Tuesday, 18 November 2014

Ways of Distinguishing Short-term from Long-term

The concepts of the 'short term' and 'long term' are used frequently by forecasters, analysts and organisations with a forward-looking remit.  But in my experience there is little coherence in their definitions.  Some organisations approach this issue by identifying a standard length of time - e.g. 'long term' meaning five or ten years or more.  These definitions are arbitrary.  In economic and decision theory, there are a number of definitions including the 'time taken to return to equilibrium' - a system-centric definition - and the 'time over which all inputs can be considered variable' - a decision-centric definition.

An approach which is perhaps more useful for forecasters is to think of the short-term / long-term distinction as relating to the types of information used.  Short-term forecasts primarily use information about the situation now.  Long-term forecasts primarily use information about base rates.  A short-term forecast will therefore be one that uses as a rationale information about what is happening now, while a long-term forecast will be largely invariant to the particular time it is being made.  This distinction is not, of course, a clear one: most forecasts will combine historical base rates with present-focused specifics.  But it is useful to think about the relative weightings placed on these two types of information as a measure of the extent to which it is a short- or a long-term forecast.

Waves for short-term forecasts, tides for long-term forecasts

Forecasting the weather in one minute's time will almost entirely involve information about what the weather is like now.  Forecasting the weather in one year's time will almost entirely involve historical data and very little information about what the weather is like now.  So in the context of weather forecasting, one minute is clearly short-term and one year is clearly long-term.

In more volatile systems, information about today will have less diagnostic value about the future than in more stable systems.  So long-term political forecasts look out far further than long-term weather forecasts.  An information-based distinction between the concepts of the short- and long-term captures these differences but in a way that is more powerful in that it encompasses other factors (such as the volume of information collected) as well.   

4 comments:

Peter Coghill said...

I see short term/long term used every day as a kind of linguistic short cut which absolves the speaker of applying proper rigour while appearing to be providing valuable insight. I think it tends to give the impression of removing more uncertainty than it does. This can be dangerous for the analyst and the decision maker.

It also unfairly shifts the cognitive burden on to the customer. They have to keep a vague map to time as they interpret the analysis. Better off good giving probabilities of events in defined time spans. Imo

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