Prediction: The Long and the Short of It
- (pp. 374-98)
AbstractCommentators often lament forecasters' inability to provide precise predictions of the long-run behavior of complex economic and physical systems. Yet their concerns often conflate the presence of substantial long-run uncertainty with the need for long-run predictability; short-run predictions can partially substitute for long-run predictions if decision-makers can adjust their activities over time. So what is the relative importance of short- and long-run predictability? We study this question in a model of rational dynamic adjustment to a changing environment. Even if adjustment costs, discount factors, and long-run uncertainty are large, short-run predictability can be much more important than long-run predictability.
CitationMillner, Antony, and Daniel Heyen. 2021. "Prediction: The Long and the Short of It." American Economic Journal: Microeconomics, 13 (1): 374-98. DOI: 10.1257/mic.20180240
- D21 Firm Behavior: Theory
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness