Why do economists get it so wrong?

[midwesterner (banned)]

Why do economists get it so wrong?

Think long and hard about this pumper and mainstream new junkies.

Where are the economic bubbles? How fast will China grow? When and where will the debt crisis strike? How large should the economic stimulus be? And at its most basic: when should I invest, and where?

There's just one problem: economists have a poor track record for getting it right.

So what are "the perils of economic prediction"? A session at Davos tried to find out, with five of the world's top economists at hand to defend their profession.

Why bother?

Paradoxically, while everybody knows that forecasts are mostly wrong, "everybody still demands them," said the senior economist of a large banking group, speaking off the record.

To make things worse, he said, economists - just like investors - were suffering from a very bad case of "group think" where "everybody is unwilling to stick their nose out" and challenge the consensus.

"If you step outside the comfort band of the consensus forecast," agrees Simon Johnson from the MIT Sloan School of Management and another former IMF chief economist, "you get beaten up, you can risk your career."

This consensus, in turn, will make an impact, warns Professor Stiglitz: "If the chairman of the Federal Reserve says we have a new paradigm, and other economists say he's wrong, who will people believe? People will believe the Fed, and that in turn influences the economic outcome.

So why bother with economic forecasts?

"It's a starting point for analysis or discussion," says the chief executive of a large asset management firm, "but you don't have to believe it... economists are just one input among many."

So how often do the economists advising his firm get it right? He shrugs his shoulders: "Oh, about 3 or 4 times out of ten."

www.bbc.co.uk/news/business-12294332

[safeharbor37]

A stock I bought when it had a Analyst rating of "sell" changed to a buy when it doubled in price and, now that it's quadrupled +, it's a "hold."
Recommendations tend to be what you should have done six days [weeks, months] ago, not what you should do today. The old saying, "Buy low, sell high." is ignored. When the stock is down, the recommendation is "sell." When it's increased about as much as it will, it becomes a "buy."
I really am tired of Morningstar 5 star rated Mutual Funds turning into 1 star funds ~ after I've lost about as much as possible. Then, when it recovers and becomes a 5 star rating again, I'm even. The ratings are based on "recent results" which, they warn you, "does not predict future results."
The "economists" are paid to attract attention ~ which they do. If anyone could accurately predict the market, he'd [she'd] become so rich, so soon, that he/she would have better things to do than predict. Basically, "inside information" is the only information that matters.

[midwesterner (banned)]

A stock I bought when it had a Analyst rating of "sell" changed to a buy when it doubled in price and, now that it's quadrupled +, it's a "hold."
Recommendations tend to be what you should have done six days [weeks, months] ago, not what you should do today. The old saying, "Buy low, sell high." is ignored. When the stock is down, the recommendation is "sell." When it's increased about as much as it will, it becomes a "buy."
I really am tired of Morningstar 5 star rated Mutual Funds turning into 1 star funds ~ after I've lost about as much as possible. Then, when it recovers and becomes a 5 star rating again, I'm even. The ratings are based on "recent results" which, they warn you, "does not predict future results."
The "economists" are paid to attract attention ~ which they do. If anyone could accurately predict the market, he'd [she'd] become so rich, so soon, that he/she would have better things to do than predict. Basically, "inside information" is the only information that matters.

Fact is nobody can perfectly predict the market. Some have better track records and are not sold out by big business interests and will tell it like it is. That's a huge problem with stock pumping, finanical analysist not worth a penny they are paid, and talk show salemen like Cramer.
Watch the trends, see what actions the Fed does, busines, inflation, all the factors involved and you can start to paint a picture in a general direction.
If you want real economic advice, here's the best yet, put down the newpaper, magazines, and television and start looking at some alternative media, like here!!!

[verrip1]

Economists are not stock market pickers, for Christ's sake. Economists evaluate the past and create frameworks for understanding market dynamics. The are not the fucking Amazing Kreskin whose job it is to crystal ball the future.

OTOH, I'd take the word of the worst economist over high school graduate (if that) flakes who post crap which demonstrates absolutely no classical training in economics, statistics, or most anything else they choose to rant about.

