Question

Say the level of the market as measured by the Dow Jones Industrial Average is currently at 12,000. A forecaster has made a prediction of 13,300 for the level of the market in one year, along with a 95% confidence interval whose lower bound is 12,500 and whose upper bound is 14,500. You know from experience that this particular forecaster tends to be both excessively optimistic and miscalibrated. Describe how you might debias this individual. Give a numerical example (making up relevant numbers as appropriate).

Answer 1

The Dow Jones industrial is currently at 12,000

a forecaster has made a prediction of 13,300 for the level in one year

At 95% confidence interval. the lower bound is 12,500 and upper bond is 14,500

No one can predict the future prices of the particular stocks and stock indexes. In general, if we invest in long run, then the prices of the stock will go up and in short run we cannot expect or predict the price fluctuations whether it may go or down. Therefore, from the above explanation we have observed that the long-run investment is good and better than the short run.

The Dow Jones of 13,300 is only the prediction for short period i.e., within 1 year and based on this the forecaster may expect to reach the DJIA at historical heights with in the next one year period.In this case the forecaster is optimistic about the stock market and indexes. Hence, the forecaster has to look the past historical data of DJIA Prices and based on this historical data the forecaster may forecast or predict the overall economy. Therefore, at 95% confidence interval the DJIA will be low of 12,000 and max of 13,000.