Economic forecasting is fraught with uncertainty, and even the most seasoned financial professional is only correct a fraction of the time. Yet despite this uncertainty, forecasters rarely revise their predictions when new evidence presents itself.
Tim Harford, behavioral economist and columnist at the Financial Times, has suggested that this lack of revision stems from an economic God complex, and he discussed how analysts can make more accurate forecasts at this year’s European Investment Conference.
Harford draws upon the work of University of Pennsylvania professor Philip Tetlock, particularly his concept of the “Superforecaster,” to explain why a certain psychological attitude enables better predictions. Tetlock found that people with a particular personality type — those whom he dubs “actively open-minded thinkers” — are able to make more accurate forecasts because of their willingness to change their minds in light of new evidence.
“Most of us say we’re willing to change our minds. Most of us say we’re willing to meet people who disagree with us. But most of us are lying,” Harford said. He went on to state that those who enjoy being challenged — who don’t view a change of mind as a sign of weakness — and actively look for ways to disprove what they believe are more accurate in their predictions. “It’s not just a case of can you get the forecast right,” Harford said. “It’s also a case of what happens when you get the forecast wrong.”
Harford uses the contrast between historical economists John Maynard Keynes and Irving Fisher — the former of whom is widely lauded, while the latter has been largely dismissed — to illustrate the importance of changing direction when contradicted and, in Fisher’s case, the dangers of stubbornly believing what you want to believe even when proven wrong.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo credit: Harry Richards