# Interesting radio programme: "Why we believe economic forecasters"



## Brendan Burgess (13 Jun 2011)

http://www.bbc.co.uk/programmes/b011vf2k

Tuesday 14th BBC Radio 4  9pm



> predicting the future - why expert forecasters aren't very good at it but we  believe them anyway. Why did so many economists not foresee the  financial crisis in 2008? President Obama recently criticised American  spy agencies for not predicting unrest across the Middle East - but  could they have done - are experts in their field actually better at  predicting future events? And are some personalities or professions  better at it than others? Some psychologists say experts are about as  accurate as dart throwing monkeys yet we consistently ask them to  predict the future. In this week's All in the Mind Claudia is joined by  author Dan Gardner and by psychologist Dylan Evans to discuss the  reasons why expert predictions fail but why we are still attracted to  those who predict confidently even if they end up being spectacularly  wrong. Could it all be down to a human aversion to uncertainty?


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## Marc (30 Jun 2011)

Most of us want certainty around our decision making, even when we know, logically, that it doesn’t exist. With investing, it’s a desire to believe that there’s someone who can protect us from bear markets and the devastating losses that can result. 

However, we’ve seen on numerous occasions that experts simply aren’t that expert. 

Of course, the next question is: “Why?”

In his book _Wrong_, David Freedman explains that many experts have ulterior motives behind their “expert” diagnoses. Unfortunately, our desire to hear expert advice is often to blame.

That leads to what Freedman called the “Wizard of Oz” effect. We come under the spell of wizards, authoritative voices who we are “trained” to take their words as truths. We want to believe that we can control things.

Freedman provides a great example of how people react to advice. Imagine that you have back pain and visit two doctors:

•    The first states that he’s seen many similar cases and that it’s hard to say exactly what’s wrong. He suggests trying Treatment A first, and then go on from there.
•    The second doctor states that he knows how exactly what’s wrong and what to do.

Which doctor would you choose? Almost always people will choose the latter. Yet, that might very well be the wrong choice. While we want certainty, it rarely exists. And it certainly doesn’t exist in the investment world, where so much of returns are explained by unforecastable events (such as Japanese earthquakes or the attack on the World Trade Centre).

There are three types of investment forecasters; those who don’t know where the market is going; those who know they don’t know; and those who know they don’t know but get paid a lot of money to pretend they do. In other words, they are playing an entirely different game.

As Philip Tetlock noted in his book, Expert Political Judgment, they’re “fighting to preserve their reputation in a cutthroat adversarial culture. They woo dumb-ass reporters who want glib sound bites. In their world, only the overconfident survive and only the truly arrogant thrive.” He noted the same self-assured hedgehog style of reasons that suppresses forecasting accuracy and slow belief updating translates into attention-grabbing bold predictions that are rarely checked for accuracy.

Freedman cautions to be wary of advice that has the following characteristics:


•    Is clear cut, free of doubt and actionable
•    Is universal, a one-size-fits-all solution
•    Upbeat and palatable
•    Filled with dramatic claims and stories, and specifically numbers which add an illusion of precision

Freedman explains that while we live in a complex world, we expect simple answers. He notes that experts often operate at the boundary of what is capable of being analysed and that if the answers were simple they would likely have been discovered long ago. Understanding this is what gives us a clue to “recognize advice that is likely to be right, or at least on the right track. It will be complex, come with many qualifications and it will be highly dependent on conditions.” And because of the caveats, it will be difficult to act on. All of these are at odds with what we want from advice. Yet, Freedman notes that “studies have shown that experts asked to determine the uncertainty in their findings tend to underestimate it — and continue to do so even after the problem is pointed out to them.” They’re like the rest of us — overconfident in their abilities. He offered the following example.

A 2007 study in the Financial Analysts Journal, “Are Cover Stories Effective Contrarian Indicators?” examined 20 years of feature-story headlines in BusinessWeek, Fortune and Forbes and found that stories praising companies or declaring trends tended to appear when things were about to go south. Tetlock, who studied the historical evidence on forecasts, concluded that it makes virtually no difference:

•    Whether forecasters are Ph.D.s, economists, political scientists, journalists or historians
•    Whether they had policy experience or access to classified information
•    Whether they had logged many or few years of experience in their chosen line of work

The only predictor of accuracy was fame, which was negatively correlated with accuracy: The most famous — those more likely feted by the media — made the worst forecasts.

Freedman reaches this conclusion: “While it’s clearly true that you should never trust experts blindly, there are many situations in which you should and even must trust them, and in which to do otherwise is nothing other than reckless.” He advises that “more of us ought to be following consensus expert advice that seems well supported, is not terribly burdensome to implement and appears to have little downside, such as eating fish, getting exercise, putting money into tax-deferred savings plans, and so on.”

He goes on to note: “Yet many of us manage to avoid following advice that not only is espoused by a wide range of experts but seems so basic and well proven that to mistrust it would appear to defy logic.”


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## Ceist Beag (30 Jun 2011)

Are there still people out there who do actually believe economists? I know RTE and others still wheel them out at every opportunity but for me their credibility is shot to pieces so don't lump me in the category of those who believe anything an economist predicts!


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