The Illusory World of Economic Forecasting

Tuesday, September 19, 2006 | 07:26 AM

Paul Farrell (who's been on an angry tear lately) states what we have all known for quite sometime: Economists make awful forecasters. Farrell calls it "the illusory world of economic illusionists."

We've discussed this issue several times in the past: 1) in general with The Folly of Forecasting; and B) specifically, with The Mystery of the Awful Economists.

William Sherden did research on the accuracy of leading forecasters over a few decades, and his findings were summarized in his book "The Fortune Sellers: The Big Business of Buying and Selling Predictions." And his conclusions are still accurate: 

"They are timeless. The political influence on predictions is basic human nature. I see no way that economic forecasting can improve since it is trying to do the impossible."

Here are Sherden's top 10 findings in The Fortune Sellers:

1. The forecasting skill of economists is on average about as good as guessing. In fact, predictions by the politically driven Council of Economic Advisors, Federal Reserve Board and Congressional Budget Office were often worse than guessing.

2. Economists cannot predict the turning points in the economy. Of 48 predictions made by economists, 46 missed the turning points.

3. Economic forecasting accuracy declines with longer lead times.

4. No economic forecasters consistently lead the pack in accuracy.

5. No economic ideology consistently produces superior forecasts.

6. No economic forecaster has consistently higher forecasting skills predicting any particular economic statistic.

7. Consensus forecasts do not improve accuracy (although the press loves them).

8. Psychological bias affects forecasters and their forecasts. Some economists are naturally optimistic and bullish, others are consistently pessimistic bears.

9. Increased sophistication provides no improvement in forecasting accuracy. Remember the Long-Term Capital Management hedge fund? Two brilliant Nobel Economists backed by Wall Street's elite nearly sabotaged the world economy.

10. Finally, Sherden says there's no evidence that economic forecasting has improved in recent decades. In fact, forecasting appears to be deteriorating as partisan politics, Wall Street gaming and unpredictable global events invent new illusions.

The one caveat I would add to this is I have found ECRI to be consistently useful as an economic analysts, along with ISI and NDR. They help discern objective reality, rather than make forecasts per se.

Good stuff, Paul.


America's 'Hollywood economy'
Paul B. Farrell, MarketWatch
Marketwatch, 7:23 PM ET Sep 18, 2006

Tuesday, September 19, 2006 | 07:26 AM | Permalink | Comments (18) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



TrackBack URL for this entry:

Listed below are links to weblogs that reference The Illusory World of Economic Forecasting:


I recently read Sheridan's "The Fortune Sellers." I think he overstates his case a little bit, but not nearly as much as most forecasters.

If, as you noted, "forecasters" spent more time on possibilities then on time sensitive predictions their input would be much more useful. Why on earth people think they can make time accurate predictions on systems with intelligent agents and feedback loops is beyond me.

Although your list covers many of Mr. Sheridan's points, I would still recommend the book to anyone who bases money decisions on ANY type of forecasting.

He has a whole chapter where he shreds the practice of forecasting company earnings. By implication, it could be taken that companies that consistently hit their numbers are suspect with regards to 'gaming' the system.


Posted by: Russell | Sep 19, 2006 8:14:46 AM

The comments to this entry are closed.

Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      


Complete Archives List



Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:

Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo



Odds & Ends

Site by Moxie Design Studios™