We all live our personal and professional lives based on forecasts. Forecasts are used for many routine things such as buying a home. investing in a college education and planning for retirement. Some rely on other people's advice and some of us like to make our own forecasts. Everyone has heard stories about the forecaster that called the stock market crash of 1929 or the economic crisis of 2008. An article in Boston.com describes a new academic study on the accuracy of forecasters by Jerker Denrell of Oxford and Christina Fang of NYU. The conclusions from the paper are:
- "Economists who had a better record at calling extreme events had a worse record in general."
- "The analyst with the largest number as well as the highest proportion of accurate and extreme forecasts had, by far, the worst forecasting record."
- "Those who correctly predict extreme events tend to have a greater tendency to make extreme predictions; those who make extreme predictions tend to spend most of the time being wrong."
The conclusions I draw:
- A forecaster who correctly calls an extreme event is probably not reliable to call the next extreme event
- Good forecasters tend to forecast well in normal times and are not likely to forsee extreme events
- Do your own analysis and make your own forecasts.