Q-Bank

Mike McLaughlin is an economist who makes quarterly forecasts for the state of the economy and interest rates. Last quarter, the economy did not grow as fast as McLaughlin predicted. McLaughlin explains that his forecast was inaccurate by stating “This change in the economy was due to a real estate market that slowed faster than many forecasters, including myself, expected. If it weren’t for the real estate market, my projection for GDP would have been accurate.” Which of the following is the best interpretation of McLaughlin’s statement, from a behavioral finance view? McLaughlin is using: A) an “if-only” defense for his inaccurate forecasts and this will prevent him from accurately evaluating his own abilities. B) an “if-only” defense for his inaccurate forecasts and his recognition of it will sharpen his abilities. C) a “single predictor” defense for his inaccurate forecasts and this will prevent him from accurately evaluating his own abilities. The correct answer was A. McLaughlin is using an “if-only” defense for his inaccurate forecasts. According to behavioral finance, investors will use excuses to justify their inaccurate forecasts. These excuses will prevent them from accurately evaluating their own abilities. As a result, they will persist in making the same mistakes. I don’t get this. I feel the choices itself are wrong. Isn’t this supposed to be a Ceterus-Paribus? According to my understanding, “If-only” would be one where the analyst would blame on an inaction…“if only this had/had not happened, then my forecast will be correct” and Ceterus-Paribus would blame it on outside forces. Isn’t the the real estate market outside his control? Thanks

Can someone take a shot at this?

You answered it yourself. You wrote: “If-only” would be one where the analyst would blame on an inaction…“if only this had/had not happened, then my forecast will be correct” This is exactly what the analyst said. from the text: "If it weren’t for the real estate market, my projection for GDP would have been accurate.” If only (blah blagh blah), then I would have been right. If only excuse.

I can take a shot… “If only” this had happened the way I had predicted - aka the real estate market slowed at the rate predicted - I would have been correct. It is placing the blame on other investors for not following the analyst’s advice which caused the real estate prices to decline. Ceretus Paribas would be because of a fundamental change outside of the realm of their prediction that alters the outcome. An example of this would be if the Fed had dramatically and unexpectedly increased interest rates which slowed housing demand and caused the real estate market to decline; thereby causing the analyst’s forecast to be incorrect. Does this help?

You are correct it should be ceretus paribas, I also belive this, but given the three options A sounds the best one.

its if only if the analyst had a forecast of the event that was wrong. its ceteris paribus if an unexpected event hit all forecasts—ie. 9/11

I am going to agree with gauravka here and say that in this context you choose the best option (these things aren’t always mutually exclusive) so while CP may be a better answer given these options the if-only seems like a viable solution. My advise, don’t spend too much time on this kind of detail.

Thanks guys…!