Two recent events triggered me to do a bit of research.
- My son – having started Secondary Level 4 a few days back – asked me which job would be the best and whether he should target the Junior College or Polytechnic as his next step on the educational ladder.
- I saw multiple headlines in print and online media about Economic Forecasts for 2017 and sometimes even beyond.
So, have you ever wondered why Economists work so hard—to analyze data and to churn out forecast after forecast—on future economic developments?
Why then, assuming they believe their own forecast, don’t they get some funds (cheap to have in today’s zero-interest environment and easy to get with their excellent professional reputation) and invest them in the right financial vehicle which correlates with their forecast, and then retire and relax on a beautiful tropical island, sipping Piña Coladas while waiting for their forecast to become reality?
Why are so few of them doing that?
The short version:
Life is not that easy. Unfortunately—for the economists that is—human beings (being the main actors in the economy) are neither rational nor selfish, nor do they never change their tastes like what is assumed in most of their economic models. As Human Sciences (Behavioural Economics) has proven over and over again, people are neither fully rational nor are they completely selfish, and their tastes are anything but stable. We are humans after all and not of the species Homo Economicus.
Their forecast accuracy is very sobering.
How many had included Brexit and/or Trump as President in their forecast models for 2016? Wouldn’t those significant surprises have an impact on any economy?
So why do they still continue to forecast and why do people still read or even believe their forecasts?
Firstly, because it is their job, and secondly, because we tend to believe “authorities” (economists are still widely accepted as authorities, why is beyond me) despite the future being unpredictable and uncertain.
Another problem is that economists don’t have “skin in the game” (not differing too much from bankers in that aspect). If they happen to be accurate (even purely by luck), they enjoy publicity, get publication deals, or some consultancy offers. If they are wrong, nothing much happens, they do not get penalized. And this nice win-win situation motivates them to churn out as many predictions as possible. Statistically sooner or later, one of them might be a hit and win them reputation.
Therefore, like in many other scenarios I become critical whenever I encounter predictions.
Then I ask myself these questions: what incentive does the expert predictor have and how good is his success rate (challenging to find out as the media never states the pundit’s track record).
More often than not, however, I just stop at reading the headline and skip the rest of that “expert forecast” to do some other stuff with my time.
Oh, yes, I almost forgot, what did I reply to my son?
“Well, son, you grow up in very dynamic times. You have to stay nimble and flexible. Dare to be different. Uniqueness always pays and it is your duty to be like no other. When you go through your education don’t follow the crowd. Think for yourself. Find your niche and then work on being excellent in it. Socialize a lot, connect with others in person and listen to what they have to share. You will learn a lot from doing that. Knowledge is exploding, so you need to commit yourself to a plan for lifelong learning. And “knowledge” does certainly comprise negative knowledge (what n o t to do), which often is much more potent than positive knowledge (what to do). In that regard I do know that you certainly should not aspire to become an economist.”
I guess, my son was not too happy with that elaborate reply not answering his specific question at all.
He will figure it out.
Want to read more on examples where the economists as a profession collectively ‘underperform’?
While doing my little research I came across so many of them that it will take me a few days to collate them properly.
Do come back to this post this Saturday at 11.57 AM (SST) and this link to the long version will be “alive”.