and McPhail, I read The Road to Serfdom by projecting it onto four registers—security and freedom, impersonal forces and the market, rules and the rule of law, and language and education—and identify in each the need for judgement, hopefully balanced but inevitably arbitrary beyond an analytical threshold, a need exacerbated by incomplete and dispersed knowledge. My larger project is to understand the role of the expert, theoretician if one prefers, in a ‘free’ society.     

National and International Benefit Transfer Testing with a Rigorous Test Procedure

Benefit transfer, as a mean to transfer values from existing monetary valuation studies to new policy sites, has been in use for many years. This paper aims to analyze the forecasting quality of benefit transfer by applying a rigoroust-test – also referred to as Accuracy-t-test – that takes into account testing errors which were made in previous surveys. Beside the analysis of national benefit transfers based on two German contingent valuation studies additional efforts were made to investigate into the validity and accuracy of international benefit transfer by considering two Norwegian studies that employed a similar survey design.     

Participatory prognostics in Germany—developing citizen scenarios for the relationship between biomedicine and the economy in 2014

The rapid development of biomedicine demands a trustworthy, proactive regulatory regime that is able to manage progress with genuine regard for ethical, social and legal concerns. With its recent past of eugenics and euthanasia, Germany is particularly concerned with setting up a fair and transparent approach, able to respond quickly to scientific developments as well as societal concerns. This article reports on the development, implementation and evaluation of a citizen scenario workshop as a tool of participatory prognostics, integrating elements from participatory technology assessment and forecasting. In 7 days of highly structured work and expert support, 24 German participants developed four scenarios on “The Relationship of Biomedicine and the Economy in the Year 2014.” Results and evaluation both show that the process (1) leads to scenarios that provide a useful perspective beyond expert opinion; (2) enriches the public and political discourse; and (3) offers a social learning opportunity appreciated by nonprofessionals and experts alike. We are confident in recommending this technique as a useful addition to existing foresight and horizon scanning activities.     

Averting economic collapse and the solipsism bias

We study the behavior of experimental subjects who have to make a sequence of risky investment decisions in the presence of network externalities. Subjects follow a simple heuristic—investing after positive experiences and reducing their propensity to invest after a failure. This result contrasts with the theoretical findings of Jeitschko and Taylor [Jeitschko, T.D., Taylor, C., 2001. Local discouragement and global collapse: A theory of coordination avalanches. Amer. Econ. Rev. 91 (1), 208–224] in which even agents who have only good experiences eventually stop investing because they account for the fact that others with worse experiences will quit. This can trigger sudden economic collapse—a coordination avalanche—even in the most efficient Bayesian equilibrium. In the experiment, subjects follow their own experiences and disregard the possible bad experiences of others—thus exhibiting behavior that we term “solipsism bias.” Solipsism results in sustained investment activity and thus averts complete collapse.     

Toward improved and practical incentive regulation

The first half of this paper overviews traditional methods of ratemaking—embedded and marginal cost pricing—and four recent alternatives—automatic rate adjustments, profit-sharing, tariff menus, and the Vogelsang-Finsinger convergence mechanism—that have come to challenge them. We develop a list of nine desirable properties that are suitable to gauge any regulatory mechanism. In the second half of the paper, we explore in greater detail two recent incentive plans—the FCC's price caps approach and a mechanism that the three authors proposed in a FERC document. Based on the nine properties, these two mechanisms are compared.     

