Module Components

• Overview
• Assignments

Topics

• The Weather and Financial Forecasting
• Financial Forecasting
• Budgeting and Financial Forecasting
• Understanding Trends in Health Care

Nurs 690 Managerial Health Finance

Module 12: Forecast and Decision Making

The Weather and Financial Forecasting

Weather forecasting is the application of current technology and science to predict the state of the atmosphere for a future time and a given location. Forecasts are traditionally made by collecting as much data as possible about the current state of the atmosphere (particularly the temperature, humidity and wind) and using understanding of atmospheric processes (through meteorology) to determine how the atmosphere evolves in the future. The chaotic nature of the atmosphere and incomplete understanding of the processes mean that forecasts become less accurate as the range of the forecast increases.

Traditional observations made at the surface of atmospheric pressure, temperature, wind speed, wind direction, humidity, precipitation are collected routinely from trained observers, automatic weather stations or buoys. During the data assimilation process, information gained from the observations is used in conjunction with a numerical model's most recent forecast for the time that observations were made to produce the meteorological analysis. Numerical weather prediction models are computer simulations of the atmosphere. They take the analysis as the starting point and evolve the state of the atmosphere forward in time using understanding of physics and fluid dynamics.The complicated equations, which govern how the state of a fluid changes with time, require supercomputers to solve them. The output from the model provides the basis of the weather forecast. Interestingly, there are many more insights from weather forecasting that can be applied to financial planning:

1. Uncertainty Increases With Time: A small change tomorrow might not have a major impact on the future, but a number of small changes over an increasing amount of time will compound and make it much more difficult to predict the long-term future.

2. Course Corrections Will Happen: Every day things change, both in your finances and in the weather. Tomorrow's spaghetti plots will look different from today's. You don't need to update your financial plan every few hours like the meteorologist does with his forecast, but your plan should be reassessed at least once a year. 

3. The Future is Unpredictable: If a meteorologist ever tries to tell you exactly what will happen tomorrow or next week, it's probably best to ignore him the same way you ignore the financial specialist telling you what the S&P 500 will do over the next year. Nobody can accurately predict the future in weather or the stock market, so instead we need to take what we know and try to estimate the probability of different outcomes.

4. Be prepared for the "Worst Case Scenario": We don't like to focus on the worst possible outcomes, but it's important to understand what they represent and to prepare for them because they could have a much higher potential impact than the best-case scenario. If one computer model shows a major hurricane hitting heavily populated Miami, the meteorologists are going to be much more concerned about that even if it's an outlier compared to other models. If one of your financial planning scenarios shows you running out of money at age 70, we need to focus on how that could happen and prepare for what you'd do if that scenario came to pass, even if it's unlikely.

5. Don't Get Caught Up in the News Hype: A few months back, computer models were showing a hurricane forming and hitting South Florida and many news sites started to hype this potential threat. Just as the financial news loves to hype doom and gloom scenarios of potential stock market crashes, it's best to tune this out. The people of Miami do not start boarding up their homes every time a computer model shows a possible hurricane and you should not get out of the stock market every time someone calls for a market crash. There are plenty of real meteorologists and real financial advisers out there who will provide useful information in a sensible and knowledgeable manner.

6. Insurance Can Help Protect You: If you live in an area that is prone to tropical systems and flooding you likely have special insurance to cover your property if the worst-case scenario occurs. There are many ways to help insure yourself for a worst-case financial planning scenario as well. Diversification helps protect your portfolio. Life insurance protects your spouse and family. Long-term care insurance protects yourself. These are just a few of the many items you should consider.

7. Quiet Times Won't Last Forever:  The last major hurricanes to make landfall in the U.S. was Florence (September 2018), which was the wettest storm to hit the Carolinas and Michael (October 2018) which was the strongest storm to hit the Florida Panhandle. Certainly there have been other hurricanes and tropical systems that have caused major impacts in the U.S. (like Sandy in 2012), but historically there has been an average of 2 major hurricanes making landfall every 3 years. Similarly, the US stock market, specifically the S&P 500, plummeted more than 3% in one day TWICE in October 2018. Both of these streaks are impressive and might have led investors and coastal residents to let their guard down. However, it is important to remember, we never know what is “around the corner”.