How to improve economic forecasting

Article by Nicholas Gruen: “Today’s four-day weather forecasts are as accurate as one-day forecasts were 30 years ago. Economic forecasts, on the other hand, aren’t noticeably better. Former Federal Reserve chair Ben Bernanke should ponder this in his forthcoming review of the Bank of England’s forecasting.

There’s growing evidence that we can improve. But myopia and complacency get in the way. Myopia is an issue because economists think technical expertise is the essence of good forecasting when, actually, two things matter more: forecasters’ understanding of the limits of their expertise and their judgment in handling those limits.

Enter Philip Tetlock, whose 2005 book on geopolitical forecasting showed how little experts added to forecasting done by informed non-experts. To compare forecasts between the two groups, he forced participants to drop their vague weasel words — “probably”, “can’t be ruled out” — and specify exactly what they were forecasting and with what probability. 

That started sorting the sheep from the goats. The simple “point forecasts” provided by economists — such as “growth will be 3.0 per cent” — are doubly unhelpful in this regard. They’re silent about what success looks like. If I have forecast 3.0 per cent growth and actual growth comes in at 3.2 per cent — did I succeed or fail? Such predictions also don’t tell us how confident the forecaster is.

By contrast, “a 70 per cent chance of rain” specifies a clear event with a precise estimation of the weather forecaster’s confidence. Having rigorously specified the rules of the game, Tetlock has since shown how what he calls “superforecasting” is possible and how diverse teams of superforecasters do even better. 

What qualities does Tetlock see in superforecasters? As well as mastering necessary formal techniques, they’re open-minded, careful, curious and self-critical — in other words, they’re not complacent. Aware, like Socrates, of how little they know, they’re constantly seeking to learn — from unfolding events and from colleagues…(More)”.