How to Read a Forecast

January 3, 1955

This week and next, newspapers and business magazines will overflow with forecasts of business conditions in the coming year. In previous Newsweek columns (e.g., Nov. 22, 1948, and Sept. 21, 1953), I have tried to explain why, though I recognize the necessity for business forecasts, I so seldom indulge in them. Business forecasting can sometimes be a help, but it can never be a science. There are two main reasons for this. One is that the facts and contingencies that must be taken into account to predict the future are too multitudinous for any human mind to encompass. The other reason is that, in human affairs, predictions themselves affect the future they predict.

There are much greater similarities, in fact, than most business forecasters would care to admit, between their own occupation and that of race-track tipsters. (I will get to the differences later.) Business forecasters boast of the occasions in the past when their forecasts turned out to be right; so do race-track tipsters. A racetrack tipster may be right for the wrong reasons; so may a business forecaster. A tipster may falsely inform a client that a race has been fixed for a certain horse to win. That horse may win nevertheless. A business forecaster may base his prediction of a recovery or recession on fallacious economic reasoning. But as business can only go up or down, there is a 50-50 chance that his falsely based prediction may turn out to be right.

A business forecaster may contend that all his forecasts are based on careful study and analysis of available statistics and existing conditions. But this may also be true of the forecasts of an intelligent racing analyst. The latter may know everything there is to know about the past records of all the horses involved, supplemented by honest fresh information from owners or trainers. On this basis he can of course make more intelligent and informed guesses than persons who lack his information. Nevertheless he cannot predict the outcome of any race with certainty. All we can say is that the informed racing analyst will on the average stand to do much better than the uninformed. Though he will never know certainties, he will know much more about probabilities. And that is the best we can say for the most intelligent and best-informed business forecaster.

Moreover, the individual race-track gambler, or the stock-market speculator or the businessman, seldom stands to gain much merely by knowing such facts and probabilities as are already known by the majority of his fellows or competitors. For unusual profit or success, he must know more than his competitors know; he must guess right sooner than the rest. It is common to say in the stock market that an expected future event has already been “discounted.” This means that it has already been taken account of in the present price of the stock. This sort of thing also happens at the race track. Known probabilities (i.e., the composite general guess regarding the probabilities) are already embodied in the betting odds. A man who always bet on the favorite would stand to win more often than a man who bet on the long shots; but it does not necessarily follow that he would lose less money in the long run. For when he won he would win comparatively little, because too many people were right with him.

But though there are similarities between the position of the racetrack gambler and that of the speculator or the businessman, there is one vital difference. The risks in betting on horses are invented and unnecessary; the risks in speculation or in business enterprise are inherent and inescapable. Somebody must assume them. And he who assumes them intelligently confers a public benefit, whether or not that was his intention. He prevents wasteful use of resources.

So the honest and intelligent business forecaster performs a needed function. A forecaster is a nuisance only when he is cocky and self-assured, clothes his opinions in a pompous abracadabra, parades pretentious charts and mathematical formulas, and tries to give you to understand that his guesses are the verdict of science.