Life-size predictor model – Kommersant

Forecasts of professional analysts are considered by central banks as one of the components of expectations that are important for modern macroeconomic models. However, as a study by economists Rosen Valchev and Luca Gemmi shows, analysts’ impartiality is exaggerated: in reality, they tend to underestimate the value of conventional market data and overestimate new and non-standard information.

Rosen Valchev of Boston College and Luca Gemmi of the University of Lausanne, “Reviews with biases” in the NBER preprint series, begins with a description of a problem that is well known to all macroeconomists: the expectations of economic agents, which are crucial for macro forecasting, should be described within the framework of the concept of “rational expectations”, but in practice, any participant in economic exchange is poorly described by the formula “economic man”. If, for example, in the case of inflationary expectations of the population, which are important for the inflation targeting regime in the modern monetary policy of central banks, it is easy to present expectations as a “thing in itself” and not wonder how respondents fit the description of “rationally thinking economic agents”, then professional analysts, whose opinion on future macro data is the standard information taken into account in rate decisions by almost any major central bank, are considered by default to be the standard of cold rationality. Of course, the potential dishonesty of analysts and their (very weak) ability to manipulate the markets are always taken out of the brackets. But otherwise, the work of a predictive analyst presupposes the impartiality of the “economic man” by default.

Valchev and Gemmi, analyzing a large array of professional forecasts for the major markets and their deviations from later reality, quite convincingly show that the forecasts of professional analysts are always more or less specific in form – and deviations are systematic. Back in 2012, Oliver Gobion and Yuri Gorodnichenko showed that analysts’ consensus forecasts have characteristic exaggerations of the significance of random and new factors in comparison with background information. Valchev and Gemmi confirm this effect by showing the bigger picture. Professional analysts trust the information available to a narrow circle or their own information more than it deserves – and the signals contained in the background information flow tend to be underestimated.

The authors also try to test hypotheses about the nature of such systematic deviations, in particular, the versions about the “guild” solidarity of professional analysts who, on average, should choose survival strategies in the market that deviate from the “general” ones, and therefore attract attention by taking into account unusual and non-standard components. In contrast to the “shop” model, competition between analysts for the attention of the public (to a large extent this is an immediately working effect – in many respects the popularity of investment banks is supported by the quality of their analytical teams, which must maintain fame for their accurate and bright forecasts) can also be carried out in the same ways – then the scatter private forecasts in “consensus forecasts” over time in a particular market will be higher. In any case, Valchev and Gemmi state, professional analysts are by no means ideal emulators of “rational expectations,” and the deviations of their forecasts from broader sociological surveys on the topic of expectations cannot provide accurate information about the features of the irrationality of “mass” public opinion. It should be noted that Valchev and Gemmi almost do not analyze the issue of the relationship between the expectations of analysts and broader groups (mass investors, consumers, etc.) – although in practice they, as the work shows, are significant and mutually influential.

Dmitry Butrin