The Illusion of Predictability: How Regression Statistics Mislead Experts

International Journal of Forecasting, Forthcoming

39 Pages Posted: 1 Feb 2012  

Emre Soyer

Universitat Pompeu Fabra

Robin M. Hogarth

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Date Written: October 26, 2011

Abstract

Does the manner in which results are presented in empirical studies affect perceptions of the predictability of the outcomes? Noting the predominant role of linear regression analysis in empirical economics, we asked 257 academic economists to make probabilistic inferences given different presentations of the outputs of this statistical tool. Questions concerned the distribution of the dependent variable conditional on known values of the independent variable. Answers based on the presentation mode that is standard in the literature led to an illusion of predictability; outcomes were perceived to be more predictable than could be justified by the model. In particular, many respondents failed to take the error term into account. Adding graphs did not improve inferences. Paradoxically, when only graphs were provided (i.e., no regression statistics), respondents were more accurate. The implications of our study suggest, inter alia, the need to reconsider how to present empirical results and the possible provision of easy-to-use simulation tools that would enable readers of empirical papers to make accurate inferences.

Keywords: regression, presentation formats, probabilistic inference, prediction, graphics, uncertainty

JEL Classification: C01, C20, C53, Y10

Suggested Citation

Soyer, Emre and Hogarth, Robin M., The Illusion of Predictability: How Regression Statistics Mislead Experts (October 26, 2011). International Journal of Forecasting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1996568

Emre Soyer

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Robin M. Hogarth (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
34 93 542 2561 (Phone)
34 93 542 1746 (Fax)

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