The validity of the contingent valuation method: Perfect and regular embedding

This article deals with one aspect of the validity claim of the contingent valuation method, namely: to what extent does the method produce different values in situations for which economic theory claims different values. Two aspects of this validity test — perfect and regular embedding — were tested in a field experiment comprising six samples of the Dutch population. Perfect embedding occurs when the value for a specific good is similar to the value for a more inclusive good. Perfect embedding did not manifest itself in the experiment. Respondents considered a package of six goods as well as a package of two goods more valuable than one of these goods. It is argued that this supportive evidence of the method's validity claim occurred because the goods involved were well-defined. Regular embedding occurs when the same good receives a lower value if the value for it is inferred from the value for a more inclusive good rather than if that good is valued on its own. Regular embedding was only found when respondents were given the opportunity to value the inclusive good before valuing the specific good. Respondents who were given information on the inclusive good without valuing it did not state different values than respondents who were not given that information. It seems that respondents perceive an inclusive good as being relevant to their valuation decision only when they are asked to value it. Further research is necessary to shed more light on the underlying processes that may account for this.     

Simple search methods for finding a Nash equilibrium

We present two simple search methods for computing a sample Nash equilibrium in a normal-form game: one for 2-player games and one for n-player games. Both algorithms bias the search towards supports that are small and balanced, and employ a backtracking procedure to efficiently explore these supports. Making use of a new comprehensive testbed, we test these algorithms on many classes of games, and show that they perform well against the state of the art—the Lemke–Howson algorithm for 2-player games, and Simplicial Subdivision and Govindan–Wilson for n-player games.     

Technological forecasting at the Korean stock market: A dynamic competition analysis using Lotka–Volterra model

The purpose of this paper is to attempt to analyze the dynamic relationship between the Korean Stock Exchange (KSE) and Korean Securities Dealers Automated Quotation (KOSDAQ), two competing markets at the Korean stock market, in the viewpoint of technological forecasting of competition. The Lotka–Volterra system of equations, one well-known competitive diffusion models, is adopted to represent the competitive situations of the Korean stock market and it is estimated using daily empirical index data of KSE and KOSDAQ during 1997–2001. The results show that there existed a predator–prey relationships between two markets in which KSE acted as a prey for the time being after the emergence of KOSDAQ. This interaction was altered to symbiotic relationship and finally to pure competition relationship. We also perform an equilibrium analysis of the estimated Lotka–Volterra equations. As a result, we find that there is an equilibrium point in a dynamic sense. However, the equilibrium point could be unstable in the latest pure competition relationship.     

An application of DPSIR framework to identify issues of pollinator loss

This paper is an attempt to apply the Driving forces–Pressures–State–Impact–Responses (DPSIR) framework to identify the issues of pollinator loss. The linkages between the significant pressures on insect pollinators, their underlying socio-economic driving forces and responses, with the focus on Europe, are addressed in the study. A review of literature revealed the shortage of empirical studies that prove direct links between policy responses and specific pressures on the pollinators. Based on written evidence and expert judgement, land use practices and the use of agrochemicals were regarded as the most significant pressures on different functional groups of pollinators. As demonstrated in the study, agricultural and rural development policy has been the key driving force of these pressures. The application of the DPSIR framework proved to be useful in identifying the pathway of human pressures on pollinators. The study also concludes that there is further need for specific empirical research on the effects and effectiveness of the Common Agricultural Policy (CAP) measures (agri-environment measures in particular) to support farming practices that facilitate the protection of the environment and the prevention of pollinator loss.     

The diffusion of successive generations of a technology: A more general model

In many cases of technological development, successive generations of a technology evolve, each more efficient than its predecessor. It has been assumed when modeling and forecasting the adoption of these technologies that the market reaction to each generation was similar. Using the terminology of the Bass model, this similarity is encapsulated in the assumption that the coefficients of innovation and imitation are constant. New data for two and three generations of mobile telephone technology from eleven countries are modeled. The modeling framework used—simultaneous estimation for successive generations using a full information maximum likelihood procedure—demonstrates that, in most cases, the hypothesis of constant coefficients can be rejected. Use of a model with changing coefficients is shown to considerably improve forecasting performance. These results were reinforced by analysis of data for four generations of IBM mainframes.     

