The False Security of Static Forecasts
As the media reports tentative signs that the recession is over and the stock markets start to head upwards again, risk analysis expert Palisade is warning on the false security offered by static forecasts.
With recessions only occurring on average every ten years, despite their potentially devastating effects, the scenario is usually excluded from a static forecast. This goes some way to explaining why Wall Street's consensus forecast has failed to predict a recession for the past 30 years.
But Palisade believes investors and decision-makers have a key role to play in changing this behaviour. Rather than settling for the false security offered by a static forecast, they must demand proper uncertainty analysis around forecasts. Risk modelling would allow the possibility and consequences of a recession to be included in a forecast, thereby giving a less optimistic - but more realistic - estimate of base case earnings.
Craig Ferri, UK managing director at Palisade, explains: "It is tempting to hope that everything will return to what, until 2008, many people assumed to be the status quo. But, whilst this may be the case in the shorter term, we must have longer memories. Building a more realistic picture will ensure that the peaks and troughs of economic cycles will become more manageable because predicting them enables contingency to be planned. As a result they also will become a more acceptable and less feared part of business – and everyday - life."
There is still much discussion as to whether this recession will be a 'V' or a 'W'. The former suggests that the worst is over and the economy is on it's way up, while the latter reflects that the effects of quantitative easing, bail outs and revised government spending will result in a 'double dip'. Whatever the case, uncertainty analysis could help organisations to make informed decisions that will enable them to operate effectively in the prevailing market conditions.
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