Anorak | Economists are better at prediction than the weathermen

Economists are better at prediction than the weathermen

by | 4th, September 2013

OK, so this isn’t going to be an argument about stunning accuracy in anything. But we’ve two massive chaotic systems: the weather and the economy. Chaotic systems, especially massive ones, are terribly difficult to predict. Yet people keep trying with both.

OK, so who is better?

Well, actually, as it turns out, neither are. Markets do better than either do:

Enter the economist, Matthias Ritter. He uses the price of weather derivatives traded at the Chicago Mercantile Exchange to determine what the market thinks is going to be the future temperature, more precisely the two-week ahead Heating Degree Days and Cooling Degree Days for 6 US cities. And the economic forecast is impressive, it manages to lower the meteorologists’ root mean square error by about a quarter. And people say such speculative markets are useless.

Which is a very odd seeming result really. We’ve the economists trying to predict the economy, the weathermen the weather. And the people who actually do better than either are the speculators just trying to earn money.

It’s all rather Galton’s Ox: the guesses of large numbers of people often do, when averaged out, turn out to be more accurate than the predictions of the so called experts.

Posted: 4th, September 2013 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink