Economic View - The Overconfidence Problem in Forecasting - NYTimes.com - 1 views
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BUSINESSES in nearly every industry were caught off guard by the Great Recession. Few leaders in business — or government, for that matter — seem to have even considered the possibility that an economic downturn of this magnitude could happen.
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What was wrong with their thinking? These decision-makers may have been betrayed by a flaw that has been documented in hundreds of studies: overconfidence.
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Overconfidence! Emotion blinding one to reality. Hubris is what the Greeks called it. No matter how mathematical the Wall Street Quants (MIT, CalTech graduates who have been hired in huge numbers to write algorithms to figure out the stock market) try to make things, human emotions and personalities will always play a factor in any prediction in economics or any science for that matter.
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Most of us think that we are “better than average” in most things. We are also “miscalibrated,” meaning that our sense of the probability of events doesn’t line up with reality. When we say we are sure about a certain fact, for example, we may well be right only half the time.
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Some economists have questioned whether such experimental findings are relevant in competitive markets. They suggest that students, who often serve as guinea pigs in such tests, are overconfident, but that the top managers in large companies are well calibrated. A recent paper, however, reveals that this hopeful view is itself overconfident.
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