2. Trinity College Dublin, The University of Dublin
Syllabus
• 2 assignments
• 1 final paper
• Main book: Shmueli, Galit, and Kenneth C. Lichtendahl Jr. Practical Time Series
Forecasting with R: A Hands-on Guide (2nd ed.). Axelrod Schnall Publishers, 2018.
3. Trinity College Dublin, The University of Dublin
“Forecast”= predict the future value
of a time series
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Tell us what the future
holds, so we may know
that you are gods.
(Isaiah 41:23)
Lycurgus Consulting the Pythia (1835/1845), as imagined
by Eugène Delacroix (source: Wikipedia)
6. Trinity College Dublin, The University of Dublin
Who generates forecasts?
Governments
NGOs
Corporates
Private sector
Consulting firms Academia
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“The horse is here to stay but
the automobile is only a
novelty—a fad”
1903, the president of
Michigan Savings Bank
Stock prices have reached
“what looks like a
permanently high plateau… I
believe the principle of the
investment trusts is sound,
and the public is justified in
participating in them.”
Irving Fisher, October 1929
“I think there is a
world market for
maybe five
computers.”
Thomas Watson, 1943
13. Trinity College Dublin, The University of Dublin
We are poor predictors
We like simple explanations
We don’t correct
We are overconfident
We hate randomness
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Social Sciences are worse
First order chaotic systems Second order chaotic systems
Observers observing observers who
observe observers
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Fundamentally unpredictable?
Multiple equilibria
Mixed strategies
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Irreducible sources of error
- Specification error: cannot include
all variables
- Include as much as you can? No!
- Measurement error: some variables
are particularly difficult to observe
- Natural phenomena: Indian Ocean
tsunami and violence in Aceh
Source: Spagat et al. “Estimating War
Deaths: An Arena of Contestation”
24. Trinity College Dublin, The University of Dublin
Much is predictable
Rules
Strategies and equilibria
Structural constraints
Strong autocorrelation in: space, time
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Non-trivial questions
Boring Unpredictable
Just right
Civil war in
Switzerland
in 2022?
Black
swans
Rare events
29. Trinity College Dublin, The University of Dublin
Which is easiest to forecast?
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• Daily electricity demand in 3 days time
• Timing of next Halley’s comet appearance
• Time of sunrise this day next year
• Google stock price tomorrow
• Google stock price in 6 months time
• Maximum temperature tomorrow
• Exchange rate of $/€ next week
• Total sales of drugs in Irish pharmacies next month
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How predictable?
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Depends on:
1. how well we understand the factors that contribute to it
2.how much data is available
3.whether the forecasts can affect the thing we are trying to forecast.
4.the future is somewhat similar to the past
5.there is relatively low natural/unexplainable random variation.
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Improving forecasts…
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…but social
science forecasts
are much harder
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Statistics
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N refugeest = f(casualties, unemployment, day of the week, error)
N refugeest = f(Nrefugeest-1, Nrefugeest-2, Nrefugeest-3, …, error)
N refugeest = f(Nrefugeest-1, casualties, unemployment, …, error)
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Statistics
Learning Sample
Test Sample
Y increases by b when x increases by 1 (well, sort of)
Predictions in test sample
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Machine learning algorithms
Support vector machines
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Risks of Machine Learning approaches
Over-fitting
Too little data
Don’t improve that much, if at all, over
much simpler logits
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Forecasts are hard, especially
about the future
Aka: how poorly do we do?
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3
-5
-4
-3
-2
-1
0
1
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2017
Financial year ended
2013
2016
2015
2014
2012
2011
Actual
Grattan analysis of Commonwealth Budget Papers
Commonwealth plans to drift back to surplus
show the triumph of experience over hope
Actual and forecast Commonwealth underlying cash balance
per cent of GDP
Forecast made in
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Important forecasting efforts
Academic:
— Political Instability Task Force 2002-present
— DARPA ICEWS 2007-2015
— Peace Research Center Oslo (PRIO) and Uppsala University UCDP models
— Uppsala ViEWS
— Many others
Governments: typically rely on experts, but some use large-N data:
— Germany
— Netherlands
— EU
— World Bank
— US
— Others, but often classified
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Overpredicting vs
underpredicting
True warnings
False alarms
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How well: Experts
Tetlock:
284 experts
20+ years of forecasts
1000s of forecasts
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Experts: results
Overpredict rare events
No better than dilettantes
All humans far worse than simple
algorithms
Why so bad?
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Machine learning: performance
No Conflict Conflict
No conflict 1432 80
Conflict 58 374
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Predicted
Observed
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How well? Crowds
IARPA competition: GJP the winner
The top forecasters in the Good Judgement Project (Tetlock) are "reportedly
30% better than intelligence officers with access to actual classified
information.”
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56. Trinity College Dublin, The University of Dublin
Basic Notation
t=1,2,3… = time period index
Yt = value of the series at time period t
Ft+k = forecast for time period t+k, given data until
time t
et = forecast error for period t
ForecastingBook.com
57. Trinity College Dublin, The University of Dublin
Time series components
Systematic part
• Level
• Trend
• Seasonal patterns
Non-systematic part
• “Noise”
Additive:
Yt = Level + Trend + Seasonality + Noise
Multiplicative:
Yt = Level x Trend x Seasonality x Noise
ForecastingBook.com
