Thursday, September 22, 2011

Prediction is difficult, especially if you are depressed

A well known quip holds that “Prediction is difficult, especially about the future”. It is attributed to various people including Yogi Berra, Niels Bohr and, for all I know, Yogi Bear too. Nonetheless it has been widely observed that people are often pretty bad at making predictions. This is bad news for those economists who believe in the Rational Expectations hypothesis. Although they will probably say they expected to hear that.

So what factors might cause people to predict badly? In a new study, from INSEAD, researchers find that depressed individuals are particularly bad at prediction. The subjects consisted of 1,100 soccer fans asked to forecast how teams progressed in various competitions. In particular depressed people tend to over-weight unlikely events. So if you are a depressed individual and an Arsenal fan (and you can see why those two would go together) be prepared for disappointment.

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