[kman]

;DAHAHAHAHAHA ;D

[dumdeedoe]

Economics is a circular pattern, what benefits one group will hurt another. Which in time will hurt the ones that benefited.. Like Decoys oil holdings, does him a world of good when gas hits 5 dollars a gallon.. but hurts the common man...which sells his SUV and buys a volt, which starts to hurt the oil companies...
And when alot of money is invested in the stock market and companies get more liquidity, inflation should follow... helps companies...hurts the common man.... which in turn hurts companies.... "pop" time to start over...
My opinion is that most economists look at their side of the circle, and what they consider the leading indicators of that side.
When they are right they bask in the glory. But the Circle continues and unless they move off their side. They soon will become wrong.
The speed of the circle depends on how aggressive certain patterns are... thus bubbles...(makes the pattern look more like a pyramid....)

[kman]

Am I to understand that decoy holds virtual oil company stock?...He profits debt notes from the working poor that just need to get to work...shocked! I just threw up a little bit.

[verrip1]

Jan 27, 2011 19:39:07 GMT -5 dumdeedoe said:

Economics is a circular pattern, what benefits one group will hurt another. Which in time will hurt the ones that benefited.. Like Decoys oil holdings, does him a world of good when gas hits 5 dollars a gallon.. but hurts the common man...which sells his SUV and buys a volt, which starts to hurt the oil companies...
And when alot of money is invested in the stock market and companies get more liquidity, inflation should follow... helps companies...hurts the common man.... which in turn hurts companies.... "pop" time to start over...
My opinion is that most economists look at their side of the circle, and what they consider the leading indicators of that side.
When they are right they bask in the glory. But the Circle continues and unless they move off their side. They soon will become wrong.
The speed of the circle depends on how aggressive certain patterns are... thus bubbles...(makes the pattern look more like a pyramid....)

1. What part of economics in not "their side of the circle"?

2. "Leading indicators" of what side? Who are in these 'sides'?

3. "Bask in the glory" - geez, you think all these geeks worry about basking in fooking glory? You think they only act like superstars? You don't think that they try to get it right and keep it right? You sure have a shallow opinion about how professionals work.

4. WTF is this 'circle' you keep talking about? You mean secular and cyclical markets?

<edit - changed some punctuation and added a question re the quoted text>

[itstippy]

The stock market is not the economy. Always keep that in mind. Economists all agreed two years ago that we could not have a recovery in the overall economy without recoveries in jobs and housing. That has not happened, and indeed the US economy is in utter shambles. Yet many of the corporations large enough to be listed on the S&P 500 are making huge profits. How's that possible in an economy that's in shambles?

1) Operating capital is dirt cheap thanks to the Central Banks flooding the global economy with cash. Big corporations can borrow at 1%. They saved a trillion dollars by simply refinancing existing debt.
2) There's a huge oversupply of global production capacity. There's no need to invest in new plants or equipment - either they've already got all they need or the Chinese government will build a new factory to supply them. All profits go straight to the bottom line.
3) Labor is dirt cheap. Automation has eliminated the need for millions of jobs, and what can't be automated can be off shored.

Is the current environment sustainable? No. But for the past couple years it's been fat city for the big corps. They've stockpiled trillions of dollars in their war chests. They don't spend it and they don't give it to shareholders as dividends. They hoard it.

Throwing more money into the financial system won't turn the economy around. The Central banks are pushing on a string. Ben Bernanke either doesn't know what he's doing, or if he does know what he's doing he's lying about his true motives and objectives. The Fed is NOT going to protect the dollar, keep inflation in check, and promote employment by doing what its been doing.

Buying stock in these big corporations doesn't necessarily mean you, as a shareholder, will come out ahead either. Flip a coin.

[dumdeedoe]

First of all I am no economics major but I read and keep track tons of economic news and view points.
I do know that if you ask 10 economists what got America out of the great depression you will get 10 different answers..So I assume that most economist have their opinion on which leading indicators carry the most weight, that is what I meant by which side they take...
The circle I was speaking of was a layman's attempt to say what goes up always comes down...
Good times always brings over production and drawbacks.
You will never see a hedge fund operator standing on a keg with a bong in one hand and a party favor in another..
But if you read their speeches or books they will pat themselves on the back whenever they get "it" right..
You will have to pardon me while I Google "secular and cyclical Markets..."

