What’s the point of forecasts?

Matt blogs every now and then defending economic forecasters and always seems to draw out at least a couple of comments slagging off forecasters for being inaccurate. His reponse is that it’s not the numbers that matter but the qualitative analysis of risks and market direction. His defence came to mind when I was reading a recent AEJ article about testing the performance of expert advisers.

The authors make the point — which isn’t central to their hypothesis — that there’s a difference between forecasters who get the numbers right and forecasters who are useful to their clients.

…a decision maker must take some default action even in the absence of any expert, and may not appreciate forecasts that suggest the same actions, even if they are provided by an informed expert. On the other hand, if forecasts lead to better decisions, the decision maker may appreciate them, even if they are provided by an uninformed expert.

All of which suggests that trying to judge economic forecasts by the accuracy of their predictions alone may miss much of the value that they provide. Of course, there is probably a correlation between the accuracy of the forecasts and the usefulness of the accompanying advice but the two need to be judged together by their usefulness to the forecasters’ clients. Given that people continue to purchase forecasts it appears that their value in improving decisions is far from negligible.

6 replies
  1. DT
    DT says:


    Treasury budget forecasts, after 10 years of being frequently wrong by large margins, are considered by many to be inaccurate and unreliable.

    Assuming that is true, are the Treasury’s budget forecasts nevertheless useful?

    • Matt Nolan
      Matt Nolan says:

      Treasury’s forecasts were below what happened for a good number of years, and now they’ve been above what happened for a good number of years.  Overall in terms of the “medium-long term level of economic activity” they have been both incredibly consistent and accurate – it is the size and scope of cycles that has been hard to deal with.

      In this context, Treasury’s forecasts which are used to ascertain whether the government budget is sustainable into the medium-long term are doing exactly what you would want 😉

  2. Kimble
    Kimble says:

    And so sprouts the grassroots movement to “Decimate the Decimal Place”.

    The goal of the DDP movement is to reduce the use of decimal places in economic forecasts by 10% each year for the next 10 years.

    We expect the use of decimal places in forecasts by the end of 2021 will be 65.1% lower than…BUGGER!

    • Matt Nolan
      Matt Nolan says:

      I wonder if not using decimal places would actually make the forecasts more useful – giving less of the “myth” of accuracy, and promoting their use in a more qualitative way (or at least a risk balancing way).

      • DT
        DT says:

        The problem is that dumbass media would report, for instance, inflation of 1.5% as being “good news” as it was below the forecast of 2% (or 1% if rounding down).

        (Moreover, inflation is a good example of one measure where single digit decimal places probably are appropriate as forecasts tend to be pretty close.)

        • Matt Nolan
          Matt Nolan says:

          Maybe we should just remove numbers and talk about feelings – how does inflation make you feel?

          Can’t misreport something with no content 😉

Comments are closed.