Behavioral Finance - Reading 12: The Folly of Forecasting:

quarter, interest, class, black

Q1. Mike McLaughlin is an economist who makes quarterly forecasts for the state of the economy and interest rates. Last quarter, the economy did not grow as fast as McLaughlin predicted. McLaughlin explains that his forecast was inaccurate by stating “This change in the economy was due to a real estate market that slowed faster than many forecasters, including myself, expected. If it weren’t for the real estate market, my projection for GDP would have been accurate.” Which of the following is the best interpretation of McLaughlin’s statement, from a behavioral finance view? McLaughlin is using:

A) an “if-only” defense for his inaccurate forecasts and his recognition of it will sharpen his abilities.

B) an “if-only” defense for his inaccurate forecasts and this will prevent him from accurately evaluating his own abilities.

C) a “single predictor” defense for his inaccurate forecasts and this will prevent him from accurately evaluating his own abilities.

Q2. Maribel Marcos is an economist for Cumulus Investments. She makes monthly forecasts for consumer confidence and business inventories. Last month, consumer confidence was higher than Marcos expected. Marcos explains that her forecast was inaccurate by stating “The fact that I was slightly off in my prediction for consumer confidence is not a problem for our clients. After all, I recommended that they move into stocks because I had predicted an increase in consumer confidence, albeit lower than actually occurred.” Which of the following is the best interpretation of Marcos’s statement, from a behavioral finance view? Marcos is using:

A) a “correct direction” defense for her inaccurate forecasts and this will facilitate more inaccurate forecasts on her part.

B) an “almost right” defense for her inaccurate forecasts and her recognition of it will sharpen her abilities.

C) an “almost right” defense for her inaccurate forecasts and this will facilitate more inaccurate forecasts on her part.

Q3. According to behavioral finance, forecasters often make excuses for their inaccurate predictions. Which of the following best represents the problem with this occurrence, from a behavioral finance view?

A) The excuses will prevent investors from recognizing their own limitations.

B) The excuses allow poor forecasters to stay in their positions when they should be replaced.

C) Other investors depend on these forecasts, resulting in aggregate investment losses.