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Settled Economics? Financial Predictions Are Almost Always Wrong

Don’t trust economic forecasters: that’s the message from Citigroup’s Economic Surprise Index. As Derek Thompson explains at the Atlantic, “A high Surprise Index indicates that economic figures have been stronger than analysts projected. A low Surprise Index indicates that the economy is doing much worse than analysts predict.”

Check out the Index here.

Remember — those who try to predict the future of our financial world are usually wrong. Sometimes very wrong. Any investor who thought his predictions were correct would shut up about it and cash in big in the financial markets. Predictions in the media come from investors and analysts who stand to gain more from publicity than from investing based on their predictions.

Remember — those who know don’t tell, and those who tell don’t know.

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  • Mrs. Davis

    And the climate is probably a lot more complex than the economy.

  • Harry Allan

    Predictions are difficult,especially about the future.

  • Anthony

    Economics as social/financial forecasting on capital markets (goods/services/labor/productivity/tecnology/etc.)interacting via human dynamics towards profit remains always hard to predict. Yet, capital markets globally continue to tout the indexes.

  • Cheves

    Well, just because financial scientists (aka “economists”) get things wrong, it doesn’t then follow that climate scientists do. I mean, economics in involves several years’ worth of people producing goods and services. Climate involves the entire planet, hundreds of years, and infinite inputs and variables. I mean, GAH. It’s settleld science, WRM.

  • Luke Lea

    The situation is not that different with climate models: since none of the models have successfully predicted the future (they all predict the past) the answer is to combine them all into one grand average prediction.

    Economists (climatologists) as then polled about their opinion as to the accuracy of the combined result. Isn’t that the way real science is supposed to done?

    [for answer see how physicists are evaluating the latest evidence for a Higgs boson at CERN: ]

  • Eurydice

    It’s not about keeping all the good predictions to yourself and cashing in big – it’s that you can be 100% right and still go broke trying to fight the market. The early predictors of the Euro’s downfall may seem like geniuses today, but if they’d acted on their predictions a decade ago they would have lost a lot of money (or opportunities to make money) and been considered “wrong.”

    Short term forecasts tend to be right if the world isn’t too volatile, but where the forecasts are useful is not so much for their accuracy in predicting the future, but for how they represent the current conventional wisdom. It’s all about predicting human behavior and big part of that is understanding what people believe, how strongly they believe it and what it will take to make them change their minds.

  • Soul

    What gets me is the number of people that will invest their hard earned money in the market based on whims and rumors read on the internet.

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