A case study of expert judgment: Economists' probabilities versus base-rate model forecasts

Authors

  • Phillip A. Braun,

    Corresponding author
    1. Northwestern University, USA
    • Kellogg Graduate School of Management, Finance Department, Northwestern University, 200 I Sheridan Road, Evanston, Illinois 60208, USA
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    • Completing his PhD in economics and finance at the Graduate School of Business, University of Chicago, and now teaches at the Kellogg Graduate School of Management, Northwestern University.

  • Ilan Yaniv PhD

    Corresponding author
    1. University of Chicago, USA
    • Ilan Yaniv, Center for Decision Research, Graduate School of Business, University of Chicago, 1101 East 58th Street, Chicago, Illinois 60637, USA
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    • University of Michigan in 1988 and is now assistant professor of behavioral science at the Graduate School of Business, University of Chicago.


Abstract

In this case study of economists' forecasts concerning economic downturn, we examine key issues concerning the psychology of prediction and the controversy surrounding the value of expertise in forecasting. We examine when experts' knowledge promotes forecast accuracy and whether biases found in psychological studies (including underutilization of relevant base rates and tendencies to extreme prediction) occur in these economic forecasts. Experts' forecasts were compared to forecasts derived from base-rate models that relied on the historical frequencies of economic downturns. The performance patterns of the experts and models crossed over the forecast horizon. Experts outperformed models in shorter-term forecasting, whereas models outperformed experts in longer-term forecasting. These results highlight the abilities and limits of experts and models in prediction and the sources of their inaccuracy.

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