Discussion Paper

Are Professional Forecasters Overconfident?

Abstract: The post-COVID years have not been kind to professional forecasters, whether from the private sector or policy institutions: their forecast errors for both output growth and inflation have increased dramatically relative to pre-COVID (see Figure 1 in this paper). In this two-post series we ask: First, are forecasters aware of their own fallibility? That is, when they provide measures of the uncertainty around their forecasts, are such measures on average in line with the size of the prediction errors they make? Second, can forecasters predict uncertain times? That is, does their own assessment of uncertainty change on par with changes in their forecasting ability? As we will see, the answer to both questions sheds light of whether forecasters are rational. And the answer to both questions is “no” for horizons longer than one year but is perhaps surprisingly “yes” for shorter-run forecasts.

Keywords: professional forecasters; uncertainty; overconfidence;

JEL Classification: E31; E32; E37;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2024-09-03

Number: 20240903