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Tuesday, January 8, 2013

GDP = Generally Deficient Prediction

"In reality, when a group of economists give you their GDP forecast, the true 90 percent prediction interval - based on how these forecasts have actually performed and not on how accurate the economists claim them to be - spans about 6.4 points of GDP (equivalent to a margin of error of plus or minus 3.2 percent).

"When you hear on the news that GDP will grow by 2.5 percent next year, that means it could quite easily grow at a spectacular rate of 5.7 percent instead.  Or it could fall by 0.7 percent - a fairly serious recession.  Economists haven't been able to do any better than that, and there isn't much evidence that their forecasts are improving.  The old joke about economists' having called nine out of the last six recessions correctly has some truth to it; one actual statistic is that in the 1990s, economists predicted only 2 of the 60 recessions around the world a year ahead of time.

"Economists aren't unique in this regard.  Results like these are the rule; experts either aren't very good at providing an honest description of the uncertainty in their forecasts, or they aren't very interested in doing so.  This property of overconfident predictions has been identified in many other fields, including medical research, political science, finance, and psychology."

From The Signal and the Noise:  Why So many Predictions Fail - But Some Don't by Nate Silver

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