Prophets and loss: why forecasts fail

“IN 1984, the Economist asked sixteen people to make ten-year forecasts of economic growth rates, exchange rates, oil prices, and other staples of economic prognostication. Four of the test subjects were former finance ministers, four were chairmen of multinational companies, four were economics students at Oxford University, and four were London dustmen. A decade later, the Economist reviewed the forecasts and discovered they were, on average, awful. But some were more awful than others: The dustmen tied the corporate chairmen for the first place, while the finance ministers came last.

Many other publications have conducted similar exercises over the years, with similarly humiliating results. The now-defunct magazine Brill’s Content, for one, compared the predictions of famous American pundits with a chimpanzee named Chippy, who made his guesses by choosing among flashcards. Chippy consistently matched or beat the best in the business.

Even economists who win Nobel Prizes have been known to blow big calls. In 1997, as Asian economies struggled with a major currency crisis, Paul Krugman – New York Times columnist and winner of the Nobel in 2008 – worried that Asia must act quickly. If not, he wrote in Fortune magazine, ‘we could be looking at a true Depression scenario – the kind of slump that 60 years ago devastated societies, destabilised governments, and eventually led to war.’ Krugman’s prescription? Currency controls. It had to be done or else. But mostly, it wasn’t done. And Asia was booming again within two years.

Pessimists have no monopoly on forecasting flops, however. Excited predictions of the amazing technologies to come – Driverless cars! Robot maids! Jet packs! – have been dazzling the public since the late nineteenth century. These old forecasts continue to entertain today, though for quite different reasons. And for every bear prophesying blood in the stock markets, there is a bull who is sure things will only get better. The American economist Irving Fisher was one. ‘Stock prices have reached what looks like a permanently high plateau,’ the esteemed economist assured nervous investors. ‘I do not feel there will soon be, if ever, a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months.’ That was October 17, 1929. The market crashed the following week. But that crash was none of Britain’s concern, the legendary John Maynard Keynes believed. ‘There will be no serious consequences in London resulting from the Wall Street Slump,’ Keynes wrote. ‘We find the look ahead decidedly encouraging.’ Shortly afterward, Britain sank with the rest of the world into the Great Depression.”

Reprinted with permission. Future Babble: Why Expert Predictions Fail and Why We Believe Them Anyway by Dan Gardner (Virgin Books, £11.99).