Some advice for economics and financial forecasters

Bruce Bartlett, former Treasury Department economist, in a Forbes article says (HT: Paul Krugman Blog):

Unfortunately, it is in the nature of economic and financial forecasting that being right too soon is insignificantly different from just being wrong. And forecasters that are wrong when most of their community is also wrong never suffer for it. The trick is to be right just a little bit sooner than everyone else–but only a little bit.

🙂 I have written quite a few posts on the forecasting business. In particular I like what Bernanke said in his speech (November 14, 2007) :

 The only economic forecast in which I have complete confidence is that the economy will not evolve along the precise path implied by our projections.  Nevertheless, as I have already noted, because policy affects spending and inflation with a lag, Committee members have no choice other than to make medium-term forecasts–provisional and subject to uncertainty though they may be.

 

Anyways, Bruce Bartlett article summarises the various forecasts (both right and wrong) on the housing crisis. Some people called the crisis as early as 2002 but of course got cold shoulders from Greenspan and Fed. Some people got it completely wrong as they said price rise in housing is because of economic fundamentals (rising income etc). That is why he offers the above quoted advice. Make sure you forecast just before the event breaks through. Timing is as crucial as the value of the forecast.

 

Barlettt also points that crisis was predicted by quite a few. This again takes me back to the previous post where I said:  I think we should just trash the idea that this crisis was unprecedented and no one could have predicted the set of events. More and more people are adding up.

 

Increasingly, I have started to believe that it was not  lack of crisis-sayers (yes there is a crisis) but lack of crisis-believers (people who trashed the idea). Unfortunately, it was latter which were more powerful and former didn’t get the timing right. 

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