[verrip1]

"I do know that if you ask 10 economists what got America out of the great depression you will get 10 different answers..So I assume that most economist have their opinion on which leading indicators carry the most weight, that is what I meant by which side they take..."

I know that I'm going to regret this, but:

a. Give me your source of information that 10 economists will give you 10 different answers about how the US got out of the Great Depression. C'mon, you just made that up, didn't you?

b. What makes you think that economists form opinions on what they have defined as the overwhelming, primary indicator for market movements. I think you just made that up, too.

The damned internet is the problem. People can just google with any kind of loaded searchwords they want and read crap that they soak up like diarrhea onto a Shamwow. The engine and their selections give them what they want and as much of that that they could ever read. Doesn't matter to the reader that the writers may have no credentials or minor credentials. Just suck up that brown stuff. Ooooh, so tasty! And remember, it is just the flavor that they want. By reading that other mooks 'think' like they do gives them all the proofs they need.

God, has this country dumbed down.

[midwesterner (banned)]

The damned internet is the problem. People can just google with any kind of loaded searchwords they want and read crap that they soak up like diarrhea onto a Shamwow. The engine and their selections give them what they want and as much of that that they could ever read. Doesn't matter to the reader that the writers may have no credentials or minor credentials. Just suck up that brown stuff. Ooooh, so tasty! And remember, it is just the flavor that they want. By reading that other mooks 'think' like they do gives them all the proofs they need.

God, has this country dumbed down.

Want some cheese with that whine?

www.goodcleantech.com/images/rat.jpg

Rat Pack, how suiting. True colors shinning through

[verrip1]

Whine? BWAHAHAHAHAHA. Mid the ultimate whiner has the gall to call others whiners?

Ka-ching! NO SALE.

[dumdeedoe]

Bernake believes deflation of the dollar was the main enemy of recovery. (could be considered a leading indicator.)
www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm
I believe that his focus on that point is why he is striving so hard for it not to happen again. (thus my focus remark.)

There are others that believe FDR new deal, regulation and production ramp up for the war saved the country. (unemployment went lower)..
Others say Keynesian economics, money supply, debt deflation... and other cause and recovery opinions on the great depression...
And sorry for not giving more references defending my point, But I am not going to use drudge reports or huffington post or zerohedge crap. I will find more credible sources and post them.

[itstippy]

Most serious economists agree that there is a "law of unintended consequences". That whatever action a central bank may take to promote positive results in one area of the economy is likely to have negative results elsewhere. No free lunch.

If one's sole goal is to raise the GDP, that can be accomplished. Simply borrow or print a boatload of money and flood the financial system with it. GDP will go up. It may skyrocket through "money velocity", or it may creep up due to "hoarding", but either way it WILL go up.

This will move an economy from "recession" (three straight quarters of declining GDP) to "recovery" (three straight quarters of expanding GDP). It will also cause problems elsewhere in the economy, and you can't just keep quantitative easing and providing artificial liquidity forever. The costs elsewhere in the economy get too high. If something can't go on indefinitely, it won't.

Economists know this. It's very basic. They don't "have it wrong".

[vl]

Economists are linear thinkers. The very basis for their industry is a contradiction to the nature of unintended consequences or-- everyday life.
Yesterday, one was saying: things will 'pop' in the 3rd quarter 2011. We all know that won't happen because, even if millions went back to work today, it would take 2-3 years for them to dig out, re-balance, budget and then buy again.
Two things are on the verge of extinction on Earth: Central Banks and Big Business. Both for the same reason. That said, those who can't do for themselves will become the dodo's and be mighty awkward in a common sense world.

[nicomachus]

In previous eras, economics would be considered a subdivision of ethics, which Aristotle first noted is "not an exact science."

In contemporary times, as referenced in the opening post, economics is a sociological predictive science. I suspect the reason it gets it wrong so often is because human behavior is not so easily reduced to mechanics. Who could have predicted that people would watch reality television? Who could have predicted that people would want to buy cell phones that can't make phone calls? And these are the more obvious examples in a highly complex market place.

[jarhead1976]

V_L, "Common sense is genius dressed in its working clothes." R.W. Emerson

[decoy409]

Quote: Am I to understand that decoy holds virtual oil company stock?...He profits debt notes from the working poor that just need to get to work...shocked! I just threw up a little bit.

Read more: notmsnmoney.proboards.com/index.cgi?board=moneytalk&action=display&thread=2436#ixzz1CLifpxHa

While you were throwing up, 'a little bit,' I was puking,

Quote: Goldman Sachs Can’t Say It Didn’t Get Bailed Out Anymore — It Kept Billions From AIG

Remember, Goldman faced a hearing in July of 2010 about the bank’s exposure to AIG.

That’s when CFO David Viniar and MD David Lehman testified they knew nothing about AIG funds landing in the bank’s private reserves.

Then two weeks later, according to the report, Goldman sent an the e-mail acknowledging that $2.9 billion in AIG funds did in fact end up in its own account.

The bipartisan report, which the Huffington Post obtained and read before its official release today, looks into what caused the financial collapse.

According to the FCIC:

The total was for proprietary trade. Unlike the $14 billion received from AIG on trades in which Goldman owed the money to its own counterparties, this $2.9 billion was retained by Goldman.

Most of the $2.9 billion came soon after AIG got its $182 billion taxpayer bailout.

A great way of explaining why taxpayers have a right to be furious about this new revelation is, “if these allegations are correct, it appears to have been a direct transfer of wealth from the Treasury to Goldman’s shareholders,” which an analyst told the HuffPo.

Taxpayers were told the AIG bailout was absolutely necessary to save the economy, not to save an investment bank that would emerge from the crisis pretty much unscathed.

When news broke back in ’09 that Goldman had received about $14 billion from the AIG bailout, the bank categorically denied accusations that any money had gone into its own private account.

Their line was that they were not a bailout recipient, and they stuck to it.

But the email that the FCIC report describes, which the bank itself authored, shows that was a lie.

The full report gets released at 10 am.
(source - www.businessinsider.com/goldman-sachs-aig-bailout)

and yet you brag about STEALING and PROFIT made from it, defend it and try to JUSTIFY it.

[safeharbor37]

Unrest in Egypt rattles the markets
Political turmoil in the Middle East spurs buying in gold, oil and the dollar. The Dow falls more than 100 points, with the Nasdaq down 2%. money.msn.com/

I've noticed that this is the typical spin we get from the market "experts." The market may very well be at a temporary high and I'm tempted to some for later repurchase, but timing requires that I pay attention ~ which I may not be willing or able to do.
If the Egypt [etc.] situation is really at the root of the pullback, it will rebound shortly. I suspect that the analysis I posted earlier is explains what's behind this ~ so I suspect I'll sit it out, or maybe a little to spread risk. In any case I expect the year to end higher than it started, so I'm comfortable sitting it out.
The gold bounce is probably due to the uncertainty caused by the unrest. I don't mess with gold.

Even though many sentiment measures are suggesting that there is too much complacency out there right now, if not outright bullishness, at least one indicator suggests that there is still a healthy level of skepticism.

www.marketwatch.com/story/contrarian-indicator-with-bullish-message-2011-01-28?siteid=yhoof

[itstippy]

So many variables, as wxyz noted in post #19.

People want economists to give them actionable investment advice. It doesn't work that way. In economics, the more granular you get the more wrong you are likely to be. Just when the Sun and Stars and Moon are in perfect alignment and you're confident you know what direction the economy will go in the near future, along comes a g'dam cheese meteor that blows everything out of kilter.

[vl]

If Economists were paid for accurate forecasts there would not be any Economists. Instead, they are paid salaries for "steerage". WE are supposed to believe those forecasts are actual analysis. Think it through, how can anyone accurately 'forecast' when we're in untrod territory?
Common Sense suggests that a viable Economist doesn't take a salary and doesn't advertise forecasts, they generate results others strive to duplicate. They also manage commodity investments not saturated with too many groups and artificial foundations.

