Forecasting beset by tendency to think we are good at predictions

Last updated: October 9, 2013 8:13 pm

Forecasting beset by tendency to think we are good at predictions

By Claire Jones, Economics reporter

When it comes to predictions about the economy, our judgments are flawed partly because human beings tend to think they can predict the future better than they can. A speech in May by Ben Broadbent, an external member of the Bank of England’s Monetary Policy Committee, made reference to research by psychologist Daniel Kahneman that highlights the human predilection for seeing patterns in randomness, and drawing inferences from these “patterns” to say what will happen next.If a coin is tossed four times in a row, for example, and each time comes up heads, there is a bias towards expecting heads on the fifth turn. This tendency to see the world as more deterministic than it often is leads to overconfidence about what the future holds.

The bias is more pronounced when economists – or any other profession that relies on prediction – are working in an environment where uncertainty is rife and events are often genuinely random, such as during periods of financial crisis.

Recent official forecasts bear witness to this.

Like the Office for Budget Responsibility, the Bank of England’s MPC has had a woeful record since the crash. Since 2010, the committee’s quarterly projections have repeatedly overestimated growth and underestimated inflation.

Worryingly, psychology also suggests people are prone to forgetting their forecasts have been wrong.

“Unless reminded with hard evidence, people seem genuinely to believe that their prior predictions were different to what they actually were. The tendency to absolve ourselves of past predictive error is deep seated and, unless consciously checked, automatic,” Mr Broadbent said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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