Reading 12: The Folly of Forecasting: Ignore All Economists

According to behavioral finance, expert forecasters are overconfident in their forecasting ability because they feel their knowledge allows them to make more accurate forecasts. Because they believe their forecasts are based on skill, they blame some external factor when the forecasts turn out incorrect. Although the other responses may have some real world validity, they are not given as a reason for overconfidence, according to behavioral finance.

According to behavioral finance, expert forecasters are overconfident in their forecasting ability due to cognitive dissonance. Cognitive dissonance states that individuals will avoid information (reflecting what has been actually experienced) that is in disagreement (dissonance) with the individuals perceived ability of himself or herself. As a result, experts will have limited recollection of their failures.

According to behavioral finance, expert forecasters are more overconfident in their forecasting ability than non-experts because they believe their knowledge and skill allows them to make better forecasts. Although it is true that they often have unique access to company officers, this is not mentioned as a factor for overconfidence by behavioral finance theory.