Witches, ghouls and economic forecasting

“Economists were put on earth to make astrologists look good.” West Wing Series 1 Episode 1

On Halloween night this year, Womerah Avenue was invaded by gangs of zombies, witches and the (more than) occasional fairy.

Normally our street is home to another nightlife altogether – clutches of arty types, gorgeous male couples with well developed pecs, and the occasional street person.

But on Halloween, cobwebs were strung up, chairs set up on terrace stoops, and wine and cheese laid out. A note had been letter boxed earlier in the week, so everyone had a chance to buy their lollies, and we were well prepared for the 5:30 kickoff.

After weeks of excited anticipation, my own very nervous monster (see pic) was reluctant to take to the streets until her more confident friend appeared in a glamourous witch costume. Monster then rushed off happily with witch, not to be seen again for the rest of the night.

My older offspring sat with me on the steps, muttering imprecations against American imperialism, consumerism, and parental idiocy in dressing their children in outrageous costumes. Fortunately, he was quite hard to understand as he stuffed his mouth with sweets.

Parents trailed their children and chatted as they straggled down the street. Neighbours leant over fences admiring costumes. The woman across the road sported a witch’s hat and cackled from her upper window. Another household lowered a bucket filled with lollies to the tricksters.

It was all very social, and there was a strange sense of community – strange in that we tend not to think of ourselves as much of a community normally. So many people moving in and out, and the young singles intent on working and partying hard dominate the landscape.

Below them is a less visible underworld of the permanent residents, including the families with children who haven’t moved off further east, west or to the northern shores. And somehow Halloween, a secular, American festival, has become our street’s annual uprising of this underworld – when children and parents take over the street for the night.

Meanwhile I’ve been contemplating another form of witchcraft and sorcery in the form of economic forecasting. I’ve been interested in the similarities between fortune telling and economic and financial forecasting for some time. This was sparked by a column in the Sun Herald, which pits apparently experienced stock market players against a horoscope, a dart board and several amateur readers in a competition to make the most money on the stock market.

My occasional monitoring of the competition suggested that the experts don’t seem to do that much better than their competitors. It always strikes me how brave, or foolish, the experts must be to put themselves on the line publicly like this.

When we normally see these sorts of pundits, it’s on the evening news, making predictions about future growth, or interest rates or some such. There’s never any real opportunity to check on the accuracy of their predictions, and the Sun Herald provides a rare opportunity for unbiased reporting on their work (and there’s a rare compliment for the Sun Herald, which is usually so easy to bag)

I also heard a This American Life program (terrific podcasts – highly recommended  http://www.thisamericanlife.org/podcast) which intrigued me by reporting that US economic forecasters “are not that good at forecasting the economy”

On average they’ve been inaccurate in predicting economic growth by about 1% point per year – which is apparently very significant. 1% growth is really bad for the economy. 3% is the exact opposite – new businesses start, houses are built etc everybody’s happier.

Economic foresters have apparently missed all the significant economic events of the past 20 years – the recent global financial crisis is just the latest example of where forecasters not only failed to predict its emergence, but also failed to recognise when they were in the beginnings of the recession.

The This American Life program reported that massive and sophisticated computer modelling of economic forecasts results in not particularly high levels of accuracy. There is too much chaos in the world – chaotic randomness, including national and global political events – for modelling to be that effective in increasing forecasting accuracy.

Also, the program reported that the forecasters find it very difficult to admit that their forecasts are wrong – their egos get in the way when they need to revise their forecasts.

Blue Chip Economic Forecast brings together the 50 best forecasters in the US and produces a consensus report. The guy who puts the reports together was on the program. He said that “Any economic forecasting you see that includes a decimal point is well beyond the level of accuracy that is possible.” But the consumers of economic forecasts – the governments and business and even non-government organisations – want decimal point forecasts, even though they know, or should know, that this level of accuracy is not possible.  And they pay big bucks for the forecasts.

The program concluded that the only sure thing in forecasting is that the future will come.  Seems to me that the only sure thing is that people will pay money to anyone who promises to predict the future.

So we’re all very snooty about astrology and fortune telling in general,  but our news services, governments and financial institutions put great score on, in fact would seem to rely on, economic forecasting which have no proven rates of accuracy. And the providers of the forecasts are able to charge substantially more than the average astrologist.  And they get the chance to advertise their unsubstantiated claims in all areas of the media.

Doesn’t seem very logical to me.

More on this next time – when I’ve finished reading The Fortune Sellers:  The big business of buying and selling predictions by W A Sherden