Introduction

Abstract

In the past few years, professional forecasters and those who relay their predictions to the broader public have made the largest forecasting error in their lifetimes. Very few economists foresaw the 2007 financial crisis and the twenty-first century’s first Great Recession. Some of the most prominent policy makers have since confessed that they just could not imagine a scenario as dire as the one that occurred. The former chairman of the US Federal Reserve, Alan Greenspan, testifying in Congress in October 2008, explained that the Fed failed to forecast a significant nationwide drop in house prices because such a decline had never been observed. With the benefit of hindsight, this shows that disaster myopia may blind even the most sophisticated forecasters. It is all too easy to forget the painful episodes of the past when times look good.