Financial Forecast Sophistry

“Economists have predicted 9 out of the last 5 recessions.”

“If you lined up all the economists in the world end to end . . . they wouldn’t reach a conclusion.”

“If you lined up all the economists in the world end to end . . . it wouldn’t be such a bad thing.”

As you might surmise from the above quotes, I’d take with a grain of salt any article that prominently includes the disclaimer, “if the economists’ forecast is accurate . . .”

In this case, what’s being forecast is the performance of the U.S. housing market.

According to The Wall Street Journal’s lead headline today, “Home Forecast Calls for Pain,” “home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015.”

“Forecasting Trifecta”

The foregoing hits the trifecta of what I’ll call “the art of credible forecasting”:

–The time horizon is immediate enough to grab your interest — but distant enough that no one will remember if the forecast misses the mark. 

–The percentage changes are highly specific, down to fractions of a percent (2.5% and 1.1%, in this case).  Realtors know that this technique implies precision and accuracy (which is why you occasionally see a home listed for $297,154 or something equally ridiculous). 

–The forecast extrapolates current conditions — always a safe strategy.

For more thoughts in this vein, see2016 . . . 2016 . . . Do I Hear 2017?”; “2015 Housing Prediction“; and “Risk of Bad Statistics:  99.7%.”

P.S.:  For sheer sophistry, it’s hard to top . . . surprise! . . . the strategy Goldman Sachs employs (or at least used to) with respect to forecasting stock prices.

Namely, its legion of analysts make every possible forecast under the sun.

Then, when one of the forecasts inevitably pans out, they loudly christen their new “star analyst” — and quietly reassign the ones whose forecasts were off.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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