Dispelling Some Big Myths About Economic Forecasts

The financial media makes a living discussing the machinations of the economy and markets. Talking heads yap away about this economic indicator pointing to better times and that statistic signalling a coming recession.

People pass themselves off as ‘experts’ on economic matters and the general public assumes that they must know the answers and can predict the future of the economy better than a layman.

But the fact is not one person on this earth can predict the future. Sure you can get it right every now and again, even a broken clock is right twice a day as the saying goes. And the more general and sweeping the statements that you make the harder it is for anyone to pin you down and say that you were wrong.

Professor William Sherden wrote a book called The Fortune Sellers: The Big Business of Buying and Selling Predictions. Sherden tested the accuracy of leading economic forecasters over many decades.

The Investment Watch blog said his research concluded that there’s ‘no way economic forecasting can improve since it is trying to do the impossible’.

I will repeat his 11 findings as revealed in the above blog here because I think it is important for us to dispel the myths that are continually propagated…

Here they are:

1. Economists’ predictions are no better than guesses

Forecasting skill of economists is no better than guesstimates by Main Street investors.

2. Government economists often worse than guesses

Sherden discovered that predictions made by the elite economists on the President’s Council of Economic Advisors, the Federal Reserve Board, and even the non-partisan Congressional Budget Office were actually worse than guessing.

3. Long-term accuracy is impossible

The accuracy of forecasting declines the longer the lead times.

4. Turning points cannot be predicted

Economists cannot predict the crucial turning points in the economy, confirming Siegel’s research. Worse, the vast majority of all long-term predictions fail.

5. No specific forecasters are better than the rest of pack

Sherden also learned that no particular forecasters were consistently more accurate.

6. No forecaster was more expert with specific statistics

No forecaster has consistently higher skills in predicting any one economic statistic.

7. No one ideological orientation was better

No ideology perspective consistently produced superior forecasts.

8. Consensus forecasts do not improve accuracy

But still, the press and their readers love those lists, averages and consensus forecasts.

9. Psychological bias distorts forecasters and their forecasts

Some economists are naturally optimistic and bullish. Others are naturally pessimistic bears. Some are conservative, some progressive. Why? Look inside their brains or at their DNA. Every economist has mental biases and political ideologies that distort their choice of research topics and data selection, and therefore skew their predictions.

10. Increased sophistication does not improve accuracy

Sorry folks, but all the new scientific methods, technologies, algorithms and computer models of the economy can make forecasts worse. At least give skilled Wall Street insiders an even better edge over naive retail investors.

11. No improvement over the years

Finally, Sherden says there’s no evidence that economic forecasting has improved in recent decades, despite vast new technologies.

That’s a pretty damning set of findings to say the least. And yet every single night on the news we wheel out someone to comment on that day’s price action in the market. They come up with some reason why prices moved the way they did and they make a sweeping statement about what will come next. What a farce.

So, have I just done myself out of a job?

Not so fast. I’ll explain why in my other Money Morning article for today: How a Share Trader Approaches the Market

Murray Dawes
Editor, Slipstream Trader

Join me on Google Plus
From the Port Phillip Publishing Library

At Money Morning our aim is simple: to give you intelligent and enjoyable commentary on the most important stock market news and financial information of the day - and tell you how to profit from it. We know the best investments are often the hardest to find. So that's why we sift through mountains of reporting, research and data on your behalf, to present you with only the worthwhile opportunities to invest in. Become a more informed, enlightened and profitable investor today - by taking out your free subscription to Money Morning now.

Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia