: Why is the assumption of normal distribution so prevalent in forecasting? Has it been observed historically ?

Question

I keep seeing this when studying economics but it feels like it cant be true

In: 2

Answer 1

Sometimes it’s a practical thing, if you don’t know the underlying distribution, Normal shows up often enough to be a good first guess.

BUT, there’s also the Central Limit Theorem.

If you have multiple sample sets, the distribution of the mean of the sample sets becomes normal!

In other words, if you study a distribution of distributions it becomes normal.

For example, individual income is likely not normal, but rather lognormal.

You might do a meta-analysis of 200 studies where each study looks at 1000 individually sampled people. The meta-analysis of averaged 1000 sampled incomes WILL be normally distributed.