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Long Reads

Forecasting Is Fallible, Yet Necessary

Given that economic forecasters are so often caught out by shocks, one might reasonably ask why they bother. The short answer is that they have no choice, even when they are well aware of the imperfection of their analyses, because people simply cannot live without predictions.

AMSTERDAM – In a complex and uncertain world, making predictions is a fraught business, not least for economists, whose forecasts are notoriously inaccurate. Even worse, economic forecasts tend to let you down just when you need them most. The Nobel laureate economist Paul Samuelson once quipped that “the stock market has called nine of the last five recessions,” which seems forgivable when compared with economic forecasters who rarely predict any.

Given that economic forecasters are so often caught out by shocks, one might ask why they bother. The short answer is that they have no choice, even when they are well aware of the fallibility of their analyses. People simply cannot live without predictions. Because all decisions – in business, politics, or even one’s personal life – are based on some idea of what the future holds, demand for forecasts is insatiable. People want to be able to justify decisions that they would have made anyway for other reasons. And when things go wrong, they can always blame the “experts.”

The Problem of Overconfidence

Forecasts – and the stories behind them – can comfort us, but they can also lead us astray by creating an illusion of control. This is why investment projects are often late or over budget. Similarly, official forecasts published by government agencies and central banks tend to be overly optimistic. This not just because they are based on assumptions of a policy’s future success, but because they are designed to change people’s expectations and behavior.

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