“Economic Crisis and the Crisis of Economics?” — The role of economic science in economic forecasting
Presenter
Professor
Department of Economics
Hanken School of Economics, HECER
Time and location
North Quad 4330, Thursday (1:00-2:00) pm
Abstract
In the aftermath of the 2007-9 crisis, there has been serious criticism towards economics in the media, the general audience and among academic economists themselves (Economist 2009; FT 2018; Dahlem report 2009). One line of criticism is targeted towards the incapacity of the discipline to predict the crisis. A counterargument often presented states that a crisis is unpredictable by definition since if it was predictable then there would be no sudden change in asset prices, for instance. Due to the self-fulfilling nature of forecasts, the prices themselves would react to credible forecasts, and thus price variation would be much smoother.
In this study, I (et al. ?) set up asset markets in an experimental laboratory and focus on a very specific case where, yet, predictions can be self-fulfilling. Assets pay an exogenously given periodically stochastic dividend. In addition to agents trading in the market, there is a third-party forecaster whose compensation depends only on how well she/he can predict the (i) dividends and (ii) asset prices. Prior to making her/his forecast, she/he receives a signal regarding the future value of dividends. There is treatment variation in whether (a) predictions are publicly known to the agents in market or not, (b) whether the signal is informative (expert) or not (quack), and (c) whether the forecaster is an academic economist or not. Finally (d), there is exogenous variation as to whether the market knows the forecaster to be an expert or economist or not. The treatment condition is known to the market agents but only the forecaster sees the signal whereas the agents must rely on the forecasts. The market reactions (asset prices and their volatility) to these different kind of forecasts (or their absence) are studied. The study hopes to shed light on two questions: 1) how markets react to forecasts, whether informative forecasts by experts curb booms and busts and price volatility and /or generate stronger reactions by the market; 2) whether predicting asset prices is easier or more difficult when asset prices react to predictions, and is it easier for economists/experts, not because they know better, but because markets better comply with the reactions of the experts/economists.