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John Hall

"Every time an economic indicator is reported, the news describes it as being over or below expectations. In other words, the model is always right."

You misunderstand. Participants in stock market value stocks based on the expected present value of future earnings. Forecasts of future earnings are then dependent on the expected future path of economic variables. If some economic indicator comes out significantly different from expectations (and it actually has a lot of information content, like non-farm payrolls), then that has an impact on stock prices. If the economic indicator comes in consistent with expectations, then it shouldn't have any impact on stock prices. In reality, it's not the model that's right, it's that the market prices need to be revised when the model is significantly wrong.


are you condoning criticisim which is good. I see many models actually are wrong.


JH: Your description seems to be a malfunctioning clock that is reset on the hour. During each hour, the clock always moves out of sync with reality, either running too fast or too slow. My observation in this post is the parallel between economic models and epi models, and how the business media are treating them differently when they both resemble malfunctioning clocks. Where is the article that explains why the jobs expectation models were so wrong?

a: All competent modelers accept that their models are imperfect, and I have written many posts here that point to the weaknesses of some of the epi models. Many of these models actually got the larger picture right. The discussion about modeling should be focused on whether the model assumptions are reasonable or not.

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