The Babson Chart

The Babsonchart (yes, no space) was started in 1906-1907, according to Babson's autobiography where its construction is covered in quite a bit, but not complete, detail in Chapter 13. He acknowledges the acquaintance of Benner, from whom he drew the idea of a composite, and accords George Swain with the idea of drawing a normal line through the chart.

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Constructed on the basis of 12 statistical series (4 commercial, 4 monetary and 4 financial), Babson's model had the special feature of combining them by simple addition (after reduction to a common base, the average for 1903 - 1904) into a single index whose fluctuations are intersected by a discretionary average line. It seeks to model a 20-year cycle in four stages: overexpansion, decline, depression, and improvement, which reflects Benner's influence.

The crossing of this average line should be a simple indicator for the public – "manufacturers, traders, heads of trade unions and professional people" – which is the target of the "Barometer Letter" and which warns them, for example, "that business this week is 32 points below the line X-Y, compared with last week's 30 points below the line and the 56 points of a year ago." (29 August 1922).

He began forecasting a dramatic market fall in 1927, a bit early, but perhaps because of this early reading, his 1929 report was the first on the wires and he was dubbed the "Prophet of Loss".

JK Galbraith writes the following about this episode in Babson's forecasting career:

"Babson was not a man who inspired confidence as a prophet in the manner of Irving Fisher or the Harvard Economic Society. As an educator, philosopher, theologian, statistician, forecaster and friend of the law of gravity he has sometimes been thought to have spread himself too thin. The methods by which he reached his conclusions were a problem. They involved a hocus pocus of lines and areas on a chart. Intuition and even mysticism played a part. Those who employed rational, objective and scientific methods failed to foretell the crash.

In these matters, as so often in our culture, it is far, far better to be wrong in a respectable way than to be right for the wrong reasons. Wall St was not at a loss as what to do about Babson. It promptly and soundly denounced him."

Nevertheless, it is his forecast that is remembered.

the Babson Chart