© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Last updated: October 9, 2013 8:13 pm
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.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in