On the Wisdom of Crowds (of Economists)

We study the properties of macroeconomic survey forecast response averages as the number of survey respondents grows. Such averages are “portfolios” of forecasts. We characterize the speed and pattern of the gains from diversification and their eventual decrease with portfolio size (the number of survey respondents) in both (1) the key real-world data-based environment of the U.S. Survey of Professional Forecasters (SPF), and (2) the theoretical model-based environment of equicorrelated forecast errors. We proceed by proposing and comparing various direct and model-based “crowd size signature plots”, which summarize the forecasting performance of k-average forecasts as a function of k, where k is the number of forecasts in the average. We then estimate the equicorrelation model for growth and inflation forecast errors by choosing model parameters to minimize the divergence between direct and model-based signature plots. The results indicate near-perfect equicorrelation model fit for both growth and inflation, which we explicate by showing analytically that, under conditions, the direct and fitted equicorrelation model-based signature plots are identical at a particular model parameter configuration. We find that the gains from diversification are greater for inflation forecasts than for growth forecasts, but that both gains nevertheless decrease quite quickly, so that fewer SPF respondents than currently used may be adequate.