Economic Forecast Illusion or why “Economist” is one of the worst professions one could choose

Two recent events triggered me to do a bit of research.

  1. 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.
  2. 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.

economic_forecastingHow many of the thousands of economists predicted the 2008 Financial Crisis accurately?  Not too many, I reckon.

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.  

I smile.  

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”.

6 Comments

  1. Wow kids these days are quite forward-looking. Haha I highly doubt that “job prospects” was in my dictionary when I was at that age.

    It is easy to make forecasts. Anyone can do it. It’s just pointless. 5 out of 6 of Goldman Sach’s top trade ideas for 2016 were stopped out by the time Valentine’s Day rolled around.

    There is a recent paper titled “The Trouble with Macroeconomics” (you may have already come across this during your research) that trashes macro models used these days and how economists are drifting away from science, more interested in preserving reputations than testing their theories against reality. It got pretty famous because the author named names in the paper, offended his colleagues, and then, he went on to take the job as the World Bank’s Chief Economist. LOL. Quite interesting to see an someone bash his own livelihood. (If you’re keen on reading the paper you can just google the title.)

    Looking forward to your post on Saturday!

    • Hi Yolohuat,

      Yes, Forecasting is easy, but checking it against actual outcomes and standing by ones Forecast is not.
      Thank you for sharing those additional stats and that Paul Romer paper (no, I had not read that before). Paul Romer shared another interesting post explaining why he joined the World Bank. Because it is lead by a trained Doctor.

      https://paulromer.net/md-to-lead-worldbank/

      And he mentions Singapore in that post as well: “In my lifetime, the most important lesson economists have learned is that in countries of all sizes–small ones like Singapore, medium-sized ones like South Korea, large ones like China and India–better policy can lift people out of poverty more quickly than we dared hope. Because a billion people still live in extreme poverty, each day of delay in taking full advantage of this lesson imposes a cost that is staggering.”

  2. Andy,

    “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.”  

    Check!

    “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.”  

    Double Check!

    “Knowledge is exploding, so you need to commit yourself to a plan for lifelong learning.”  

    Triple Check!

    All of sudden, I feel good 🙂

    Thanks!

    • All of a sudden, Jared? I got the impression you do feel good about your choices most of the time without needing external affirmations. LoL

      And who knows, maybe my subconscious mind made me write all of that with having you in mind?

  3. Hi Andy !
    Yah ,, forecasting is really a ” big business ” Economist also a high demand career !
    A famous economist ( not sure if is Paul Samuelson )…” Teach a Parrot to say ” supply and demand ” and you have an economist ”

    Economy forecast is always out ..yet , many people still like to listen to it …
    Cheers!!

    • Hi STE,
      Good one, it’s all about market forces. Without demand there wouldn’t be so much supply.
      The question is, do people read/listen to forecasts for entertainment or do they draw actionable conclusions from them. The first is a genuinely valid reason, the latter is certainly dangerous in this uncertain world we live in.

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