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The illusion of predictability: How regression statistics mislead experts

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  • Soyer, Emre
  • Hogarth, Robin M.

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 based on different presentations of the outputs of this statistical tool. The questions concerned the distribution of the dependent variable, conditional on known values of the independent variable. The answers based on the presentation mode that is standard in the literature demonstrated an illusion of predictability; the 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 the inference. Paradoxically, the respondents were more accurate when only graphs were provided (i.e., no regression statistics). The implications of our study suggest, inter alia, the need to reconsider the way in which empirical results are presented, and the possible provision of easy-to-use simulation tools that would enable readers of empirical papers to make accurate inferences.

Suggested Citation

  • Soyer, Emre & Hogarth, Robin M., 2012. "The illusion of predictability: How regression statistics mislead experts," International Journal of Forecasting, Elsevier, vol. 28(3), pages 695-711.
    • Handle: RePEc:eee:intfor:v:28:y:2012:i:3:p:695-711
    DOI: 10.1016/j.ijforecast.2012.02.002
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    Cited by:

    1. Steffen Roth & Jari Kaivo-Oja, 2016. "Is the future a political economy? Functional analysis of three leading foresight and futures studies journals," Post-Print hal-01465701, HAL.
    2. Soyer, Emre & Hogarth, Robin M., 2015. "The golden rule of forecasting: Objections, refinements, and enhancements," Journal of Business Research, Elsevier, vol. 68(8), pages 1702-1704.
    3. Hogarth, Robin M. & Soyer, Emre, 2015. "Communicating forecasts: The simplicity of simulated experience," Journal of Business Research, Elsevier, vol. 68(8), pages 1800-1809.
    4. Cai, Huifen & Boateng, Agyenim & Guney, Yilmaz, 2019. "Host country institutions and firm-level R&D influences: An analysis of European Union FDI in China," Research in International Business and Finance, Elsevier, vol. 47(C), pages 311-326.
    5. Kim, Jae H. & Ji, Philip Inyeob, 2015. "Significance testing in empirical finance: A critical review and assessment," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 1-14.
    6. Kim, Jae, 2015. "How to Choose the Level of Significance: A Pedagogical Note," MPRA Paper 66373, University Library of Munich, Germany.
    7. Arch G. Woodside & Man-Ling Chang & Cheng-Feng Cheng, 2012. "Government Regulations of Business, Corruption, Reforms, and the Economic Growth of Nations," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 11(2), pages 127-142, December.
    8. Ang, Huat Bin (Andy) & Woodside, Arch G., 2017. "Is Bart Simpson offering sage advice? A case-based general theory of managers' core self-evaluations and job satisfaction," Journal of Business Research, Elsevier, vol. 74(C), pages 11-37.
    9. Armstrong, J. Scott & Green, Kesten C. & Graefe, Andreas, 2015. "Golden rule of forecasting: Be conservative," Journal of Business Research, Elsevier, vol. 68(8), pages 1717-1731.
    10. Fergus Bolger & Gene Rowe, 2015. "The Aggregation of Expert Judgment: Do Good Things Come to Those Who Weight?," Risk Analysis, John Wiley & Sons, vol. 35(1), pages 5-11, January.
    11. Ren, Shengce & Tsai, Huei-Ting & Eisingerich, Andreas B., 2016. "Case-based asymmetric modeling of firms with high versus low outcomes in implementing changes in direction," Journal of Business Research, Elsevier, vol. 69(2), pages 500-507.
    12. Green, Kesten C. & Armstrong, J. Scott & Graefe, Andreas, 2015. "Golden rule of forecasting rearticulated: Forecast unto others as you would have them forecast unto you," Journal of Business Research, Elsevier, vol. 68(8), pages 1768-1771.
    13. Green, Kesten C. & Armstrong, J. Scott, 2015. "Simple versus complex forecasting: The evidence," Journal of Business Research, Elsevier, vol. 68(8), pages 1678-1685.
    14. Deirdre N. McCloskey & Stephen T. Ziliak, 2012. "Statistical Significance in the New Tom and the Old Tom: A Reply to Thomas Mayer," Econ Journal Watch, Econ Journal Watch, vol. 9(3), pages 298-308, September.
    15. Armstrong, J. Scott, 2011. "Illusions in Regression Analysis," MPRA Paper 81663, University Library of Munich, Germany.

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