Predicting No one can predict the future I. Predicting We have to act ...

Predicting
No one can predict the future
I. Predicting
We have to act.
The scientific method suggests a view of the world that ignores the imperative to act.
Predicting
Economic and financial theory falls short of HUMAN reality.
Premise
In terms of taking action in our lives, there is no such thing as the past.
There is only the future.
We do reflect on our experience.
We review precedents to help us predict the consequences of our decisions but then we have to act minute
to minute in the here and now.
You need a specific objective!
SPECIFIC OBJECTIVE
The more Specific the Objective – the better
Need a Plan to reach an Objective
The more Specific the Plan – the better
Normal is a setting on a disk washer
Hedging
Hedging involves taking a position in the futures-options market that is equal and opposite to the position
one expects to take in the cash market.
Hedging is supposed to provide protection against adverse price movements [price risk].
Hedging
Hedging instruments
Futures
Forwards
Swaps
Options
Derivatives
Hedging
Hedging is not a guarantee against loss, only against losing everything at once.
Profit
Expense = Price X Quantity Bought
Revenue = Price X Quantity Sold
Show Me the Money
Profit is:
Profits are a measure of efficiency.
Profits encourage/discourage
Profits are natures way.
II. Clarification of Terms
Prediction
Predictability
Projectability
Prediction
investment and expansion.

pre-dict (pri-dikt’) verb. To state, tell about, or make known about, by means of special knowledge or
inference.
pre-dic-tion (pri-dik’shen) noun.
1. An act of predicting. 2. A foretelling based on observation, experience or reasoning.
Prediction
What is going to happen next?
If I take action X -
how will that influence what’s going to happen next?
Prediction
What is going to happen next?
Predictability
The “next” is the time horizon.
Predicting is not impossible.
Predicting is difficult.
Predictability is the likelihood of things happening in a way we expect them to happen.
How sure can I be that X will result from a certain action?
Projectability
Projectability: - new word – Implies how a prediction will impact you or your company’s profit.
If outcome X actually comes to pass,
how am I going to feel about it?
The Caterpillar said to Alice:
“If you do not know where you want to go, then any road will get you there.”
Being able to assess today how you are going to react about something that can’t happen until tomorrow.
Projectability
III. Predicting Process
A. Ask the right questions
B. Identify the important variables
C. Chose the right measure
D. Obtain enough timely information
E. Make the decision
A. Ask the Right Questions.
In my opinion, this is very hard.
Questions have to be
Small enough to be answerable - but
Large enough to be important.
A. Ask the Right Questions.
What will the be the price of the 2002/2003 winter wheat crop?
What is the price direction between now and Fridays USDA stocks report?
What is the direction between now and June stocks report?
B. Identify the Important Variables

Scientific research is the systematic elimination of variables
B. Identify the Important Variables
People make a transition from being a savvy inquirer into a compulsive data gatherer and number cruncher.
Which variables are important and under what circumstances?
C. Chose the Right Measure
Multiple variables can get you in big trouble.
Quantification is only half the solution.
Qualitative variables are equally important.
Political events are extremely important.
C. Chose the Right Measure
Three reasons why regression does not work
1. Proceeds too slowly
2. The regression may be so strong that it does not center on the mean
3. The mean may be unstable
D. Make the decision
Plan the Trade
Trade the Plan
Historical probability distributions
Make The Decision