Weekend Economics Puzzle 2, The Feckless Forecast


British economist John Kay reminds us that half and hour before Bureau of Economic Analysis issued its official estimate of US GDP growth in the third quarter of last year, the Bloomberg financial information service carried 67 different predictions of US gross domestic product.

Though such forecasts are frequently wrong, they are regularly made in the media by economists. They tend to overstate the extent of knowledge we have about the economy which leads to undermining the credibility of economists. Why does it persist?

John Kay thinks it’s useless form of economic research;

“Correctly predicting the official estimate 30 minutes before its release may be profitable but contributes nothing to our understanding of the economy. The private value of such information is large but its social utility is zero, which is why procuring it is at once the best-paid and most futile form of economic research.

Keynes likened professional investment to a beauty contest, in which “it is not a case of choosing those which are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be”.

Business of estimation could even be a very dangerous business if you happen to be in wrong place. Stalin had the organizers of first post-war Soviet census shot for ‘violation of elementary statistical principles’. Their figures revealed the full extent of the Soviet war dead plus the famines and terror of the 1930s.

Now economists are venturing into predicting other areas as well; an economist at Dartmouth predicted Olympic medals and Oscar nominees.

Relate Links:

- Welcome to the World of Bloomberg TV, by John Kay (video)
- Misuse of Economic Data by Government Officials
- When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein
-The Death of Economics, Paul Ormerod
- Irrational Exuberance, Robert Schiller
- The Economics of Fickleness and How We Guess What Others Will Do by John Allen Paulos
- Morgan Stanley economics commentary and Bloomberg Podcasts
- Regressions: Why Are Economists Obsessed with Them?


“Correctly predicting the official estimate 30 minutes before its release may be profitable but contributes nothing to our understanding of the economy."

Paul, I think there's a forest here that's being missed for the trees. I'm on the buying end of a lot of research, and I couldn't care less how closely an analyst predicts these numbers. What I do care about is the thinking that goes into the prediction. A good prediction with bad reasoning is a fairly useless thing, but a missed prediction with thorough, well thought out reasoning is a very useful thing. That's because the thought process that produces the estimate, and the subsequent evaluation of why it was wrong, produces a better understanding about how the economy functions, which leads to a more efficient allocation of resources. That's an unambiguously positive thing.

Marc, thanks for highlighting the 'how' aspect of making the estimate. Personally I don't agree with John Kay's views; i'm one of those who regularly listen to Bloomberg podcasts and people range from those like Ben Friedman to other 'regular' economists. May be academic economists are a bit scared that they are losing an important segment of the market.-Paul


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This page contains a single entry by Paul published on March 11, 2006 6:32 PM.

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