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On the efficacy of the wisdom of crowds to forecast economic indicators

  • Regular Article - Statistical and Nonlinear Physics
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Abstract

The interest in the wisdom of crowds stems mainly from the possibility of combining independent forecasts from experts in the hope that many expert minds are better than a few. Hence the relevant subject of study nowadays is the Vox Expertorum rather than Galton’s original Vox Populi. Here we use the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters to analyze 15455 forecasting contests to predict a variety of economic indicators. We find that the median has advantages over the mean as a method to combine the experts’ estimates: the odds that the crowd beats all participants of a forecasting contest is 0.015 when the aggregation is given by the mean and 0.026 when it is given by the median. Both aggregation methods yield a 20% error on the average, which must be contrasted with the expected error of a randomly selected forecaster, which is about 22%. We conclude that selective attention is the most likely explanation for the mysterious high accuracy of the crowd reported in the literature. This conclusion is strengthened by the rebuff of the claim that this high accuracy results from the cancellation of the participants’ errors: we find no meaningful correlation between the asymmetry of the distribution of the individuals’ estimates and the collective error.

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Data Availibility Statement

This manuscript has associated data in a data repository. [Authors’ comment: The economic forecasting data considered in the manuscript are from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters and are available at https://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters.]

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Acknowledgements

The research of JFF was supported in part by Grant No. 2020/03041-3, Fundação de Amparo à Pesquisa do Estado de São Paulo (FAPESP) and by Grant No. 305620/2021-5, Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq).

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Authors and Affiliations

  1. Instituto de Física de São Carlos, Universidade de São Paulo, Caixa Postal 369, 13560-970, São Carlos, São Paulo, Brazil

    Nilton S. Siqueira Neto & José F. Fontanari

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  1. Nilton S. Siqueira Neto
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  2. José F. Fontanari
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All the authors contributed equally to the paper.

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Correspondence to José F. Fontanari.

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Neto, N.S.S., Fontanari, J.F. On the efficacy of the wisdom of crowds to forecast economic indicators. Eur. Phys. J. B 96, 6 (2023). https://doi.org/10.1140/epjb/s10051-023-00482-6

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