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Economic Forecast Evaluation: Profits versus the Conventional Error Measures

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  • Leitch, Gordon
  • Tanner, J Ernest

Abstract

Economists are often puzzled as to why profit-maximizing firms buy professional forecasts when statistics such as the root-mean-squared error or the mean absolute error often indicate that a naive model will forecast about as well. This paper argues that the reason is that these traditional summary statistics may not be closely related to a forecast's profits. Using profit measures, the authors find only very weak relationships between such summary error statistics and forecast value. If these results are robust, then least-squares regression analysis may not be appropriate for many studies of economic behavior. Copyright 1991 by American Economic Association.

Suggested Citation

  • Leitch, Gordon & Tanner, J Ernest, 1991. "Economic Forecast Evaluation: Profits versus the Conventional Error Measures," American Economic Review, American Economic Association, vol. 81(3), pages 580-590, June.
  • Handle: RePEc:aea:aecrev:v:81:y:1991:i:3:p:580-90
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