An exploration of American economist Dennis Shen’s goal to incentivize better financial forecasting and more efficient markets.

Interview by Muhammad Asim

© Catarina Heeckt

Where are the faults in modern economics? To Dennis Shen, one such fault might be in forecasting — something the economics profession just has not been able to get right so far. When one glances at most forecast assessments of leading global economic institutions, one realizes shortly thereafter that they may not be as dependable as the institutions’ reputations may suggest.

In reality, economic forecasts may be no more accurate than simply taking a random stab at things he says — and as famously conjectured by an analogy of researcher Philip E. Tetlock comparing economic and financial forecasters to a group of chimpanzees tossing darts at a dartboard. This analogy may be rash and a little exaggerated, but according to Tetlock’s assessment of more than 30,000 forecasts from the 1980s and 1990s, professional forecasters did just barely outscore such dart-tossing chimps.

Such imprecision of analyst judgements pertains especially to longer-term forecasting, where the economics industry appears especially in the dark. The International Monetary Fund, as one example, even as the central bank of central banks, is known for rarely ever predicting an economic downturn correctly — and, resultantly, rarely ever sending the correct early signals to the global community that danger may await. This presents consequences for human lives in the end in just how prepared governments are (or not) for crises that inevitably spring up.

But Shen believes this is not how it should have been or needs to be. Economic and political forecasting can be done better. Forecasts can be more dependable — if only the global economics community would care enough about forecasting accuracy to design the necessary infrastructure around analysts incentivizing and rewarding better prognostication.

Early Life

Dennis Y. Shen was born in Ya’an, Sichuan Province, China. His father, Gaozhong Shen, emigrated in 1988 to the United States on State support from the People’s Republic of China for completion of a doctorate in cellular and molecular biology at Arizona State University. It was only following the events of Tiananmen Square that Shen and his mother were allowed exit visa rights by the State, reuniting with his father in the United States in 1991.

Shen went on to study Operations Research and Engineering at Cornell University (B.Sc., 2007), with a concentration in financial engineering — gathering a foundation in statistics and mathematics. His career as an economist started at AllianceBernstein — a global institutional money manager — in New York (2007–11), where he was — by chance — given a role on the company’s Global Economic Research team. Having grown up on subjects such as geography, history and mathematics, he found the traineeship in economics to be a middle-ground of interest areas and stuck with it.

Alongside Chief Economist Joseph Carson, he would go on to co-develop the “Carson-Shen monetary policy rule” in 2009 — an incremental step for central-bank inflation targeting to furthermore seek redressing asset-price bubbles. In 2010–11, he conducted studies of the debt sustainability of euro-area periphery economies during the euro-area crisis.

Relocating to Europe

Following his relocation to London, United Kingdom, to study internationally, Shen completed a postgraduate education at the London School of Economics and Political Science (L.S.E.) (M.P.A., International Development, 2013), earning a distinction for his dissertation: “The Economics of Hypoxia” — analyzing an interdisciplinary cross-section of economics and environmental challenges. This Master’s in development policy strengthened a belief in economics as a conduit for change. While at the LSE, he was on the founding team of The Public Sphere Journal — a graduate public policy journal still active today at the university.

Dennis continued at AllianceBernstein (2012–15) from London, following completion of his Master’s. His research explored dynamic changes in fiscal multipliers — seeking to explain frequent fallacies of historical assumptions of fiscal multipliers being static quotients — a disastrous assumption infamously admitted by the IMF following the Greek assistance program of 2010. His experiences covering Greece and euro-area periphery countries conferred an appreciation of the immense consequences imprecise economic assumptions and policy prescriptions can have.

Meeting his German spouse, Madeleine Lee, at the LSE, Shen relocated to Berlin, Germany. Since 2017, he has been a senior economist at the European credit rating agency in Frankfurt and Berlin, overseeing the global economic outlook. His research is presented on television, print and digital mediums, alongside books such as Wirtschaftskrieg (2020, Ulrich Blum).

