Items filtered by date: April 2011

The Failure of Predictive Modeling and Irrational Thinking

Tuesday, 12 April 2011 21:33
Can human behavior be accurately predicted, or is it too complex and nuanced to quantify and discern through  modeling?

Predictive modeling, the process by which a model is created or chosen to try to best predict the probability of an outcome, has lost credibility as a forecasting tool. Overly simplistic models have failed to account for the sheer complexity of human interaction and the degree to which most people behave irrationally. Most predictive economic models presume that people behave rationally most of the time, a premise which is terribly flawed but which serves as the intellectual foundation of many current economic models (See the Wall Street Journal article on this issue, here).

Predictive modeling has seeped into nearly every facet of our decision-making. It has been the cornerstone for most economic models for decades, and lately it has even attempted to predict consumer behavior. Companies like Amazon use predictive modeling to determine what consumers will purchase, and even suggest purchase alternatives based on what other consumers have purchased after reviewing the same item that the consumer initially looked at.

These models are quite good at predicting outcomes provided that the input variables, or human choices, are extremely limited. Thus, Amazon’s ability to predict what a consumer might purchase after having reviewed a particular item on its website is quite good, because the range of inputs and variables necessary to make that prediction is low.

Category: The Economy

The New Normal

Tuesday, 12 April 2011 16:33
Jobs: 1998, Commerce: 1999, Housing: 2002, Tourism, 2005, Mood: 2003.

Those are the years to which the Great Recession has propelled South Florida’s economy. In a series entitled Economic Time Travel, The Miami Herald, here, and here, recently provided evidence of the stark reality that many businesses and consumers face.

The Herald study tracked 60 different monthly indicators, from revenue generated by hotels, building permits, home re-sales, unemployment, cargo volume, taxes, and many others, all weighted based on their relative importance to the economy as judged by economists, analysts and industry leaders.

Collectively, the Great Recession sent the South Florida economy back to 2002. Individually, many sectors have fared much worse, such as commerce and the overall business climate. The jobs market slid back to levels unseen since 1998. Only tourism and trade, two sectors that support lower level, service sector jobs, have prospered and bounced back.

60 economic indicators can’t be wrong about what we’ve all intuitively felt for a few years: we’re crawling backwards, not forwards economically. Our standard of living, earnings and our purchasing power have declined significantly, yet prices continue to march forward. Commodity prices have surged, and gas is poised to surpass the record levels reached in 2008. Nearly every family has been directly or indirectly affected by this economic malaise.

Category: The Economy