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Why Are Professional Forecasters Biased? Agency versus Behavioral Explanations

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Author Info
Ehrbeck, Tilman
Waldmann, Robert

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Abstract

Professional forecasters may not simply aim to minimize expected squared forecast errors. In models with repeated forecasts, the pattern of forecasts reveals valuable information about the forecasters even before the outcome is realized. Rational forecasters will compromise between minimizing errors and mimicking prediction patterns typical of able forecasters. Simple models based on this argument imply that forecasts are biased in the direction of forecasts typical of able forecasters. The authors' models of strategic bias are rejected empirically as forecasts are biased in directions typical of forecasters with large mean squared forecast errors. This observation is consistent with behavioral explanations of forecast bias. Copyright 1996, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Publisher Info
Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 111 (1996)
Issue (Month): 1 (February)
Pages: 21-40
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Handle: RePEc:tpr:qjecon:v:111:y:1996:i:1:p:21-40

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