The ability of forecasters to predict turning points is limited. Forecasts from the official sector, either from national sources or international agencies, are no better at predicting turning points.
- One class says that forecasters do not have enough information to reliably call a recession. Economic models are not reliable enough to predict recessions, or recessions occur because of shocks (e.g. political crises) that are difficult to anticipate.
- A second class of theories says that forecasters do not have the incentive to predict a recession, which – though not a tail – event are still relatively rare. Included in this class are explanations that rely on asymmetric loss functions: there may be greater loss – reputational and other kinds – for incorrectly calling a recession than benefits from correctly calling one.
- The third class stresses behavioural reasons for why forecasters hold on to their priors and only revise them slowly and insufficiently in response to incoming information.
A more than a healthy dose of skepticism is always warranted when dealing with these so called “expert forecasts.”
- The Little Book of Behavioral Investing: Forecasting is a Sham (stockviz.biz)
- Reel Life vs. Real Life (stockviz.biz)
- The Seersucker Theory (stockviz.biz)
- Why Do Models Beat Experts? (stockviz.biz)
- The illusion of knowledge (stockviz.biz)