The role of judgment in macroeconomic forecasting accuracy

This paper presents evidence on the role that judgmental adjustments play in macroeconomic forecast accuracy. It starts by contrasting the predictive records of four prominent forecasters who adjust their models with those of three models that are used mechanically. The adjusted forecasts tend to be more accurate overall, although important exceptions can be found. Next the article compares adjusted forecasts with those generated mechanically by the same model. Again, with some significant exceptions, judgmental adjustments improve accuracy more often than not. The article closes by considering whether macroeconomic forecasters should place more or less emphasis on their adjustments relative to their models. It finds a clear tendency for modelers to overadjust their models, illustrating what prominent psychologists have termed ‘the major error of intuitive prediction’. In short, model builders should not hesitate to adjust their models to offset their limitations but should also guard against the tendency to overestimate the value of their personal insights.