Shen received Focus Economics analyst forecast awards (2021-2023) and was a selected member of the jury for 2022’s Emerging Europe Awards. He was selected as panellist for 2022’s G7 finance ministers meetings in Bonn, Germany. In 2020, he co-authored the so-called DSSI+ debt-restructuring framework — a model for the facilitation of debt forgiveness supporting low-income economies.

The inadequacies of economics

During his career, Shen reflects on how he became all too aware of the inadequacies of the economics field.

So much is guesswork absent the hard laws and identities of the physical sciences. Laws and rules in economics appear nearly expressly designed to be broken. Economists’ predictions are almost assumed as likely to be flatly wrong, and economics, unlike the natural sciences, tends moreover frustratingly to repeat the same mistakes of the past rather than build on a previous generation’s experiences and learnings.

When so much in policymaking relies on sound economic judgement, how is it that economic diagnostics are so irrational, imprecise and short-sighted he asks?

Shen argues a greater degree of interdisciplinary consideration is part of any solution to this quandary. As pioneers of economics — Adam Smith, David Ricardo, John Stuart Mill — were generalists dabbling across multiple social sciences bringing innovation and a better understanding of how social sciences may be interconnected to their contributions to economics, so must modern economics have the humility to learn from other social sciences, advancing a holistic-ness of thought.

Furthermore, Shen argues what is needed is a basic infrastructure incentivizing analysts to pursue greater precision in their judgement and forecasts, as well as penalizing analysts when judgement and forecasts are imprecise. Such a basic performance-based infrastructure may appear obvious for any professional line of work, but Shen says such an ecosystem of checks and balances and scorekeepers simply does not exist in economics.

Rather, he describes an ‘anything goes’ atmosphere. Strangely enough, he evinces, although economic policymaking and financial markets are driven fundamentally by the opinions and predictions of its industry’s analysts, the accuracy of these analyst opinions and predictions appears nearly irrelevant. He gives an analogy — in a field of medicine, the accuracy of doctors’ analyses and prescriptions of patients’ ills would prove decisive for any doctor’s professional standing and career longevity.

But in economics, analysts make false, analytically-questionable predictions and imprecise policy prescriptions daily having apparent impunity — facing no consequences for inaccuracy and rarely ever admitting being wrong. Internal performance structures of organizations neither recognize diagnostic accuracy of strong analysts nor discipline analysts who deliver imprecise judgments and policy recommendations routinely. Correct economic predictions are not considered as being vital as far as performance objectives even for research groups whose sole responsibility revolves around the selling of financial analysis and forecasts.

Rather than attention on soundness of economic prescriptions, a ‘present normal’ exists he says within which the more “famous” an expert and/or institution is, the more media seeks out said person or institution’s judgement repeatedly — regardless of said person or institution’s record of being reliable. The problem being: the more famous an expert is, the worse in fact this person performs on assessments of precision according to researcher Tetlock. Such economic experts have spent time honing a brand rather than necessarily honing wisdom. This preference for names rather than sound advice is at the crux of the current dilemma.

Bad economic information and advice presently abound. This manifests inefficiencies in financial markets when market pricing is based around short-sighted economic predictions — fueling financial bubbles and damaging corrections when said economic assumptions are proven wrong.

A better global infrastructure needs to be imagined

Institutions need to re-imagine and design better incentive structures to support analysts who deliver accurate predictions and sound policy advice. Shen says only then could a crucial missing part of the current infrastructure be finally introduced for economics, strengthening the reliability of assessments and filtering good analysis from a cacophony of bad and misleading information.

Shen argues structures ought to be designed for economic forecasting groups to be financially compensated based on the precision of their opinions and recommendations. The Good Judgment Open is one incremental step towards this. Next, organizations already managing forecast awards and formats of formal public recognition for good economic evaluation are helpful if overly limited as far as their scale and effect presently. Structures need to be conceptualized giving attention to economists having strong prediction records — so-called Superforecasters, rather than a system of listening to whomever shouts the loudest and having the most “authority”.

Shen believes in the potential for more precise economic assessments to facilitate better markets and better economic governance. A campaign supporting better economics is something we should all hope to hear more about in the future.