Why are economic forecasters so often wrong?

Experts are easy to identify. They swiftly perceive patterns, solve problems faster than novices, have superior memories, represent problems at a deeper level than laymen and (sometimes) have a strong sense of their own fallibility. In these respects, they are useful troubleshooters.

But when experts turn clairvoyants -- especially on the economy -- they tend to disagree and add little value. This is due to their lack of flexibility and the unreliability of intuition in unstable environments:

• Tens of thousands of hours honing their art can hamstring experts' cognitive flexibility; this fixedness leads to deteriorating expert performance as economic problems go from the simple to the complex.
• Their attempts to flourish Occam's razor by favouring the simplest of a host of explanations fail to consider novel approaches and incorporate the possibility of system change.
• Many experts are prone to hubris, dismissing information that does not tally with what they already believe and readily crediting that which does. The behaviour of economies frequently provides plenty of both.

Economic forecasters operate in one of the most difficult environments. The stock market is a complex, probabilistic domain with high degrees of freedom. Beth Azar, writing in "Why Experts Often Disagree", argues that gnomes in these domains agree less than 20% of the time, often holding diametrically opposite views on the same issue, and thus adding no value. They also fail to identify 'black swans' -- the improbable but high impact events celebrated by Nassim Nicholas Taleb in his latest book. "You know what is wrong with a lot more confidence than what is right," he says.

Sources:

'Are You an Expert?', Legg Mason Capital Management

'Analytic Culture In The US Intelligence Community', Central Intelligence Agency