[Deleted]

An economist in my opinion is an "educated" guesser

They take trend analysis...and reports from numerous places...and try to "predict" what will or wont happen within a specified time frame

They are a little like weathermen....some of what they forecast may be accurate....but always have your umbrella handy anyway

[safeharbor37]

Anyone believe that the "Austrian School" is more accurate than the mainstream economists?
There are two types of economic predictions that I think of:
1] Which way the economy [or a part of the economy] is going.
2] Which is the best way to run [or improve] the economy.
One of the problems is that, e.g., "economists" can't agree with what economic policies did to improve or damage the economy during the Great Depression which ended about sixty years ago. It seems that even if some "economists" are accurate, we don't know which ones that are. Paul Krugman, the Nobel Prize winner, is, to me, scary ~ or at least it's scary that anyone considers his views are worthy of consideration. It keeps reminding me of the Nobel Prize winners who drove a multi-billion dollar hedge fund [LTCM] into bankruptcy.
The problem with looking for good advice is that you can't tell if it's good advice after you get it, until, of course, it bankrupts you [buyer beware!]. The question is Why? What good is due diligence when there is no way to determine what the facts are? The Dismal Science is not called dismal for no reason.

[itstippy]

Huh.

Turns out January's consumer sales were anemic after all. This after weeks of bally-hoo about how the consumer is back and ready to spend. Last month we found out the December Holiday sales weren't as stellar as originally reported.

"Sales excluding autos and auto parts also rose a weaker-than-expected 0.3%, compared to a 0.5% increase in ex-auto sales in December. Economists had forecast a rise of 0.6% in the measure for January, according to Briefing.com."
money.cnn.com/2011/02/15/news/economy/retail_sales_january/index.htm?iid=EL

Obviously, anyone that pays attention to economic forecasts from "Briefing.com" and the like is just looking for which way the idiotic forecasts will move the herd. For January they were off by 100% (0.6 forecast, 0.3 actual). This happens constantly. If my sales projections at work were routinely off by +-25%-150% I'd be fired. Yet the media keeps duly reporting these "forecasts" as if there's something to report.

I asked once why people even bother with these numbers when they get revised so ridiculously up or down later, and the reply I got was "we know they're no good, but they're all we have to work with". Gee Sus.

How do I get a job being a forecaster for "Briefing.com"? I'm sure it pays well. What an easy gig.

[kman]

Economist do not get paid to be right.

[nicomachus]

Economic projection (which is not the same as economics absolutely) seeks accuracy based on the data of the past. When it tries to work alone it is more prone to be inaccurate. It can increase accuracy, I'd think, by considering insights from other social sciences (sociology, psychology, political science, etc).

[itstippy]

How do I get that Lawrence Yum guy's job? The "chief economist" from the National Association of Realtors who's been declaring housing has turned the corner every month for the past 2 1/2 years? Prior to that he kept insisting that problems were "localized" and there was no indication of any nation-wide housing bubble or widespread mortgage issues.

I could do that schtick. I know I could! I write nonsense on these boards all the time for free. Imagine what I could turn out if I were paid his salary!

No wonder the Real Estate industry is suffering - look who they hire as their "Chief Economist". At least the dude on the Ford ads who urges that "now's the time to buy a Ford" doesn't pretend to be an economist. He's just the "Ford dude". You can't question his credibility.

[verrip1]

Itstippy said:
"I could do that schtick. I know I could! I write nonsense on these boards all the time for free. Imagine what I could turn out if I were paid his salary!

No wonder the Real Estate industry is suffering - look who they hire as their Chief Economist. At least the dude on the Ford ads who urges that now's the time to buy a Ford doesn't pretend to be an economist. He's just the Ford dude. You can't question his credibility."

I knew it. You're Mike Rowe. Hey, Mike, let me on your Dirty Jobs program. I promise that I can make you puke!!!!! lololol.

[itstippy]

At least the Ford Dude keeps it believable. He says they're good cars; I'll bet they are. Here's the type of stuff we get out of Washington "economists":

Wars that pay for themselves
Tax cuts that increase revenue
National Health Care Plans that don't cost anyone a dime
Defense budget increases that are budget cuts
Social Security Trust Funds
Consumer Price Indexes that aren't impacted by food or gasoline prices
Government Sponsored Enterprises that are self-funding

Welcome to the Washington school of economic theory.