The role and limits of forecasts

Organize uncertainty — do not manufacture certainty.

The role and limits of forecasts

| Concept | Explanation | |---|---| | Point forecast | One estimated future value. | | Range forecast | A band of plausible outcomes. | | Scenario forecast | Conditional outcomes under different assumptions. | | Probability estimate | Explicit confidence assigned to outcomes. | | Forecast horizon | The period over which the estimate is intended to apply. | | Forecast error | Difference between the forecast and realized result. |

Key idea: Use forecasts to organize uncertainty, not to create an illusion of certainty.

Module knowledge check

1. How does risk capacity differ from risk tolerance?
2. Why is volatility not the same as permanent loss?
3. Can a good decision produce a loss?
4. Why are scenarios more useful than one precise forecast?

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