Institutional Design, Uncertainty, and Path Dependency during Transitions: Cases from Russia

During transitional moments, new leaders must design political institutions. Some of these designs succeed in establishing lasting rules of the game. Others do not. This paper analyzes those factors which either facilitate or undermine institutional persistence during transitions, focusing particularly on the role that uncertainty and path dependency play in these processes. The empirical section of the paper examines three cases of institutional design in the Soviet/Russian transition—the creation of the Russian presidency, the emergence of electoral law for Russia's lower house of parliament, the State Duma, and the evolution of institutional design regarding the formation of Russia's upper house, the Federal Council. This comparison shows why the first two cases of institutional design created lasting institutions—even though these new rules did not reflect precisely the interests of their creators—while the third case of institutional design did not.     

The limits of forecasting methods in anticipating rare events

In this paper we review methods that aim to aid the anticipation of rare, high-impact, events. We evaluate these methods according to their ability to yield well-calibrated probabilities or point forecasts for such events. We first identify six factors that can lead to poor calibration and then examine how successful the methods are in mitigating these factors. We demonstrate that all the extant forecasting methods — including the use of expert judgment, statistical forecasting, Delphi and prediction markets — contain fundamental weaknesses. We contrast these methods with a non-forecasting method that is intended to aid planning for the future — scenario planning. We conclude that all the methods are problematic for aiding the anticipation of rare events and that the only remedies are to either (i) to provide protection for the organization against the occurrence of negatively-valenced events whilst allowing the organization to benefit from the occurrence of positively-valenced events, or (ii) to provide conditions to challenge one's own thinking — and hence improve anticipation. We outline how components of devil's advocacy and dialectical inquiry can be combined with Delphi and scenario planning to enhance anticipation of rare events.     

Some empirical evidence on the ‘discouraged worker’ effect

This note produces empirical evidence on the existence of a significant ‘discouraged worker’ effect in US data–namely, on the tendency for groups of secondary workers to move in and out of the labor force with the business cycle, looking for jobs when these are available, while giving up job search during recessions — by focusing on the behavior of the ‘not in the labor force’ series, as well as of two of its segments (‘going to school’, and ‘keeping house’), at the business-cycle frequencies. Both in the aggregate, and for a number of age–sex groups, the series display a clear counter-cyclical pattern, thus lending support to the discouraged worker notion.     

The Carrot vs. the Stick in Work Team Motivation

This paper reports on the use of carrot (positive) and stick (negative) incentives as methods of increasing effort among members of work teams. We study teams of four members in a laboratory environment in which giving effort towards the team goal is simulated by eliciting voluntary contributions towards the provision of a public good. We test the efficiency-improving properties of four distinct environments: monetary prizes given to high contributors versus monetary fines assessed to low contributors, where high/low contributor is defined first in terms of absolute contributions and then in terms of contributions relative to abilities—which we call handicapping. Our results show that both carrot and stick can increase efficiency (i.e., contributions) levels by 10–28%. We find that handicapped incentives promise the highest efficiency levels, and when handicapping is not used penalties may be more effective than prizes. The implications for work teams and suggestions for practical implementation are discussed.     

What’s spurious, what’s real? Measuring the productivity impacts of ICT at the firm-level

In order to assess the productivity effects of information and communication technologies (ICT), regressions based on cross–sectional firm–level data may yield unreliable results for the commonly employed production function framework. In this paper, various estimation biases and econometric strategies to overcome their sources are discussed. The effects are illustrated on the basis of a representative set of panel data for German service firms covering the period 1994 to 1999. The application of a suited SYS–GMM estimator yields evidence for significant productivity effects of ICT. However, these are substantially smaller than those suggested by cross–section estimates.I would like to thank Irene Bertschek, François Laisney, Georg Licht, Werner Smolny, Kevin Stiroh, Elke Wolf, Thomas Zwick and two anonymous referees for their helpful comments and the MIP–team for providing me with the data. This paper was written as part of the research project ‘‘Productivity and Spillover Effects from ICT as a General Purpose Technology’’ commissioned by the Landesstiftung Baden–Württemberg foundation.Final version received: September 2002/Final version accepted: April 2004