State of economic and financial forecasting.

With all the supposed complex theories explaining human behaviour especially in the study of economics and finance, what is funny to me is the failure by the supposed 'very knowledgeable people' (VKP) to decifer a thesis which universially postulates human behaviour under any constraints. The dominant theories in mainstream finance and economics such as the rational expectations theory devised by Muth and populised by Lucas and the Efficient Market Hypothesis have failed many times under environmental constraints. This is quite crucial because when u try to model the real world your model is 'only' credible if it continues to work under various scenarious. The limitations imposed by the model on variables with a substantial bearing on it via various 'assumptions' can make the model parameters become spurious, in that, the model suddenly doesn't work under 'special conditions.' But after careful consideration you notice that if those 'ignored' variables were factored in, realistic forecasting would have occured.

The misgivings I have is that although some of these VSPs do acknowledge the imperfectness of their theories, there is a lot of arrogance on their part over how better their theories are over unothordox ones to such an extent which implies as if their theories are infalible. Such a deception has been adopted fully by politicians (especially right-wing) to take advantage of people in the pursuit of cheap political goals. Because of this, rationally founded models have ended up infuencing irrational decisions in the real world. As a result, notable policy failures have occured frequently in this financial crisis especially in austerity-crazed Europe. One which comes to mind is the failure to incorporate the zero-lower-bound thinking in focasting of key economic variables such as infation which led to these VSPs sounding false alams about the effects of Quantitative Easing (QE) in a depressed economy. What we are seeing now to their chargrin are record low interest rates in the major economies such as the U.S., U.K. and Japan leading to inflation rates way below targets.

What is actually evident is the poor state of economic and financial forecasting out there by the VSPs.