Beware of Forecasting Season

“The only function of economic forecasting is to make astrology look respectable.”

— Economist John Kenneth Galbraith

New Year's resolutions aren't the only January lists that look embarrassing 12 months later. January means it’s time for the media to pronounce its always-bold, never-remembered New Year’s predictions. You will see, hear, and read grand prognostications. They have a general bias toward provoking fear. Our advice? Take them lightly.

There are many brilliant economists who provide incalculable value. Their predictions are nuanced, backed by ample evidence, and not tailored for headlines or soundbites. The media prefers loud, bold, and absolute. Realize that there is an inverse relationship between certitude and credibility. 

If you look back each year, most predictions are anchored in what happened the year before. However, the year before, most of those occurances were total surprises. The same will likely be true for this year. 

We believe Galbraith’s quote is spot-on for the short-term, calendar-oriented forecasts favored by the media. Here’s some more great quotes collected by Howard Marks in the chapter on forecasts in his book The Most Important Thing:

“We have two classes of forecasters: Those who don’t know-and those who don’t know they don’t know.” – John Kenneth Galbraith

“It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.” –Amos Tversky

“There are two kinds of people who lose money: those who know nothing and those who know everything.” –Henry Kaufman

Finally, here is a long-term, not headline-worthy prediction by University of Oregon economist Tim Duy:

“As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy.”

— Economist Tim Duy

Previous
Previous

Why “Fee-Only” is Important When Working with an Advisor

Next
Next

Financial Advice for Your Child