In the news today: UK supermarket giant Tesco's year-on-year pre-Christmas sales have increased by just 3.1% and this had 'fallen short of analysts' expectations' of 4%.
The result was a drop in its share value.
If I predict that Roger Federer will win the US Open this year and he in fact gets knocked out in the semis, then it's my prediction that's wrong. No one - especially the local betting shop - will be impressed by the argument that the prediction was correct but reality went bad and I should get my winnings anyway as he was really expected to win.
Why then are economic analysts allowed to keep their jobs when their predictions turn out to be wrong?
Which raises the next question - just how different are 3.1% and 4% anyway?
The stock market thinks it knows the answer to this, but the right answer is not quite as simple-minded as your average market trader.
From day one, science undergraduates have it drummed into them that uncertainty is an irreducible part of life in general and experimental science in particular. For example, when you read a voltmeter - yes even a digital one - what you see may not be the true value. Your reading is only good to within some range surrounding the true value. The size of that range depends on many factors and there's a shedload of ways to estimate them and calculate their effects.
As a result, scientists do not claim to know the true value for anything - even the most precise measurements ever made are subject to uncertainty. When a value is quoted scientifically, it is expressed as some number with an uncertainty specification, like the electron magnetic moment (g/2) which is 1.001 159 652 180 85 with an uncertainty of 76 in the last two digits.
In fact, scientists distrust any value that is quoted without an accompanying uncertainty simply because it can't be compared with anything else. 3.1% may be consistent with 4% (analysts jobs are safe) or it may reveal gross incompetence. Without uncertainty no one can say.
So had our analyst friends predicted '4% plus or minus 1%' for Tesco's year on year sales increase, they would have been credible before and after the event.
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