We all have an urge to predict the future. From the oracles of Ancient Greece, through Nostradamus, to modern-day fortune tellers and psychics, humans have always searched for comfort in the face of uncertainty. This is especially true when the state of the economy is concerned.
The problem, of course, is that these forecasts are rarely right, and, worse, they fail to predict catastrophic events like the economic collapse in 2008. And, even after the collapse, forecasters at the International Monetary Fund predicted that the GDP growth rate would accelerate towards the first half of 2009. Instead, we entered into a worldwide recession.
More recently, the trillion dollar stimulus program that was passed in the first weeks of the new Obama administration was entirely built on economic forecasting. Without it, the administration said, the unemployment rates would reach 8 percent. As it turned out, unemployment rose above 10 percent.
Perhaps Matthew Parris, a former British member of Parliament, said it best in an interview with BBC World Business Report. "Nobody, neither the experts nor us amateurs have the least idea what is going to happen with the economy in the future. I don't think the economists really know. I don't see why we should accord to them any more authority than we accord to palm readers or astrologers. They're a bit of fun and they sometimes get it right, but it's not a serious science."
Yet, here we are again in 2015. Since the global outlook looks less than optimal - with Greece's bailout and China's currency devaluation -- think tanks are in full swing predicting global outcomes and degree of risk to stakeholders in various domains. No doubt, every notable economist and policy maker is working hard to forecast whether the economic engine is revving or sputtering. The degree of urgency is reflected in every newspaper, radio station and TV channel. The question is, how accurate are these predictions? If history is any indication, not at all.
So why do we continue to forecast the future, despite our past failures in doing so? The first reason is that the need to plan ahead is a built-in part of human nature. The more we can anticipate disasters or the course of human events, we think, the better prepared we'll feel when faced with those disasters.
The second reason is anxiety. When we feel anxious, our minds and bodies move into a state of vigilance. Anxiety is evidence, for many, to do something about the things that threaten us. Our hearts beat faster, our stomachs flutter, and our minds begin to race while calculating out choices and probabilities. It's a form of protection. But it also lies to us. Sometimes, the little voice that we hear in our heads is the very one that will force us to buy into a scam.
There are risks and consequences to bad forecasts, besides just being wrong. On a personal level, people caught in a pattern of anxious planning often feel sad, guilty, frustrated, or ashamed. We might feel fear at not knowing all the answers and spend months attending to the neutralization of the anxious response by planning ahead. The emotional consequences of this endeavor start small, but year after year, their weight builds until we cannot imagine a future without a rationale, a plan, or a model for living.
A few years ago, Scott Armstrong, a professor of marketing at the University of Pennsylvania argued that people would pay heavily for expert advice despite evidence that the money was poorly spent. It's the same with forecasting: we believe that it will ensure a safe passage in the right direction. But this belief creates a negative feedback loop. By piecing together snippets of fear and re-running the tracks in our heads, we become limited by our beliefs. That little protective voice hinders us from changing the status quo and the fear of uncertainty reinforces the same, old paradigm: "we might be in danger."
Repeatedly acting on anxiety fails to teach us that we are more capable of handling uncertainty than we think. If we believe that all dogs bite and we then avoid or kill all dogs, we never learn that not all dogs bite. Following the same line of reasoning, forecasting less than a certain economic future might never teach us an appropriate response for tolerating uncertainty. If we believe that we cannot handle our anxious feelings and that they might at some point overwhelm us, then we also never learn that anxiety does pass with time, and whether it rises or falls, we can always handle it.
Sure, one could argue that economists offer us forecasts on the markets, no matter how inaccurate, because we are better off with a forecast than without one. But guessing, and feeling less anxious, in the moment is not better than learning to tolerate an uncertain future. And we don't gain much from predictive models that are consistently more wrong than right.
At worse, bad forecasts can be costly..
The housing surge of the last few decades had all the hallmarks of a classic euphoric bubble, perpetuated by leading economic forecasters. At the top of the boom, the hyped up economic predictions allowed buyers to bid up already existent high prices. For were it otherwise, those prices could never have reached so high a tipping point. In fact, only if a vast majority of investors expect prices to move higher, can they rise so quickly. At the market top, everyone turned into a committed believer of economic prosperity. When the euphoric wave inevitably collapsed, the public experienced a widespread fear that ultimately disabled the markets.
Fear played an especially dominant role for investors with modest means. The emotional let down felt by the pain of seeing their net worth evaporate, led many to seek relief by disengaging from the market all together. Accordingly, asset prices and other fear-sensitive financial variables fell far more rapidly. Thus, with the collapse being sharp and deep following the 2008 crash, the recovery was deemed to be slow. Dealing with day-today reality required a level of detailed decision making that most perceived as beyond their capabilities, preferring to walk away. For many, the comfort of guidance in positive forecasts turned to anger. Fear, coupled with risk aversion skewed judgment toward dumping risky assets, trading uncertainty for the familiar and predictable. Stock prices were suppressed by a degree of fear not experienced in the early twentieth century. The pace of economic deterioration quickened, shaping the dynamics of the broader economy.
We are at this moment faced with a number of serious long term economic problems, all in a sense having to do with the uncertain. Though we wish it were otherwise, economic forecasting is a discipline of probabilities. The vexing human shortcoming of "not knowing" has undoubtedly force us to embark on the journey of forecasting. But bottom line is this, we don't know what we don't know, and accepting uncertainty is the best defense against planning for something that may or may not happen. As Charles Spurgeon, a British preacher put it: "Anxiety does not empty tomorrow of its sorrows, but only empties today of its strength."